Real Estate Investors plc
Annual Report 2014

Plain-text annual report

FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2014 REAL ESTATE INVESTORS PLC FINANCIAL STATEMENTS For the year ended 31 December 2014 Company Registration Number: 5045715 Registered Office: Directors: Secretary: Auditor: Solicitor: Cathedral Place, 3rd Floor 42-44 Waterloo Street Birmingham B2 5QB J R A Crabtree OBE: Chairman W Wyatt: Non-Executive Director P London: Non-Executive Director P P S Bassi CBE: Chief Executive M H P Daly: Finance Director M H P Daly Grant Thornton UK LLP Chartered Accountants Registered Auditor Colmore Plaza 20 Colmore Circus Birmingham B4 6AT Gateley One Eleven Edmund Street Birmingham B3 2HJ Nominated Adviser: Smith & Williamson Corporate Finance Limited 25 Moorgate London EC2R 6AY Broker: Banker: Registrar: 1 Liberum Capital Limited Ropemaker Place, Level 12 25 Ropemaker Street London EC2Y 9LY Lloyds Banking Group 55 Temple Row Birmingham B2 5LS Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU REAL ESTATE INVESTORS PLC CONTENTS For the year ended 31 December 2014 INDEX Chairman’s and Chief Executive’s report Directors’ report Group strategic report Corporate governance report Directors' remuneration report Independent auditor’s report Consolidated statement of comprehensive income Consolidated statement of changes in equity Consolidated statement of financial position Consolidated statement of cash flows Notes to the financial statements Company statutory financial statements (prepared under UK GAAP) PAGE 3 - 8 9 - 10 11 12 13 - 14 15 16 17 18 - 19 20 21 - 47 48 – 59 Notice of Annual General Meeting 60 - 62 2 REAL ESTATE INVESTORS PLC CHAIRMAN’S AND CHIEF EXECUTIVE’S REPORT For the year ended 31 December 2014 Highlights • • Record revenue up 19%, profits up 21% and dividends up 50% Progressive and growing dividend policy in place with the intention to move to quarterly dividend payments from 2016 Scalable platform with ability to manage larger portfolio of assets £20 million capital raise in March 2014 successfully deployed on criteria compliant properties - acquisitions totalling £29.4 million (2013: £2.3 million) Rigorous focus on asset management delivering added value across the portfolio and driving rental growth • • • • Gross Property Assets of £104.4 million (2013: £76.2 million) up 37% • Conversion to a Real Estate Investment Trust* (REIT) on 1 January 2015 • Very strong and growing regional economy Revenue of £8.0 million (2013: £6.7 million) up 19% Profit before tax of £6.0 million (2013: £5.0 million) up 21% EPRA** EPS of (0.3p) (2013: 0.4p) Total dividend per share up 50% to 1.5p, final dividend per share of 0.75p EPRA NAV per share 61.3p (2013: 59.1p) up 4% Financial Highlights • • • • • • Gross Property Assets of £104.4 million (2013: £76.2 million) up 37% • Net Loan to Value of 35.2% (2013: 47.3%) gross debt £43.0 million (2013: £44.6 million) • • Cash £6.3 million (2013: £8.5 million) weighted average debt maturity 6.3 years (2013: 7.0 years) Funds from £20.0 million equity fundraise successfully deployed Gross Property Assets Investment Property Assets EPRA NAV per share EPRA NNNAV per share Net Assets Loan to Value Loan to Value (net of cash) 31 December 2014 £104.4 million £102.0 million 61.3p 57.9p £64.6 million 41.2% 35.2% 31 December 2013 £76.2 million £70.6 million 59.1p 58.6p £41.9 million 58.6% 47.3% Change +37% +44% +4% -1% +54% +3% +26% Operational Highlights • Contracted rental income of £7.7 million (2013: £5.8 million) up 33% • Overall occupancy: 84.6% and WAULT*** 4.4 years (to break) (2013: 83.6% and 3.7 years) • Acquisitions totalling £29.5 million (2013: £2.6 million) • • • • Property disposal proceeds totalling £7.0 million (2013: £7.0 million) Total ownership of 799,112 sq ft (2013: 650,000 sq ft) up 23% 175 tenants (2013: 150 tenants) up 16.67% Prime Birmingham City centre ownership 159,792 sq ft (2013: 143,408 sq ft), representing 31.4% of our portfolio by value (2013: 37.2%) * REIT = Real Estate Investment Trusts are listed property investment companies or groups not liable to corporation tax on their rental income or capital gains from their qualifying activities ** EPRA = European Public Real Estate Association ***WAULT = Weighted Average Unexpired Lease Term CHAIRMAN’S AND CHIEF EXECUTIVE’S STATEMENT Overview The Birmingham and West Midlands economy is on the cusp of emerging as a significant economic powerhouse, with a diversified economy led by professional and financial services, creative industries, tourism, education and high end manufacturing. As anticipated, this investor demand in the region has continued throughout 2014 and we believe we will see no slowing down over 2015, other than a ‘pause’ around the election in May 2015. Investments in the UK regions reached £21.1 billion, up 41% on 2013. Commercial property investment in the West Midlands soared in 2014 to £2.3bn, up 44% on 2013. 3 REAL ESTATE INVESTORS PLC CHAIRMAN’S AND CHIEF EXECUTIVE’S REPORT For the year ended 31 December 2014 Investment demand in the West Midlands is varied, and includes international buyers from China, Singapore, the Middle East and the USA, as well as the traditional UK based institutional funds, insurance companies, public and private property companies. Investors are attracted by the relatively high yields in comparison to London and the South East, the strong economic recovery of the region and the prospect of rising rental values. Traditional UK property companies and private individuals are relatively inactive, as these buyers are often reliant upon bank lending and focus on secondary assets. Bank lending is becoming normalised and this will trigger these purchases and stimulate the secondary investment market and reveal yield compression in these markets. REI has benefitted from rising values, and anticipates further growth from improving occupier demand and rising rental values, in particular from our prime Birmingham City centre ownership, which represents 31% of our portfolio. Our year end valuations have revealed a general uplift in values, however management believe that these continue to ‘lag’ the market and actual sales values would provide further uplifts as demonstrated by the sales we have made during 2014. Our investments outside the City centre, in quality secondary locations, are predicted to see yield compression in 2015 and 2016, providing REI with further potential growth. Our portfolio has grown significantly over the year, up 37% in value, and we anticipate further growth through the acquisition of criteria compliant properties and improving the capital values and income from our existing portfolio. REI’s reputation as an established property investor, with a proven track record, along with the management’s privileged and in depth knowledge and network, continues to provide acquisition opportunities that are criteria compliant and secure capital growth and income enhancing opportunities for the Company. The long debated and anticipated volume sales of distressed assets has not really materialised. Whilst REI were able to capture some of these opportunities, it appears that the banking industry has quietly sold much of their non-core or distressed lending books and properties to specialist UK funds and US private equity houses, with substantial discounts. Our market insight indicates that a volume of stock is being brought to the market for sale by these vendors, and the UK funds who have re-focussed their criteria, now look to hold assets with longer leases and individual valuations in excess of £10 million. These disposals and change of strategy provide criteria property ideal for our asset management objectives. Results The execution of our focussed regional strategy, supported by management’s unique network and proven track record, has allowed us to report an excellent set of financial results for the year ended 31 December 2014. Record profits before tax of £6.0 million (2013: £5.0 million) are up 21%. Record gross assets of £104.4 million are up by 37%. Contracted rental income of £7.7m (2013: £5.8 million) is up 33%. Total dividend payments of 1.5p per share in respect of the 2014 financial year is up 50%. We are pleased with the performance and believe we are well positioned to grow REI further, and drive higher rental income, profits and dividends for our shareholders. If we extract the negative cost of our ‘hedge/interest rate swap’ of £1.4 million, which is a non cash item, pre tax profits would be £7.5 million for 2014. Our decision to convert into a Real Estate Investment Trust in January 2015 is in line with the management’s strategy to deliver a progressive dividend, coupled with achieving capital growth through active asset management. The acquisition pipeline remains healthy, as does the potential to make opportunistic, tax free sales, due to our REIT status, but only where we consider we have achieved maximum asset management. Dividend The Board has already committed to a progressive dividend policy, and our status as a REIT will allow us to undertake dividend payments within an attractive tax status. Our interim dividend of 0.75p in respect of H1 2014 was declared in September and our final dividend of 0.75p provides a total dividend of 1.5p for 2014, an increase of 50%. The Board has also declared its intention to pay dividends quarterly, in order to distribute income generated by the Company to shareholders on a more timely basis. It is anticipated that the first such quarterly dividend would be paid in 2016. Dividend Timetable Ex-dividend date: Record date: Dividend payment date: 4 26 March 2015 27 March 2015 24 April 2015 REAL ESTATE INVESTORS PLC CHAIRMAN’S AND CHIEF EXECUTIVE’S REPORT For the year ended 31 December 2014 Regional Review We are a regional investor with a focus on Birmingham and the West Midlands. We believe our region is on the cusp of its re-emergence as an economic and commercial centre. This regeneration will undoubtedly impact positively on our business in the immediate and longer term. The economy is robust and growth is driven by the creative industries, education, tourism, retail and high end manufacturing. Listed below are some of the key facts that support and demonstrate a vibrant and growing regional economy. • Property investment in the region reached an 8 year high during the year, with West Midlands commercial property investment soaring in 2014 to £2.3 billion, up 44% on 2013 • Q4 2014 office market lettings see six year high with annual lettings reaching 713,460 sq ft - the highest total since 2008 Birmingham named number one property investment hot spot in the UK and the sixth-best in Europe • • HS2 creates 1,500 new jobs in Birmingham to manage the £50 billion project • West Midlands is the only place in the UK with an export surplus with China • House sales in the West Midlands have hit a 4 year high (RICS) • Birmingham has been named as one of the top 10 cities in the world by travel handbook company Rough Guide • West Midlands unemployment fell to its lowest since the recession began • West Midlands exported more than London for the first time and the highest in the UK • • • • • Jaguar Land Rover achieved record breaking sales for 2014 Birmingham Airport has recorded its busiest year in its 75 year history 34,000 employed in Birmingham in the digital media sector Bullring shopping centre draws in more than 40 million customers per annum 500 medical technology companies, more than any other UK region with 10,000 manufacturing SMEs in the West Midlands • Greater Birmingham is the largest regional financial and professional services hub in the UK • • • 24 major universities and further education institutions located in the region International trade in the West Midlands also registered the largest jump – at 16% to £28.28 billion Birmingham ranked best City in the UK for quality of life Property Portfolio Review The portfolio has grown to £104.4 million, up by 37% over the previous 12 months. Yet, even as the market has improved, we have secured properties that match our acquisition criteria by capitalising on our cash resources and management’s ability to act swiftly and access opportunities from a privileged network. This unique access to secure attractive opportunities, that provide strong yields and capital growth, will continue for the foreseeable future and we anticipate assets being made available to us from strategic reviews by UK and USA specialist funds holding previously distressed portfolios. Our portfolio is diversified by type of occupier and location, spread across the region with properties in Birmingham City centre, Edgbaston, Coventry, Bromsgrove, Walsall, West Bromwich, Kings Heath and Derby. We have no material exposure to any single tenant or building and our acquisition criteria remain stringent. Our Acquisition Criteria Birmingham - West Midlands – Midlands Sector – shops / offices / residential / land Status – vacant or part vacant – fully let • • • • Active asset management via: Letting risk Lease Renewal/Rent Reviews etc o o o Change of use o Refurbishment Lot Size - £500,000 - £20 million Yield Targets – 8-20% • • • Assets that cannot support traditional debt • • Speedy exchange and completion to secure an attractive price Represents value and opportunity 5 REAL ESTATE INVESTORS PLC CHAIRMAN’S AND CHIEF EXECUTIVE’S REPORT For the year ended 31 December 2014 Birmingham City Centre Other Midlands Total Core Non Core Portfolio Total Portfolio £m % Sq Ft Passing Rent £ ERV £ Yield % Equivalent Yield % Occupancy % 32.7 31.4 159,792 1,951,036 2,709,886 60.0 57.4 532,635 4,999,430 5,900,895 92.7 88.8 692,427 6,950,466 8,680,911 11.7 11.2 106,685 715,213 1,001,016 104.4 100.0 799,112 7,665,679 9,611,797 5.63 7.88 7.08 5.79 6.93 7.16 8.34 7.92 9.55 8.08 70.13 90.00 85.44 78.85 84.56 We now have a total of 799,112 sq ft, with 175 tenants. Our prime City centre ownership is 159,792 sq ft, representing 31.4% of our portfolio by value. Overall occupancy is at 84.6%, with a WAULT of 4.4 years to break. New tenants to our portfolio during 2014 include: HSBC, West Bromwich Building Society, Lunn Poly, First Secretary of State, Royal College of Surgeons, WH Smith, WH Ireland, Thomas Cook, Thomson Travel, Sharps Bedrooms, Boots UK Limited, Marks and Spencer Simply Foods Limited, NHS Property Services, Loungers, BHS, Wallis, Waterstones, Punch Taverns and Burtons. The portfolio remains stable and secure, has significant opportunity to continue to add value through further lettings and rental growth, and will benefit from yield compression. This combination should provide further upward valuations. Where we see valuations have been maximised, we will make sales and capture the gain, with no tax liability due to our REIT status. The occupier market has trailed the investment market, but has seen steady growth during 2014, however, we have noted that Q1 of 2015 has seen the number of viewings and discussions relating to new lettings significantly improve. Sales For a number of years we have operated in a ‘buyers’ market, and believe we have capitalised on the prevailing market conditions. The weight of money available for property investment and the hunger for income, coupled with the drive away from London and the South East, and the re-emergence of the regions, in particular the West Midlands, has seen strong demand for income producing investment property and residential land. We have received continuous approaches from agents and buyers for individual and collective elements of our portfolio, and where we see exceptional sales value, we will make sales. 6 REAL ESTATE INVESTORS PLC CHAIRMAN’S AND CHIEF EXECUTIVE’S REPORT For the year ended 31 December 2014 Against this much improved backdrop, we have sold property in Birmingham City centre, Edgbaston and land in Smethwick and Bilston, proceeds totalling £7.0 million. These sales have all been achieved above our book values. Despite the loss of income as a result of these sales and their value to the gross portfolio, we have still achieved record gross assets of £104.4 million and a significantly improved contracted rental income of £7.7 million, up 33%. Acquisitions During the year we invested a total of £29.4 million in new acquisitions including Warwick (£7.3 million), Walsall (£7.7 million), Bromsgrove (£0.5 million), Leicester (£1.8 million), Birmingham City centre (totalling £3.6 million) and Leamington Spa (£2.3 million). All these assets are criteria compliant and provide capital and income enhancing opportunities. Since our acquisition, some lease renewals, rent reviews and new lettings have been completed and we have seen a contribution from upward valuations to our overall profitability, however, there remains more ‘value’ to be secured. Whilst most of our acquisitions have been either fully let or part income producing, we acquired 33 Bennetts Hill, fully vacant, for £1.6 million. This listed building has since been granted a restaurant planning consent, secured a letting to Loungers Limited on a new 25 year lease at a rental of £135,000 p.a., and we have let the office space above which has provided a total rental income of £180,000 p.a.. Even after an approximate capital spend of £200,000 the property has provided REI with an excellent return. We continue to target vacant property, particularly listed, with the view to adding value through planning, refurbishment and letting. The acquisition pipeline for 2015 is excellent with over £100 million of opportunities identified. We are benefitting from our market reputation and management’s unique insight into the property market and we are confident that we will add criteria compliant acquisitions to our portfolio throughout 2015. Since the year end we acquired 36 Great Charles Street, a 24,516 sq ft office building which is part let, producing £214,709 with an ERV of £360,000 for the sum of £1.85 million in February 2015. This building is located in the heart of the new City centre Masterplan and nearby to the Paradise development. The opportunities that are available are essentially ex-institutionally owned assets that, in their present form due to lease lengths, voids and lot size, are not compliant with an institutional investor, or sales from distressed portfolios acquired by US or UK specialist funds during the property crash, that are now being broken up for sale. Where these opportunities are criteria compliant and management believe we can add value, we will act to secure these and continue to grow our portfolio. Finance & Banking At 31 December 2014 the Group’s gross debt was £43.0 million (2013: £44.1 million) with cash and cash equivalents of £6.3 million (2013: £8.5 million). The weighted average debt maturity was 6.3 years (2013: 7.0 years) with a weighted average cost of debt of 6.0% (2013 6.2%) at year end – 94% fixed or hedged (2013: 94%). Net loan to value was 35.2% (2013: 47.3%) and net interest cover based on adjusted earnings before interest and tax as a ratio of finance costs was 4.0:1 (2013: 2.1:1). Both loan to value and interest cover fall comfortably within the banking covenants. The Group’s £22.7 million facility with Lloyds Banking Group is due for renewal in October 2015. Whilst the process of agreeing terms for the renewal of these facilities, which would be subject to credit approval, documentation and due diligence, has not commenced, at the present time the bank has confirmed the intention to roll facilities at a similar level for a period of three to five years from the expiry of the current facilities. Margins, fees and loan to value terms are becoming more competitive and relaxed. REI has continued to receive excellent support from our principal bankers throughout the last few years, namely Lloyds Banking Group, Aviva, Handelsbanken and Nationwide. In February 2015 REI secured a new facility of £9.0 million with Santander – the term is for 5 years at a margin of 2.25% over LIBOR, secured against some of our unencumbered and income producing properties. Borrowing costs are only incurred when we actually drawdown, and we anticipate fully investing this money in Q2 of 2015. 7 REAL ESTATE INVESTORS PLC CHAIRMAN’S AND CHIEF EXECUTIVE’S REPORT For the year ended 31 December 2014 Outlook & Summary We have enjoyed an excellent year of progress, and remain well positioned to continue with our growth strategy and our commitment to a progressive dividend policy. We anticipate a number of new acquisitions that will continue to grow our property portfolio. We will make sales when we feel that we have maximised value, knowing that any sales made will no longer be subject to taxation due to our REIT status. The successful £20 million fundraise in March 2014 was well supported by existing and new investors and has provided the capital to grow the portfolio, enabling management to capitalise on market opportunities. REI has built a secure portfolio which provides income and capital growth, backed by quality real estate in a robust Birmingham and Midlands economy. The Company feels strongly that Birmingham and the West Midlands is on the verge of re-emerging as a major global city and re-establishing the region as a major economic and commercial centre in the UK. REI, operating as a Real Estate Investment Trust, will benefit from the assembled property portfolio, new acquisitions and a vibrant and robust regional economy. Finally, we would like to thank our tenants, staff and board members for their continued support, without whom, none of the success we have enjoyed and our excellent future prospects would be possible. John Crabtree Chairman 13 March 2015 Paul Bassi Chief Executive 13 March 2015 8 REAL ESTATE INVESTORS PLC DIRECTORS’ REPORT For the year ended 31 December 2014 The directors present their report together with the audited consolidated financial statements for the year ended 31 December 2014. Directors The directors who served during the year were as follows: J R A Crabtree W Wyatt P London (appointed 1 October 2014) P P S Bassi M H P Daly Chairman – Non-Executive Director Non-Executive Director Non-Executive Director Chief Executive Finance Director P P S Bassi and P London will retire and submit themselves for re-election at the forthcoming Annual General Meeting. Substantial shareholdings The Company has been notified of the following interests that represent 3% or more of the issued share capital of the Company at 11 February 2015. Caledonia Investments Plc CF Ruffer Total Return Fund P P S Bassi Standard Life Investments Old Mutual Global Investors Ruffer Absolute Return Fund F&C Asset Management Miton Investment Management Henderson Volantis Capital Majedie Asset Management Other matter Number 20,204,812 10,598,883 9,200,000 7,354,830 6,340,132 5,000,000 4,969,257 4,541,746 4,080,000 3,748,181 % 18.13 9.51 8.26 6.60 5.69 4.49 4.46 4.08 3.66 3.36 Financial risk management objectives and policies are included in note 15 to the financial statements. Statement of directors’ responsibilities The directors are responsible for preparing the Strategic Report, Directors’ Report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under 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 and profit or loss of the Group for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgments and estimates that are reasonable and prudent; • state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. 9 REAL ESTATE INVESTORS PLC DIRECTORS’ REPORT For the year ended 31 December 2014 The directors confirm that: • so far as each director is aware, there is no relevant audit information of which the Group’s auditor is unaware; and • the directors have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Annual General Meeting The Annual General Meeting will be held at Cathedral Place, 3rd Floor, 42-44 Waterloo Street, Birmingham, B2 5QB on 19 June 2015 at 11 am. Auditor Grant Thornton UK LLP offers itself for re-appointment as auditor in accordance with Section 489 of the Companies Act 2006. BY ORDER OF THE BOARD M H P Daly Secretary Date: 13 March 2015 Company No 5045715 10 REAL ESTATE INVESTORS PLC GROUP STRATEGIC REPORT For the year ended 31 December 2014 Review of business Real Estate Investors PLC is a commercial property investment company specialising in the established and proven markets of the greater Midlands area. The Group’s business model is based on generating rental and capital growth from an active approach to the management and development of a portfolio of quality buildings, predominantly within the office and retail sectors. Recurring rental income from the portfolio underpins profits, which are supplemented by gains from the sale of investment properties. Disposal proceeds are recycled into new acquisitions with better growth prospects, whilst maintaining compliance with the terms of flexible secured bank finance. The Group has built up a portfolio of good quality assets concentrated in these resilient established markets, without reliance on one sector or location (see pages 3 to 8). Principal risks and uncertainties The directors consider the principal risks of the Group and the strategy to mitigate these risks, as follows: Risk area Investment portfolio • Tenant default • Change in demand for space • Market pricing affecting value Financial • Reduced availability or increased cost of debt Interest rate sensitivity • People • Retention/recruitment Key performance indicators (“KPIs”) Mitigation • Not reliant on one single tenant or business sector • Focused on established business locations for investment • Monitor asset concentration • Portfolio diversification between office and retail properties • Building specifications not tailored to one user • Continual focus on current vacancies and expected changes • Low gearing policy • Fixed rate debt and hedging in place • Existing facilities sufficient for spending commitments • On-going monitoring and management of the forecast cash position Internal procedures in place to track compliance • • Remuneration structure reviewed • Regular assessment of performance The following KPIs are some of the tools used by management to monitor the performance of the Group against the aim of creating sustainable long-term returns for shareholders and have all moved favourably this year. 2014 4.05p £6.0m 57.9p 2013 5.04p £5.0m 58.6p Indicator Earnings per share Profit before tax – actual Net assets per share BY ORDER OF THE BOARD M H P Daly Secretary Date:13 March 2015 11 REAL ESTATE INVESTORS PLC CORPORATE GOVERNANCE REPORT For the year ended 31 December 2014 Directors’ statement on corporate governance The Board of Directors is accountable to shareholders for the good corporate governance of the Group. Under the AIM rules for companies, the Group is not required to comply with the UK Corporate Governance Code (June 2012) and does not comply with the Code. However, the Board is aware of the best practice defined by the Code and seeks to adopt procedures to institute good governance insofar as practical and appropriate for a Group of its size while retaining its focus on the entrepreneurial success of the business. The main elements of the Group’s governance procedure are documented below. Application of principles Directors The composition of the Board is set out on page 9. The Board currently comprises three non-executive directors and two executive directors. The Board aims to meet monthly and is provided with relevant information on financial, business and corporate matters prior to meetings. The Board is responsible for overall Group strategy, approval of property and corporate acquisitions and disposals, approval of substantial items of capital expenditure, and consideration of significant operational and financial matters. The Board has established both an Audit and Remuneration Committee. Given the small size of the Board, it is not considered necessary to establish a separate Nominations Committee. All members of the Board are fully consulted on the potential appointment of a new director. All directors are subject to re-election every three years. Accountability and audit The Audit Committee comprises two non-executive directors, J R A Crabtree and W Wyatt, and the finance director, by invitation. The committee oversees the adequacy of the Group’s internal controls, accounting policies and financial reporting and provides a forum through which the Group’s external auditor reports to the non-executive directors. Going concern The Group has prepared and reviewed forecasts and made appropriate enquiries which indicate that the Group has adequate resources to continue in operational existence for the foreseeable future. These enquiries considered the following: • the significant cash balances the Group holds and the low levels of historic and projected operating cashflows • any property purchases will only be completed if cash resources or loans are available to complete those purchases • the Group’s bankers have indicated their continuing support for the Group. The Group’s £22.7 million facility with Lloyds Banking Group is due for renewal in October 2015. Whilst the process of agreeing terms for the renewal of these facilities, which would be subject to credit approval, documentation and due diligence, has not commenced at the present time the bank have confirmed the intention to roll the facilities at a similar level for a period of three to five years from the expiry of the facilities. For these reasons, the directors continue to adopt the going concern basis in preparing the financial statements. Internal control The Board has overall responsibility for ensuring that the Group maintains systems of internal control to provide it with reasonable assurance regarding the reliability of financial information used within the business and that the assets of the business are safeguarded. It is acknowledged that such systems can only provide reasonable and not absolute assurance against material misstatements or loss. Key areas of internal control, which are overseen by the finance director, are listed below: • the preparation of monthly financial information which reports actual performance and continuously updates monthly forecasts of revenue, expense, cash flows and assets and liabilities for the remainder of the current financial accounting period • appraisal and approval of property and corporate investment proposals in the context of their cash flow profile, potential profitability and fit with the Group’s overall strategy • ongoing review of the Group’s property portfolio and issues arising therefrom • the close involvement of the executive directors in the day to day running of the business. The Board has considered the need for an internal audit function but has decided the size and complexity of the Group does not justify it at present. However, it will keep this decision under annual review. 12 REAL ESTATE INVESTORS PLC DIRECTORS' REMUNERATION REPORT For the year ended 31 December 2014 Remuneration Committee As a company trading on AIM, the Company is not obliged to comply with the provisions of the Directors’ Remuneration Reports Regulations. However, as part of its commitment to good corporate governance practice the Company provides the following information. The Remuneration Committee is made up of the three non-executive directors and the chief executive, by invitation. The terms of reference of the committee are to review and make recommendations to the Board regarding the terms and conditions of employment of the executive directors. Service agreements No director has a service agreement with a notice period that exceeds 12 months. Policy on directors’ remuneration The executive directors’ remuneration packages are designed to attract, motivate and retain directors of the high calibre needed to help the Group successfully compete in its market place. The Group’s policies are to pay executive directors a salary at market levels for comparable jobs in the sector whilst recognizing the relative size of the Group. The executive directors do not receive any benefits apart from their basic salaries and any bonuses. The performance management of the executive directors and the determination of their annual remuneration package is undertaken by the Remuneration Committee. No director plays a part in any decision about his own remuneration. Annual bonuses will be paid at the discretion of the Remuneration Committee as an incentive and to reward performance during the financial year pursuant to specific performance criteria. In exercising its discretion the committee will take into account (among other things) NAV growth, dividend growth, rental growth, management performance and overall financial performance. The Remuneration Committee believes that incentive compensation should recognize the growth and profitability of the business. Directors’ remuneration (forming part of the financial statements and subject to audit) The remuneration of directors for the year ended 31 December 2014 was as follows: Salary in lieu of benefits Salary Fees Bonus Total Employers’ national insurance contributions 2014 Total 2013 Total Share options 2014 Share options 2013 £000 £000 £000 £000 £000 £000 £000 £000 Number Number - J J Jack P P S Bassi 350 M H P Daly 200 J Crabtree W Wyatt P London - - 6 556 - 87 50 - - - 137 - - - 30 25 - 55 - 350 200 - - - 550 - 787 450 30 25 6 1,298 - 94 51 - - 1 146 - 881 501 30 25 7 1,444 13 496 281 30 25 - 845 - - - - - - - - - - - - - - Salary in lieu of benefits is paid in recognition for the fact that the Directors do not receive any benefits in kind. No post-employment benefits, including pension contributions, are received by the Directors. 13 REAL ESTATE INVESTORS PLC DIRECTORS' REMUNERATION REPORT For the year ended 31 December 2014 Policy on non-executive directors’ remuneration The remuneration of the non-executive directors is determined by the Board and based upon independent surveys of fees paid to non-executive directors of similar companies. The non-executive directors do not receive any benefits apart from their fees which are paid directly to the individual involved. Long Term Incentive Plan At the Annual General Meeting held in June 2010 a resolution was passed approving the adoption of a new Long Term Incentive Plan (LTIP). The proposed LTIP is designed to promote retention and incentivise the executive directors to grow the value of the Group and to maximise returns: • The LTIP has a ten year life from January 2010 to December 2019. • Awards become payable to the extent that shareholder return defined as net asset value (“NAV”) growth adjusted for dividends and other returns to shareholders exceed a compound growth rate of 10% per annum (Hurdle Return). If shareholder returns exceed the Hurdle Return, 20% of such excess will be payable in Ordinary shares under the LTIP. • • Participants will have the opportunity to take up to 30% of the amount accrued under the LTIP at the end of year three, with the portion able to be taken up each year thereafter increasing by 10% each year and the full amount (100%) being available only after the end of the ten year period. • Only executive directors are eligible to participate in the LTIP. • The baseline for the commencement of the LTIP is the NAV per Ordinary share at 31 December 2009 adjusted for the impact of the placing of Ordinary shares in February 2010. • Subject to the time limits set out above, awards may be taken up in the 20 business day period following the announcement of full year or interim results. • Amounts payable will be satisfied in full (save as below) by the issue of Ordinary shares or the grant of zero/nominal cost options to any participant. The price at which shares will be issued will be the higher of NAV per share as reported in the latest full year results and the weighted average mid-market closing price for the first 20 business days following announcement of the latest full year results. On issue, the Ordinary shares will rank pari passu with the existing issued Ordinary shares. • The number of Ordinary shares which can be issued under the LTIP is limited to 10% of the Company’s then issued share capital. Any excess earned above this level will be paid in cash provided that the remuneration committee consider it prudent to do so at that stage, otherwise payment will be deferred until the remuneration committee deem it prudent. • The remuneration committee may from time to time make any alteration to the plan which it thinks fit, including for legal, regulatory or tax reasons, in order to ensure the smooth workings of the plan in line with its objectives. The LTIP was implemented in December 2010. On 3 December 2010, the Group granted each of P P S Bassi and M H P Daly an option under the scheme which entitles them to subscribe for or acquire ordinary shares in the company at a price of 1p per share (in the case of new ordinary shares) or 0p per share (in the case of a transfer of existing shares). The grant and exercise of the options is subject to the rules of the LTIP and cannot be exercised unless the relevant performance criteria are met, as discussed above. The number of ordinary shares to be awarded under the option will be determined at the relevant trigger date based on the net asset value of the Group and will be calculated with reference to the prevailing net asset value per share or market price per share, whichever is higher. The first trigger date was 1 January 2013 and subsequent trigger dates occur annually thereafter until 1 January 2020. No options were granted, forfeited or exercised during the period. No expense has been recognised in respect of the LTIP for the year ended 31 December 2014 as no options are expected to vest. APPROVED BY THE BOARD OF DIRECTORS – P London Chairman, Remuneration Committee Date: 13 March 2015 14 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF REAL ESTATE INVESTORS PLC We have audited the group financial statements of Real Estate Investors plc for the year ended 31 December 2014 which comprise the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of financial position, the consolidated statement of cashflows and the related notes. 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. This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors As explained more fully in the Statement of Directors’ Responsibilities set out on pages 9 and 10, the directors are responsible for the preparation of the group financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the group financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements 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 2014 and of its profit for the year then ended; • have been properly prepared in accordance with IFRSs as adopted by the European Union; and • have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Group Strategic Report and the Directors’ Report for the financial year for which the group financial statements are prepared is consistent with the group financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following where under the Companies Act 2006 we are required to report to you if, in our opinion: • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the parent Company financial statements of Real Estate Investors plc for the year ended 31 December 2014. David White Senior Statutory Auditor For and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Birmingham Date: 13 March 2015 15 REAL ESTATE INVESTORS PLC CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2014 Revenue Cost of sales Gross profit Administrative expenses Surplus on sale of investment property Net surplus on valuation of investment properties Profit from operations Finance income Finance costs (Loss)/profit on financial liabilities at fair value through profit and loss Profit on ordinary activities before taxation Income tax charge Net profit after taxation and total comprehensive income Total and continuing earnings per ordinary share Basic Diluted Note 2014 £000 2013 £000 8,016 6,717 (2,452) 5,564 (2,542) 277 6,767 10,066 60 (2,672) (1,445) (2,086) 4,631 (1,675) 459 2,096 5,511 21 (2,638) 2,062 6,009 4,956 (1,960) (1,355) 4,049 3,601 4.05p 4.05p 5.04p 5.04p 9 5 5 16 3 6 7 7 The results of the Group for the period related entirely to continuing operations. The accompanying notes form an integral part of these financial statements. 16 REAL ESTATE INVESTORS PLC CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2014 Share capital £000 Share premium account £000 Capital redemption reserve £000 Other reserves £000 Retained earnings £000 Total £000 At 1 January 2013 7,142 61 45 121 31,622 38,991 Dividends Transactions with owners Transfer to retained earnings Profit for the year and total comprehensive income - - - - - - - - - - - - At 31 December 2013 7,142 61 45 Issue of new shares Premium on issue of new shares Expenses of share issue Dividends Transactions with owners 4,000 - - - 4,000 - 16,000 (528) - 15,472 Profit for the year and total comprehensive income - - At 31 December 2014 11,142 15,533 - - - - - - 45 - - (714) (714) (714) (714) (121) 121 - - - - - - - - - - 3,601 34,630 - - - (836) (836) 3,601 41,878 4,000 16,000 (528) (836) 18,636 4,049 4,049 37,843 64,563 The accompanying notes form an integral part of these financial statements. 17 REAL ESTATE INVESTORS PLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION At 31 December 2014 Assets Non current Intangible assets Investment properties Property, plant and equipment Deferred tax Current Inventories Trade and other receivables Cash and cash equivalents Total assets Liabilities Current Bank loans and overdraft Provision for current taxation Trade and other payables Non current Bank loans Financial liabilities Total liabilities Net assets Note 2014 £000 2013 £000 8 9 10 17 12 13 15 14 15 16 171 102,017 6 940 103,134 2,366 3,745 6,274 171 70,601 7 2,900 73,679 5,601 4,745 8,482 12,385 18,828 115,519 92,507 (24,054) (25,006) (18) (3,245) (27,317) (18,942) (4,697) (23,639) (50,956) (18) (2,716) (27,740) (19,637) (3,252) (22,889) (50,629) 64,563 41,878 The accompanying notes form an integral part of these financial statements. 18 REAL ESTATE INVESTORS PLC CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONTINUED) At 31 December 2014 Equity Share capital Share premium account Capital redemption reserve Retained earnings Total Equity Net assets per share Note 18 2014 £000 11,142 15,533 45 37,843 2013 £000 7,142 61 45 34,630 64,563 41,878 57.9p 58.6p These financial statements were approved and authorised for issue by the Board of Directors on 13 March 2015. Signed on behalf of the Board of Directors J R A Crabtree – Chairman M H P Daly – Finance Director Company No 5045715 The accompanying notes form an integral part of these financial statements. 19 REAL ESTATE INVESTORS PLC CONSOLIDATED STATEMENT OF CASHFLOWS For the year ended 31 December 2014 Cash flows from operating activities Profit after taxation Adjustments for: Depreciation Net surplus on valuation of investment property Surplus on sale of investment property Finance income Finance costs Loss/(profit) on financial liabilities at fair value through profit and loss Income tax charge Decrease in inventories Decrease/(increase) in trade and other receivables Increase/(decrease) in trade and other payables Interest paid Net cash from operating activities Cash flows from investing activities Purchase of investment properties Purchase of property, plant and equipment Proceeds from sale of investment properties Interest received Cash flows from financing activities Proceeds from issue of share capital net of expenses Equity dividends paid Proceeds from new bank loans Payment of bank loans Net (decrease)/increase in cash and cash equivalents Cash, cash equivalents and bank overdrafts at beginning of period Cash, cash equivalents and bank overdrafts at end of period 2014 £000 2013 £000 4,049 3,601 8 (6,767) (277) (60) 2,672 1,445 1,960 3,235 500 529 7,294 (2,672) 4,622 (29,532) (7) 5,660 60 (23,819) 19,472 (836) 514 (459) 18,691 (506) 6,780 6,274 11 (2,096) (459) (21) 2,638 (2,062) 1,355 1,334 (1,324) (222) 2,755 (2,638) 117 (2,552) - 5,500 21 2,969 - (714) 4,200 (479) 3,007 6,093 687 6,780 NOTES: Cash and cash equivalents consist of cash in hand, bank overdrafts and balances with banks only. The accompanying notes form an integral part of these financial statements. 20 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 1. Accounting policies The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of properties and financial instruments held at fair value through profit and loss, and in accordance with International Financial Reporting Standards (IFRS) adopted by the European Union. Separate financial statements of Real Estate Investors PLC (the Company) have been prepared, on pages 48 to 59, under the historical cost convention except for the revaluation of investment properties and in accordance with applicable accounting standards under UK GAAP. The principal accounting policies of the Group are set out below and are consistent with those applied in the 2013 financial statements, except where new standards have been issued and applied retrospectively. Further details of these standards and their application by the Group, including the effect of IFRS 11 on the treatment of the Group’s interest in its joint venture in Menin Works, are set out on pages 26 and 27. Going concern The Group has prepared and reviewed forecasts and made appropriate enquiries which indicate that the Group has adequate resources to continue in operational existence for the foreseeable future. These enquiries considered the following: • the significant cash balances the Group holds and the low levels of historic and projected operating cashflows • any property purchases will only be completed if cash resources or loans are available to complete those purchases • the Group’s bankers have indicated their continuing support for the Group. The Group’s £22.7 million facility with Lloyds Banking Group is due for renewal in October 2015. Whilst the process of agreeing terms for the renewal of these facilities, which would be subject to credit approval, documentation and due diligence, has not commenced at the present time the bank have confirmed the intention to roll the facilities at a similar level for a period of three to five years from the expiry of the facilities. For these reasons, the directors continue to adopt the going concern basis in preparing the financial statements. Business combinations Subsidiaries are all entities over which the Group has control. The Group obtains and exercises control through voting rights. The consolidated financial statements of the Group incorporate the financial statements of the parent Company as well as those entities controlled by the Group by full consolidation. Acquired subsidiaries are subject to application of the acquisition method. The consideration transferred by the Group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of the assets transferred, liabilities incurred and the equity interests issued by the Group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred. The Group recognises identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognised in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values. Goodwill is stated after separate recognition of identifiable intangible assets. It is calculated as the excess of the sum of the fair value of consideration transferred, the recognised amount of any non-controlling interest in the acquiree and the acquisition-date fair value of any existing equity interest in the acquiree, over the acquisition-date fair values of identifiable net assets. If the fair values of the identifiable net assets exceed the sum calculated above, the excess amount (i.e. gain on a bargain purchase) is recognised in profit or loss immediately. Intra-group balances and transactions, and any unrealised gains or losses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. 21 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 Investment in joint operations Operations whose economic activities are controlled jointly by the Group and by other parties independent of the Group are accounted for as joint operations under IFRS 11. The Group recognises its share of the assets and liabilities of the joint operation separately within each line item of the consolidated statement of financial position and its share of income and expenses separately within each line item in the consolidated statement of comprehensive income. Income recognition Revenue is recognised to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or duties. The following criteria must be met before income is recognised: Rental income Rental income arising from operating leases on properties owned by the Group is accounted for on a straight line basis over the period commencing on the later of the start of the lease or acquisition of the property by the Group, and ending on the earlier of the end of the lease and next break point, unless it is reasonably certain that the break option will not be exercised. Rental income revenue excludes service charges and other costs directly recoverable from tenants. Sale of properties Revenue from the sale of properties is recognised when the significant risks and rewards of ownership of the properties have passed to the buyer, usually when legally binding contracts which are irrevocable and unconditional are exchanged. Revenue is, therefore, recognised when legal title passes to the purchaser, typically upon exchange. Surrender premiums Where contractually entitled, upon receipt of a surrender premium for the early determination of a lease, the profit, net of dilapidations and non-recoverable outgoings relating to the lease concerned, is immediately reflected in income. Impairment The Group’s goodwill, office equipment and leasehold improvements are subject to impairment testing. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash generating unit level. Goodwill is allocated to those cash generating units that are expected to benefit from synergies of the related business combination and represent the lowest level within the Group at which management controls related cash flows. 22 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 Impairment (continued) Cash-generating units that include goodwill are tested for impairment at least annually. All other individual assets or cash generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, using future expected revenues from the asset or cash-generating unit. Impairment losses recognised for cash-generating units, to which goodwill has been allocated, are credited initially to the carrying amount of goodwill. Any remaining impairment loss is charged pro rata to the other assets in the cash-generating unit. With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment loss on other assets is reversed if there has been a favourable change in the estimates used to determine the asset's recoverable amount and only to the extent that the asset's carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised. Investment properties Investment properties are properties held to earn rentals and/or for capital appreciation. Investment properties are initially recognised at cost including direct transaction costs. Investment properties are subsequently valued externally or by the directors on an open market basis at the balance sheet date and recorded at valuation. Any surplus or deficit arising on revaluing investment properties is recognised in profit or loss in the period in which they arise. Dilapidation receipts are held in the balance sheet and offset against subsequent associated expenditure. Any ultimate gains or shortfalls are recognised in profit or loss, offset against any directly corresponding movement in fair value of the investment property to which they relate. Leasehold improvements and office equipment Leasehold improvements and office equipment are carried at acquisition cost less subsequent depreciation and impairment losses. Depreciation is charged on the cost of these assets less their residual value on a straight line basis over the estimated useful economic life of each asset, by equal annual instalments over the following periods: Leasehold improvements Office equipment - - length of lease four years Residual values and useful lives are reassessed annually. Inventories Trading properties, which are held for resale, are included in inventories at the lower of cost and net realisable value. Cost includes all fees relating to the purchase of the property and improvement expenses. Net realisable value is based on estimated selling price less future costs expected to be incurred to sale. Any provisions to impair trading properties below cost are reversed in future periods if market conditions subsequently support a higher fair value but only up to a maximum of the original cost. Property acquisitions are accounted for when legally binding contracts which are irrevocable and effectively unconditional are exchanged. Operating leases Group company is the lessee Leases in which substantially all risks and rewards of ownership are retained by another party, the lessor, are classified as operating leases. Payments, including prepayments, made under operating leases (net of any incentives received from the lessor) are charged as an expense on a straight line basis over the period of the lease. Group company is the lessor Properties leased out to tenants under operating leases are included in investment properties in the statement of financial position when all the risks and rewards of ownership of the property are retained by the Group. 23 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 Taxation Current income tax assets and/or liabilities comprise those obligations to, or claims from, fiscal authorities relating to the current or prior reporting period, that are unpaid at the year end date. They are calculated according to the tax rates and tax laws enacted and substantively enacted at the year end date, based on the taxable profit for the year. Deferred income taxes are calculated using the liability method on temporary differences. This involves the comparison of the carrying amounts of assets and liabilities in the consolidated financial statements with their respective tax bases. However, in accordance with the rules set out in IAS 12, no deferred taxes are recognised on the initial recognition of goodwill, or on initial recognition of an asset or liability unless the related transaction is a business combination or affects tax or accounting profit. This applies also to temporary differences associated with shares in subsidiaries if reversal of these temporary differences can be controlled by the Group and it is probable that reversal will not occur in the foreseeable future. In addition, tax losses available to be carried forward as well as other income tax credits to the Group are assessed for recognition as deferred tax assets. Deferred income taxes on investment properties relates to temporary differences between the carrying value of these assets and their tax base. In calculating deferred income taxes on investment properties the Directors are required to consider the manner in which the value of the properties will be recovered, whether through use or through sale. The Directors consider that the value of investment properties (which are held to earn rentals and for capital appreciation) will be recovered through a mixture of rental income and sale. The Directors then consider whether there would be any deductions which could be made against future sales proceeds. The deferred income tax represents the tax effect of the difference between the valuation of the investment property and its tax base. Deferred tax liabilities are provided for in full. Deferred tax assets are recognised to the extent that it is probable that they will be able to offset against future taxable income. Deferred tax assets and liabilities are calculated, without discounting, at tax rates that are expected to apply to their respective period of realisation, provided that they are enacted or substantively enacted at the balance sheet date. Most changes in deferred tax assets or liabilities are recognised as a component of tax expense in the statement of comprehensive income. Only changes in deferred tax assets or liabilities that relate to a change in the value of assets or liabilities that is charged directly to other comprehensive income are charged or credited directly to other comprehensive income. Financial assets The Group’s financial assets include cash and cash equivalents and trade and other receivables. All financial assets are initially recognised at fair value plus transaction costs, when the Group becomes party to the contractual provisions of the instrument. Interest resulting from holding financial assets is recognised in the statement of comprehensive income using the effective interest method. Loans and receivables are measured subsequent to initial recognition at amortised cost using the effective interest method, less provision for impairment. Provision for impairment of trade, loan receivables and other receivables is made when objective evidence is received that the Group will not be able to collect all amounts due to it in accordance with the original terms of the receivable. The amount of the impairment is determined as the difference between the assets’ carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Any change in their value through impairment or reversal of impairment is recognised in profit or loss. A financial asset is derecognised only where the contractual rights to the cash flows from the asset expire or the financial asset is transferred and that transfer qualifies for derecognition. A financial asset is transferred if the contractual rights to receive the cash flows of the asset have been transferred or the Group retains the contractual rights to receive the cash flows of the asset but assumes a contractual obligation to pay the cash flows to one or more recipients. A financial asset that is transferred qualifies for derecognition if the Group transfers substantially all the risks and rewards of ownership of the asset. 24 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 Cash and cash equivalents Cash and cash equivalents include cash at bank and in hand as well as short term highly liquid investments such as bank deposits, that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value. Equity • Share capital represents the nominal value of equity shares that have been issued. • Share premium represents the excess over nominal value of the fair value of the consideration received for equity shares, net of expenses of the share issue. • Other reserves represent the cumulative amount of the share based payment expense. • Retained earnings include all current and prior period results as disclosed in the statement of comprehensive income. • The capital redemption reserve represents the nominal value of shares cancelled on the purchase of own shares in order to maintain the capital base of the Group. Financial liabilities The Group’s financial liabilities include bank loans and overdrafts, trade and other payables and liabilities at fair value through profit and loss. Financial liabilities are recognised when the Group becomes a party to the contractual agreement of the instrument. All interest related charges are recognised as an expense in “finance costs” in the statement of comprehensive income using the effective interest method. Bank overdrafts are raised for support of the short term funding of the Group’s operations. Bank loans are raised for support of the long term funding of the Group’s operations. They are recognised initially at fair value, net of direct issue costs and subsequently measured at amortised cost using the effective interest method, with interest-related charges recognised as an expense in finance costs in the statement of comprehensive income. Finance charges, including premiums payable on settlement or redemption and direct issue costs, are recognised in profit or loss on an accruals basis using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Trade and other payables are recognised initially at their fair value and subsequently measured at amortised cost less settlement payments. All derivative financial instruments are valued at fair value through profit and loss. No derivative financial instruments have been designated as hedging instruments. All interest related charges are included within finance costs or finance income. Changes in an instrument's fair value are disclosed separately in the statement of comprehensive income. Fair value is determined by reference to active market transactions or using a valuation technique where no active market exists. A financial liability is derecognised only when the obligation is extinguished, that is when the obligation is discharged or cancelled or expires. Classification as equity or financial liability Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. A financial liability exists where there is a contractual obligation to deliver cash or another financial asset to another entity or to exchange financial assets or financial liabilities under potentially unfavourable conditions. In addition contracts which result in the entity delivering a variable number of its own equity instruments are financial liabilities. Shares containing such obligations are classed as financial liabilities. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Dividends and distributions relating to equity instruments are debited directly to equity. 25 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 Share warrants and share options All goods and services received in exchange for the grant of any share-based payment are measured at their fair values. Where employees are rewarded using share-based payments, the fair values of employees’ services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example, profitability and sales growth targets). All equity-settled share based payments are ultimately recognised as an expense in the statement of comprehensive income with a corresponding credit to other reserves. Upon exercise of share warrants or share options the proceeds received net of attributable transaction costs are credited to share capital, and where appropriate share premium. When the share warrants or share options have vested and then lapsed, the amount previously recognised in other reserves is transferred to retained earnings. Share based payments The fair value of granting awards under the Long Term Incentive Plan to directors is recognised through the consolidated statement of comprehensive income. The value of shares awarded is calculated by using the Black Scholes model. The resulting fair value is amortised through the consolidated statement of comprehensive income on a straight line basis over the vesting period. The charge is reversed if it is likely that any non-market based criteria will not be met. Segmental reporting An operating segment is a distinguishable component of the Group that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Group’s chief operating decision maker to make decisions about the allocation of resources and assessment of performance and about which discrete financial information is available. As the chief operating decision maker reviews financial information for and makes decisions about the Group’s investment properties and properties held for trading as a portfolio, the directors have identified a single operating segment, that of investment in and trading of commercial properties. Application of new and revised IFRS and interpretations thereof issued by the International Financial Reporting Interpretations Committee ("IFRIC") The Group has adopted the provisions of the following new standards: • IFRS 10 'Consolidated Financial Statements' ('IFRS 10') IFRS 10 supersedes IAS 27 'Consolidated and Separate Financial Statements’ (IAS 27) and SIC 12 ‘Consolidation- Special Purpose Entities’. IFRS 10 revises the definition of control and provides extensive new guidance on its application. These new requirements have the potential to affect which of the Group’s investees are considered to be subsidiaries and therefore to change the scope of consolidation. The requirements on consolidation procedures, accounting for changes in non-controlling interests and accounting for loss of control of a subsidiary are unchanged. Management has reviewed its control assessments in accordance with IFRS 10 and has concluded that there is no effect on the classification (as subsidiaries or otherwise) of any of the Group's investees held during the period or comparative periods covered by these financial statements. IFRS 11 'Joint Arrangements' ('IFRS 11') IFRS 11 supersedes IAS 31 ‘Interests in Joint Ventures’ (IAS 31) and SIC 13 ‘Jointly Controlled Entities- Non- Monetary-Contributions by Venturers’. IFRS 11 revises the categories of joint arrangement, and the criteria for classification into the categories, with the objective of more closely aligning the accounting with the investor’s rights and obligations relating to the arrangement. In addition, IAS 31’s option of using proportionate consolidation for arrangements classified as jointly controlled entities under that Standard has been eliminated. IFRS 11 now requires the use of the equity method for arrangements classified as joint ventures (as for investments in associates). • 26 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 Until 12 December 2014 the Group’s only joint arrangement within the scope of IFRS 11 was its 50% investment in Menin Works. Management has reviewed the classification and accounting treatment of this investment in line with IFRS 11 and concluded that it should be accounted for as a joint operation as defined therein. On 12 December 2014, the Group acquired the remaining interest in, and thereby control of, Menin Works. From this date, the results and position of Menin Works at 31 December 2014 have been consolidated in the Group accounts. • IFRS 12 'Disclosure of Interests in Other Entities' ('IFRS 12') IFRS 12 integrates and makes consistent the disclosure requirements for various types of investments, including unconsolidated structured entities. It introduces new disclosure requirements about the risks to which an entity is exposed from its involvement with structured entities. Note 11 illustrates the application of IFRS 12 in the current year. The Group has adopted the new provisions of the following amended standards but there is no material impact on the amounts reported or the disclosures in the financial statements: • Offsetting Financial Assets and Financial Liabilities (Amendments to IAS 32) Standards and interpretations in issue, not yet effective The Group has not early adopted the following new standards, amendments or interpretations that have been issued but are not yet effective: IFRS 9 Financial Instruments (not yet adopted by EU); IFRS 15 Revenue from Contracts with Customers (not yet adopted by EU); • • • Annual Improvements to IFRSs 2010-2012 Cycle (effective for financial years starting on or after 1 February 2015); • Annual Improvements to IFRSs 2011-2013 Cycle (effective for financial years starting on or after 1 January 2015); • Annual Improvements to IFRSs 2012-2014 Cycle (not yet adopted by EU). The Group has commenced assessment of the impact of the above standards on presentation and disclosure but is not yet in a position to state whether any of these standards would have a material impact on its results of operations and financial position. Certain other new standards and interpretations have also been issued but are not expected to have a material impact on the Group’s financial statements. Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next accounting year are as follows: Investment property valuation The Group uses the valuations performed by its independent valuers or the directors as the fair value of its investment properties. The valuation is based upon assumptions including future rental income, anticipated maintenance costs and on the appropriate discount rate. The valuer and directors also make reference to market evidence of transaction prices for similar properties. The impact of changes in property yields used to ascertain the valuation of investment properties are considered in note 15. Trade and other receivables The Group is required to judge when there is sufficient objective evidence to require the impairment of individual trade and other receivables. It does this on the basis of the age of the relevant receivables, external evidence of the credit status of the debtor entity and the status of any disputed amounts. Further details with regard to the potential impairment of trade and loan receivables are provided in note 13. Deferred taxation The Group has a deferred tax asset of £1,577,000 at 31 December 2014 (2013: £2,900,000) as detailed in note 17. The Directors make assessments as to the likely future values of investment properties and indications of when the devaluation of investment properties will reverse and taxable gains will arise through increases in the value of the property portfolio, such that the assets will crystallise in the foreseeable future. They also monitor the interest rate 27 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 swap for potential crystallisation of a loss by reviewing interest rates, and also the rental income stream to assess the potential utilisation of trading losses. Surrender premiums The Group is required to judge whether amounts due under lease surrenders are sufficiently irrevocable that income can be accrued. Judgment is also required in establishing whether income relates to an exit fee for terminating the leased asset (recognised immediately), or whether it represents accelerated rental income (recognised over the remaining lease term). Surrender premiums received during the year are shown in note 2. Critical judgements in applying the Group’s accounting policies The Group makes judgements in applying the accounting policies. The critical judgement that has been made is as follows: Categorisation of properties Properties held by the subsidiary company 3147398 Limited were classified as inventories, being properties held for resale in the ordinary course of business until 3 December 2014 when the decision was made by management to cease actively marketing the properties and instead hold them for capital appreciation and to generate rental income. As a result, from this date, the properties are classified as investment properties. Investment properties held for own use are classified as leasehold property only when intended for long term use within the business. 28 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 2. Segmental information The segmental information is provided to the Chief Executive, who is the chief operating decision maker. Segment revenues – Rental income - Surrender premiums - Sale of assets held as inventory Cost of sales – Direct costs - Cost of property - Loss on valuation of assets held as inventory Administrative expenses Surplus on disposal of investment property Net profit on valuation of investment properties Segment operating profit Segment assets The segmental information provided to the Chief Executive also includes the following: Finance income Finance costs Depreciation Income tax charge Investment in and trading of properties 2014 £000 2013 £000 5,392 754 1,870 8,016 (951) (1,411) (90) 2,452 (2,542) 277 6,767 10,066 116,156 5,313 374 1,030 6,717 (735) (1,051) (300) 2,086 (1,675) 459 2,096 5,511 92,507 2014 2013 £000 £000 60 (2,672) (8) (1,960) 21 (2,595) (11) (1,200) Revenue from external customers and non current assets arises wholly in the United Kingdom. All revenue for the year is attributable to the principal activities of the Group. Revenue from the largest customer represented 9% (2013: 9%) of the total rental income revenue for the period. 3. Profit on ordinary activities before taxation Profit on ordinary activities before taxation is stated after: Auditor’s remuneration: Fees payable for the audit of the Group financial statements Fees payable for the audit of the financial statements of the Group's subsidiaries Depreciation of owned property and equipment Operating lease payments 29 2014 £000 17 21 8 129 2013 £000 16 16 11 129 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 4. Directors and employees Staff costs during the period were as follows: Wages and salaries Social security costs 2014 £000 1,473 172 1,645 2013 £000 864 110 974 The average number of employees (including executive directors) of the Group during the period was six, all of whom were engaged in administration (2013: six). The executive and non-executive directors are also the key management personnel and details of their remuneration are included within the directors' remuneration report on pages 13 and 14. 5. Finance income/finance costs Finance income: Interest receivable Finance costs: Interest payable on bank loans 6. Income tax charge Result for the year before tax Tax rate Expected tax charge Capital allowances and losses no longer available Adjustments prior year Actual tax charge Tax charge comprises: Current tax Deferred tax charge (note 17) 30 2014 £000 60 2013 £000 21 (2,672) (2,595) % 2014 £000 6,009 20% 1,202 758 - 1,960 - 1,960 1,960 % 2013 £000 4,956 20% 991 - 364 1,355 - 1,355 1,355 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 7. Earnings per share The calculation of earnings per share is based on the result for the year after tax and on the weighted average number of shares in issue during the year. Reconciliations of the earnings and the weighted average numbers of shares used in the calculations are set out below. 2014 Average number of shares Earnings per Share Earnings £000 Earnings £000 2013 Average number of shares Earnings per share Basic and diluted earnings per share 4,049 100,023,337 4.05p 3,601 71,420,598 5.04p Basic and diluted earnings per share are the same because the effect of the LTIP options in issue is anti-dilutive. The European Public Real Estate Association indices below have been included in the financial statements to allow more effective comparisons to be drawn between the Group and other business in the real estate sector. EPRA EPS per share 2014 2013 Earnings Shares Earnings per Share Earnings Shares Earnings per share £000 No p £000 No p 4,049 100,023,337 4.05 3,601 71,420,598 5.04 (2,096) (459) 92 300 (2,061) 887 264 71,420,598 0.37 Basic earnings per share Net surplus on valuation of investment properties Profits on disposal of investment properties Tax on profits on disposals Fair value of inventory properties Change in fair value of derivatives Deferred tax (6,767) (277) 55 90 1,445 1,047 EPRA Loss/(earnings) (358) 100,023,337 (0.36) 31 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 7. Earnings per share (continued) EPRA NAV per share 2014 2013 Net assets Shares £000 Net asset value per share p Net assets Shares £000 Net asset value per share p 64,563 111,420,598 57.9 41,878 71,420,598 58.6 - 64,563 111,420,598 57.9 41,878 71,420,598 58.6 4,697 (940) - - 3,252 (2,900) - - 68,320 111,420,598 61.3 42,230 71,420,598 59.1 (4,697) 940 - - (3,252) 2,900 - - 64,563 111,420,598 57.9 41,878 71,420,598 58.6 Basic Dilutive impact of share options and warrants Diluted Adjustment to fair value of derivatives Deferred tax EPRA NAV Adjustment to fair value of derivatives Deferred tax EPRA NNNAV 8. Intangible assets Gross carrying amount Cost At 1 January 2014 and 31 December 2014 Accumulated impairment losses At 1 January 2014 and 31 December 2014 Net book amount at 31 December 2013 and 31 December 2014 Goodwill £000 171 - 171 The directors have reviewed the carrying value of the goodwill at the year end and consider no impairment provision is required. 32 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 9. Investment properties Investment properties are those held to earn rentals and for capital appreciation. The carrying amount of investment properties for the periods presented in the consolidated financial statements as at 31 December 2014 is reconciled as follows: Carrying amount at 1 January 2013 Additions – acquisition of new properties Additions – subsequent expenditure Disposals Revaluation Carrying amount at 31 December 2013 Additions – acquisition of new properties Additions – subsequent expenditure Disposals Revaluation Carrying amount at 31 December 2014 The figures stated above for the gross carrying amount include valuations as follows: At professional valuation At directors' valuation £000 71,491 2,294 258 (5,538) 2,096 70,601 29,438 94 (4,883) 6,767 102,017 £000 100,267 1,750 102,017 All of the Group’s investment properties are held as either freehold or long leasehold and are held for use in operating leases. The Group uses the fair value model for all its investment properties. If investment properties had not been revalued they would have been included on the historical cost basis at the following amounts: 2014 £'000 2013 £'000 Cost and net book amount at 31 December 108,964 82,483 In accordance with IAS40, the Group’s policy is that investment properties should be valued by an external valuer at least every three years. The valuation at 31 December 2014 has in the main been carried out by DTZ and Gerald Eve LLP, independent professional valuers, on certain properties and the directors on the remaining properties. Both professional valuers have recent experience in the location and type of properties held. Rental income from investment properties in the year ended 31 December 2014 was £6,146,000 (2013: £5,687,000) and direct operating expenses in relation to those properties were £923,000 (2013: £710,000). Direct operating expenses in relation to those properties which did not generate rental income in the period were £28,000 (2013: £25,000. 33 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 10. Property, plant & equipment Gross carrying amount At 1 January 2013 and 31 December 2013 Additions At 31 December 2014 Depreciation and Impairment At 1 January 2013 Charge for the year At 31 December 2013 Charge for the year At 31 December 2014 Net book carrying amount At 31 December 2014 At 31 December 2013 Leasehold Improvements £000 Office Equipment £000 Total £000 108 - 108 94 9 103 5 108 - 5 54 7 61 50 2 52 3 55 6 2 162 7 169 144 11 155 8 163 6 7 11. Interests in subsidiaries and joint operation Set out below are details of the subsidiaries held directly by the Group: Name Boothmanor Limited Eurocity (Crawley) Limited 3147398 Limited Rightforce Limited Metro Court (WB) Limited Southgate Derby Retail Limited Real Homes One Limited Principal activity Property investment Property investment Property investment Property investment Property investment Property investment Property trading Country of incorporation England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales The Group has control over each of these subsidiaries by virtue of its 100% shareholding in each. The joint operation relates to the Group’s interest in Menin Works which is an unincorporated business undertaking property investment in the United Kingdom. Menin Works was acquired fully on 12 December 2014. As the joint operation is an unincorporated business, no quoted market price exists for this investment. Included within the below line items in the consolidated of comprehensive income and consolidated statement of financial position are the following amounts relating to the joint operation: Consolidated statement of financial position Investment properties Trade and other receivables Bank loans 34 2013 £000 1,050 353 (587) 816 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 11. Interests in subsidiaries and joint operation (continued) Consolidated statement of comprehensive income Revenue Cost of sales Interest expense 2014 £000 68 (7) (50) 11 2013 £000 79 (17) (43) 19 As the remaining 50% interest was acquired on 12 December 2014, there are no corresponding amounts presented for the consolidated statement of financial position in 2014. On transition to IFRS 11, there were no differences between the investment derecognised and the assets and liabilities recognised at the beginning of the preceding period. There were no capital commitments at 31 December 2013 in respect of the joint operation. There were no contingent liabilities at 31 December 2013 in respect of the joint operation, and there are no significant restrictions on the ability of the joint operation to transfer funds. 12. Inventories Properties and land held for trading 2014 £000 2013 £000 2,366 5,601 All properties held for trading are included at the lower of cost and net realisable value, being their fair value less costs to sell. No inventory (2013: £3,235,000), is pledged as security for bank loans. The amount of inventories recognised as a charge in the year ended 31 December 2014 is £1,411,000 (2013: £1,051,000), which is before charging an impairment of £90,000 (2013: £300,000). 35 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 13. Trade and other receivables Trade receivables Other receivables Prepayments and accrued income 2014 £000 2,115 710 920 3,745 2013 £000 567 3,095 1,083 4,745 All of the Group’s trade and other receivables have been reviewed for indicators of impairment. Certain trade receivables were found to be impaired and a provision of £20,000 (2013: £95,000) has been recorded accordingly. The movement in the provision for impairment during the year is as follows: At 1 January (Decrease)/increase in provision At 31 December 2014 £000 95 (75) 20 2013 £000 30 65 95 In addition, some of the trade receivables not impaired are past due as at the reporting date. The age of financial assets past due but not impaired is as follows: Not more than three months past due More than three months but no more than six months past due 2014 £000 14 90 104 2013 £000 8 44 52 36 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 13. Trade and other receivables (continued) Financial assets by category The categories of financial asset included in the balance sheet and the headings in which they are included are as follows: Loans and receivables £000 2014 Non financial assets £000 2013 Balance sheet total £000 Loans and receivables £000 Non financial assets £000 Balance sheet total £000 Trade receivables Loans receivable Other receivables Prepayments and accrued income Cash and cash equivalents 2,115 710 - 6,274 9,099 - - - 920 - 920 2,115 - 710 920 6,274 10,019 567 - 3,095 - 8,482 12,144 14. Trade and other payables Trade payables Other payables Social security and taxation Accruals and deferred income - - - 1,083 - 1,083 2014 £000 508 309 446 1,982 3,245 567 - 3,095 1,083 8,482 13,227 2013 £000 509 218 260 1,729 2,716 37 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 14. Trade and other payables (continued) Financial liabilities by category The categories of financial liabilities included in the balance sheet and the headings in which they are included are as follows: 2014 2013 Financial liabilities at fair value through profit and loss Other financial liabilities at amortised cost Financial liabilities at fair value through profit and loss Other financial liabilities at amortised cost Non- financial liabilities Non- financial liabilities Balance sheet total £000 £000 £000 £000 £000 £000 £000 Current Bank loans and overdrafts Provision for current taxation Trade payables Other payables Social security and taxation Accruals and deferred income Non-current Bank loans Financial instruments - - - - - - - - 4,697 4,697 4,697 24,054 - 24,054 - 508 309 - 1,182 26,053 18,942 - 18,942 18 - - 446 800 18 508 309 446 1,982 1,264 27,317 - - - 18,942 4,697 23,639 50,956 44,995 1,264 - - - - - - - - 3,252 3,252 3,252 25,006 - 509 218 - 719 26,452 19,637 - 19,637 - 18 - - 260 1,010 1,288 - - - 46,089 1,288 Balance sheet total £000 25,006 18 509 218 260 1,729 27,740 19,637 3,252 22,889 50,629 15. Financial risk management objectives and policies The Group’s financial instruments are bank borrowings, cash, bank deposits, interest rate swap agreements and various items such as short-term receivables and payables that arise from its operations. The main purpose of these financial instruments is to fund the Group’s investment strategy and the short-term working capital requirements of the business. The main risks arising from the Group’s financial instruments are credit risk, liquidity risk, interest rate risk and property yield risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. These policies have remained unchanged throughout the period. Credit risk The Group’s principal financial assets are bank balances and trade and other receivables. The Group’s credit risk is primarily attributable to its trade and other receivables. The amounts presented in the balance sheet are net of allowance for doubtful receivables. An allowance for impairment is made where there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables concerned. The credit risk for liquid funds is considered negligible, since the counterparties are reputable banks with high quality external credit ratings. 38 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 15. Financial risk management objectives and policies (continued) The Group’s exposure to credit risk is limited to the carrying amount of financial assets recognised at the balance sheet date, as summarised below: Cash and cash equivalents Trade and other receivables 2014 £000 6,274 2,825 9,099 2013 £000 8,482 3,662 12,144 The Group continuously monitors defaults of customers and other counterparties, identified either individually or by group, and incorporates this information into its credit risk controls. External credit ratings and/or reports on customers and other counterparties are obtained and used. The Group’s policy is to deal only with credit worthy counterparties. The Group’s management considers that all the above financial assets that are not impaired for each of the reporting dates under review are of good credit quality, including those that are past due. In respect of trade and other receivables, the Group is not exposed to any significant risk exposure to any single counterparty or any group of counterparties having similar characteristics. Liquidity risk The Group seeks to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. The Group does this by taking out loans with banks to build up cash resources to fund property purchases. Bank loans and overdrafts The Group borrowings analysis (all of which are undiscounted) at 31 December 2014 is as follows: In less than one year: Bank overdraft Bank borrowings In more than one year but less than two years: Bank borrowings In more than two years but less than five years: Bank borrowings In more than five years Bank borrowings Financial instruments Deferred arrangement costs 39 2014 £000 2013 £000 - 24,054 1,702 23,304 2,264 1,289 1,577 2,493 15,201 4,697 47,793 (100) 16,045 3,252 48,085 (190) 47,693 47,895 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 15. Financial risk management objectives and policies (continued) Split Current liabilities -bank overdraft Non-current liabilities -financial liabilities at fair value through profit and loss -bank loans -bank loans Maturity of financial liabilities The gross contractual cashflows relating to non-derivative financial liabilities are as follows: In less than one year: Bank overdraft Trade payables Other payables Accruals Bank borrowings In more than one year but less than two years: Bank borrowings In more than two years but less than five years: Bank borrowings In more than five years Bank borrowings 2014 £000 - 24,054 18,942 4,697 47,693 2014 £000 - 508 309 1,182 24,054 2013 £000 1,702 23,304 19,637 3,252 47,895 2013 £000 1,702 509 218 719 23,304 2,264 1,289 1,577 2,493 15,201 16,045 45,095 46,279 In February 2008 the Group entered into interest rate swap agreements to cover £20 million of its bank borrowings. These contracts are considered by management to be part of economic hedge arrangements but have not been formally designated. The effect of these agreements is to fix the interest payable on a notional £10 million at a rate of 4.95%; unless the actual rate is between 3.65% and 4.95% in which case the actual rate is paid or unless the rate is above 4.95% in which case 3.65% is paid and to fix interest payable on a notional £10 million at 3.85% plus a margin of 2.75%. At 31 December 2014 the fair value of this arrangement based on a valuation provided by the Group's bankers was a liability of £4,697,000 (2013: £3,252,000). All of the interest rate swap agreements terminate in more than five years (2013: more than five years). Borrowing facilities The Group has undrawn committed borrowing facilities at 31 December 2014 of £nil (2013: £nil). Market risk Interest rate risk The Group finances its operations through retained profit, cash balances and the use of medium term borrowings. When medium term borrowings are used either fixed rates of interest apply or where variable rates apply, interest rate swap arrangements are entered into. When the Group places cash balances on deposit, rates used are fixed in the short term and for sufficiently short periods that there is no need to hedge against implied risk. 40 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 15. Financial risk management objectives and policies (continued) The interest rate exposure of the financial liabilities of the Group at 31 December 2014 was: Interest % Expiry Date Fixed until October 2019 Fixed until October 2019 Fixed until October 2019 Fixed until January 2019 Fixed until August 2028 Fixed until January 2030 Fixed until March 2030 Fixed until May 2030 6.300 6.600 6.230 6.295 6.550 6.040 6.270 5.780 Fixed until March 2031 Fixed until March 2027 Cap and collar agreement until January 2018 5.470 5.160 4.95% cap Variable rate Loan arrangement fees May 2016 October 2019 October 2019 January 2019 August 2028 January 2030 March 2030 May 2030 March 2031 March 2027 January 2018 2014 £000 1,171 10,000 691 823 686 4,247 719 1,475 743 9,841 10,000 2,700 43,096 (100) 42,996 2013 £000 587 10,000 734 955 715 4,403 729 1,493 757 10,059 10,000 2,700 43,132 (190) 42,942 The Directors consider the fair value of the loans not to be significantly different from their carrying value. The following table illustrates the sensitivity of the net result after tax and equity to a reasonably possible change in interest rates of + half a percentage point (2013: + half a percentage point) with effect from the beginning of the year: Decrease in result after tax and equity 2014 2013 +0.5% £’000 13 +0.5% £000 135 The interest rate change above will not have a material impact on the valuation of the interest rate swap. Property yield risk The valuation of investment properties is dependent on the assumed rental yields. However, the impact on the net result after tax and equity is difficult to estimate as it inter relates with other factors affecting investment property values. 41 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 15. Financial risk management objectives and policies (continued) Capital risk management The Group’s objectives when managing capital are: • to safeguard the Group’s ability to continue as a going concern, so that it continues to provide returns and benefits for shareholders; • to ensure that key bank covenants are not breached • to maintain sufficient facilities for operating cashflow needs and to fund future property purchases • to support the Group’s stability and growth; • to provide capital for the purpose of strengthening the Group’s risk management capability; • to provide capital for the purpose of further investment property acquisitions; and • to provide an adequate return to shareholders. The Group actively and regularly reviews and manages its capital structure to ensure an optimal capital structure and equity holder returns, taking into consideration the future capital requirements of the Group and capital efficiency, prevailing and projected profitability, projected operating cash flows, projected capital expenditures and projected strategic investment opportunities. Management regards total equity as capital and reserves, for capital management purposes. 16. Fair value disclosures The methods and techniques used for the purpose of measuring fair value are unchanged compared to the previous reporting period. Fair value measurement of financial instruments Financial assets and financial liabilities measured at fair value in the consolidated statement of financial position are grouped into three levels of a fair value hierarchy. The three levels are defined based on the observability of significant inputs to the measurement, as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities Level 2: inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices) and Level 3 : inputs for the asset or liability that are not based on observable market data (unobservable inputs). The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. The financial liabilities measured at fair value on a recurring basis in the statement of financial position, which relate to interest rate swaps, are grouped into the fair value hierarchy as follows: Interest rate swap agreements: At 1 January 2013 Income statement – surplus At 3I December 2013 Income statement – loss At 31 December 2014 Level 1 £000 Level 2 £000 Level 3 £000 - - - - - 5,314 (2,062) 3,252 1,445 4,697 - - - - - Total £000 5,314 (2,062) 3,252 1,445 4,697 The fair value of the Group’s interest rate swap agreements has been determined using observable interest rates corresponding to the maturity of the instrument. The effects of non-observable inputs are not significant for these agreements. 42 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 16. Fair value disclosures (continued) Measurement of other financial instruments The measurement methods for financial assets and liabilities accounted for at amortised cost are described below: Trade and other receivables, cash and cash equivalents and trade and other payables The carrying amount is considered a reasonable approximation of fair value due to the short duration of these instruments. Bank loans and overdrafts Fair values are considered to be equivalent to book value as loans and overdrafts were obtained at market rates. Fair value measurement of non-financial assets The following table shows the levels within the hierarchy of non-financial assets measured at fair value on a recurring basis at 31 December 2014. Investment property: - held to earn rentals and for capital appreciation Level 1 £000 Level 2 £000 Level 3 £000 Total £000 - - 102,017 102,017 The reconciliation of the carrying value of non-financial assets classified within level 3 are as follows: At 1 January 2014 Acquired during the year Disposals during the year Gains recognised in profit and loss - increase in fair value At 31 December 2014 Investment properties £000 70,601 29,532 (4,883) 6,767 102,017 Fair value of the Group’s property assets is estimated based on appraisals performed by independent, professionally qualified property valuers on certain properties and the directors on the remaining properties. The significant inputs and assumptions are developed in close consultation with management. The valuation processes and fair value changes are reviewed by the directors and audit committee at each reporting date. Measurement of fair value of investment property held to earn rentals and for capital appreciation Properties valued by external valuers are valued on an open market basis based on active market prices adjusted for any differences in the nature, location or condition of the specified asset such as plot size, encumbrances and current use. Properties valued by the directors use the same principles as the external valuers. If this information is not available, alternative valuation methods are used such as recent prices on less active markets, or discounted cashflow projections. The significant unobservable input is the adjustment for factors specific to the properties in question. The extent and direction of this adjustment depends on the number and characteristics of the observable market transactions in similar properties that are used as the starting point for the valuation. Although this input is a subjective judgement, management consider that the overall valuation would not be materially altered by any reasonably alternative assumptions. The market value of the investment properties has been supported by comparison to that produced under income capitalisation technique applying a key unobservable input, being yield. The range of yield applied is 7.5% to 11.0%. The fair value of an investment property reflects, among other things, rental income from current leases and assumptions about future rental lease income based on current market conditions and anticipated plans for the property. 43 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 17. Deferred taxation The movement in deferred taxation assets is as follows: At 1 January Income statement (note 6) At 31 December 2014 £000 2,900 (1,960) 940 2013 £000 4,255 (1,355) 2,900 Deferred tax arising from temporary differences and unused tax losses can be summarised as follows: Investment property Financial instrument Unused trading tax losses Deferred tax asset £'000 Deferred tax asset £'000 - 940 - 940 1,610 650 640 2,900 No temporary differences resulting from investments in subsidiaries or interests in joint ventures qualified for recognition as deferred tax assets or liabilities. Under the current fiscal environment, these entities are exempt from capital gains taxes. See note 6 for information on the Group’s tax expense. Deferred tax has been provided on all temporary differences for the following reason: • the interest rate swap liability will ultimately reverse regardless of movements in future interest rates; and The Group elected for Real Estate Investment Trust (REIT) status with effect from 1 January 2015. As a result, providing certain conditions are met, the Group’s profits from property investment are exempt from United Kingdom corporation tax. Therefore, there is no provision for deferred tax arising on the revaluation of properties or on unused trading losses, substantially all of which relate to property investment. 44 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 18. Share capital Allotted, issued and fully paid: Ordinary shares of 10p 2014 Number of shares 2014 £000 2013 Number of Shares 2013 £000 111,420,598 11,142 71,420,598 7,142 At an Extraordinary general meeting held on 11 April 2014 the Company received shareholder approval to raise funds for expansion by way of placing 40 million shares at 50 pence per share, raising £19.5 million net of expenses. At the Annual General meeting held in June 2010 a resolution was passed approving the adoption of a new Long Term Incentive Plan (LTIP). The proposed LTIP is designed to promote retention and incentivise the executive directors to grow the value of the Group and to maximise returns: • The LTIP has a ten year life from January 2010 to December 2019. • Awards become payable to the extent that shareholder return defined as net asset value (“NAV”) growth adjusted for dividends and other returns to shareholders exceed a compound growth rate of 10% per annum (Hurdle Return). If shareholder returns exceed the Hurdle Return, 20% of such excess will be payable in Ordinary shares under the LTIP. • • Participants will have the opportunity to take up to 30% of the amount accrued under the LTIP at the end of year three, with the portion able to be taken up each year thereafter increasing by 10% each year and the full amount (100%) being available only after the end of the ten year period. • Only executive directors are eligible to participate in the LTIP. • The baseline for the commencement of the LTIP is the NAV per Ordinary share at 31 December 2009 adjusted for the impact of the placing of Ordinary shares in February 2010. • Subject to the time limits set out above, awards may be taken up in the 20 business day period following the announcement of full year or interim results. • Amounts payable will be satisfied in full (save as below) by the issue of Ordinary shares or the grant of zero/nominal cost options to any participant. The price at which shares will be issued will be the higher of NAV per share as reported in the latest full year results and the weighted average mid-market closing price for the first 20 business days following announcement of the latest full year results. On issue, the Ordinary shares will rank pari passu with the existing issued Ordinary shares. • The number of Ordinary shares which can be issued under the LTIP is limited to 10% of the Company’s then issued share capital. Any excess earned above this level will be paid in cash provided that the remuneration committee consider it prudent to do so at that stage, otherwise payment will be deferred until the remuneration committee deem it prudent. • The remuneration committee may from time to time make any alteration to the plan which it thinks fit, including for legal, regulatory or tax reasons, in order to ensure the smooth workings of the plan in line with its objectives. As described in the Directors’ Remuneration Report, two options were issued under the 2010 LTIP on inception. The weighted average fair value of the awards made is £0.59 per option, calculated applying the Black-Scholes option pricing model with a volatility of 21% (based on the weighted average share price movements over the last 3 years), a dividend yield of 0%, a risk free rate of 4%, an expected weighted average life of 5 years, a weighted average exercise price of 0.5p and a market value of underlying shares at the date of the grant of £0.595. As at the date of the grant no further shares were expected to be issued under the LTIP based on forecasts available at that time. At 31 December 2014, no options were expected to vest (2013: no options), therefore the charge to the income statement in the years ended 31 December 2013 and 2014 is £nil. 45 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 19. Operating lease commitments Operating lease commitments relating to land and buildings expire within two to five years and amount to £71,000 (2013: £71,000). Non-cancellable operating lease commitments receivable: Within one year Later than one year but not later than five years Later than five years 2014 £000 998 8,844 26,819 36,661 2013 £000 262 5,594 21,783 27,639 Rent receivable by the Group under current leases from tenants is from commercial and retail property held. 20. Contingent liabilities There were no contingent liabilities at 31 December 2014 or at 31 December 2013. 21. Capital commitments Capital commitments authorised at 31 December 2014 were £nil (2013: £nil). 22. Pension scheme There was no pension scheme for the benefit of employees or directors in operation at 31 December 2014 or 31 December 2013. 46 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 23. Related party transactions The Group's related parties are its key management personnel and certain other companies which are related to certain directors of the Group. The executive and non-executive directors are also the key management personnel and details of their remuneration are included within the directors' remuneration report on pages 13 and 14. During the period the Group paid agency fees of £192,000 (2013: £69,720) in respect of professional services to Bond Wolfe, a partnership in which P P S Bassi is a partner, and rent and service charges of £129,000 (2013: £129,000) to Bond Wolfe Estates Limited, a company in which P P S Bassi is a director and shareholder. During the period the Group paid professional fees of £10,000 (2013: £10,330) to, and received rental income of £52,000 (2013: £52,000) from, CP Bigwood Chartered Surveyors, a company in which P P S Bassi and M H P Daly are directors and shareholders. No amounts were outstanding at 31 December 2014 (2013:£nil). During the period the Group paid dividends to its directors in their capacity as shareholders, as follows: 2014 £000 2013 £000 1 1 - 69 5 1 - - 90 7 J R Crabtree W Wyatt P London P P S Bassi M H P Daly 47 REAL ESTATE INVESTORS PLC COMPANY FINANCIAL STATEMENTS For the year ended 31 December 2014 REAL ESTATE INVESTORS PLC COMPANY STATUTORY FINANCIAL STATEMENTS (PREPARED UNDER UK GAAP) FOR THE YEAR ENDED 31 DECEMBER 2014 COMPANY NUMBER 5045715 48 REAL ESTATE INVESTORS PLC STATEMENT OF DIRECTORS' RESPONSIBILITIES For the year ended 31 December 2014 Statement of directors’ responsibilities The directors are responsible for preparing the Company financial statements (“financial statements”) in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have elected to prepare financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable laws). Under 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 and profit or loss of the company for that period. In preparing these financial statements, the directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The directors confirm that: • so far as each director is aware, there is no relevant audit information of which the company’s auditor is unaware; and • the directors have taken all the steps that they ought to have taken as directors in order to make themselves aware of any relevant audit information and to establish that the auditor is aware of that information. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 49 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF REAL ESTATE INVESTORS PLC We have audited the parent Company financial statements of Real Estate Investors plc for the year ended 31 December 2014 which comprise the principal accounting policies, the balance sheet and the related notes. The financial reporting framework that that has been applied in their preparation is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice). This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditor As more fully explained in the Statement of Directors’ Responsibilities set out on page 49 the directors are responsible for the preparation of the parent Company financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the parent Company financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the Financial Reporting Council's website at www.frc.org.uk/auditscopeukprivate. Opinion on financial statements In our opinion the parent Company financial statements: • give a true and fair view of the state of the Company’s affairs as at 31 December 2014; • have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and • have been prepared in accordance with the requirements of the Companies Act 2006. Opinion on other matters prescribed by the Companies Act 2006 In our opinion the information given in the Group Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the parent Company financial statements. Matters on which we are required to report by exception We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or 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 and returns; or • certain disclosures of directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. Other matter We have reported separately on the consolidated financial statements of Real Estate Investors plc for the year ended 31 December 2014. David White Senior Statutory Auditor For and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Birmingham Date: 13 March 2015 50 REAL ESTATE INVESTORS PLC PRINCIPAL ACCOUNTING POLICIES For the year ended 31 December 2014 Accounting policies The financial statements have been prepared in accordance with the Companies Act 2006 and UK accounting standards except as noted below in respect of the true and fair override in respect of investment properties. The Company's principal accounting policies have remained unchanged from the previous year. Accounting convention The financial statements are prepared under the historical cost convention as modified by the revaluation of investment properties. Going concern The Company has prepared and reviewed forecasts and made appropriate enquiries which indicate that the Company has adequate resources to continue in operational existence for the foreseeable future. These enquiries considered the following: • the significant cash balances the Group holds and the low levels of historic and projected operating cashflows • any property purchases will only be completed if cash resources or loans are available to complete those purchases • the Group’s bankers have indicated their continuing support for the Group. The Group’s £22.7 million facility with Lloyds Banking Group is due for renewal in October 2015. Whilst the process of agreeing terms for the renewal of these facilities, which would be subject to credit approval, documentation and due diligence, has not commenced at the present time the bank have confirmed the intention to roll the facilities at a similar level for a period of three to five years from the expiry of the facilities. For these reasons, the directors continue to adopt the going concern basis in preparing the financial statements. Turnover Rental income arising from operating leases on properties owned by the Group is accounted for on a straight line basis over the period commencing on the later of the start of the lease or acquisition of the property by the Group, and ending on the earlier of the end of the lease and next break point, unless it is reasonably certain that the break option will not be exercised. Rental income revenue excludes service charges and other costs directly recoverable from tenants. Investment properties Certain of the Company’s properties are held for long term investment and are included in the balance sheet on the basis of open market value in accordance with SSAP 19. The surpluses or deficits on annual revaluations of such properties are transferred to the revaluation reserve, unless a deficit results in a revaluation below cost or is a permanent deficit in which case the amount of the deficit is charged to the profit and loss account. If a revaluation reverses previous losses recognised in the profit and loss account, the gain up to the amount of the losses previously recognised in the profit and loss account is credited to the profit and loss account. Depreciation is not provided in respect of freehold investment properties. Leasehold investment properties are not depreciated where the unexpired term is over 20 years. This policy represents a departure from the Companies Act 2006 which require depreciation to be provided on all fixed assets. The directors consider this policy is necessary in order that the financial statements give a true and fair view, because current values and changes in current values are of prime importance rather than the calculation of systematic annual depreciation. Depreciation is only one of many factors reflected in the annual valuation and the amount, which might otherwise be shown, cannot be separately identified or quantified. Stock Trading properties, which are held for resale, are included in inventories at the lower of cost and net realisable value. Cost includes all fees relating to the purchase of the property and improvement expenses. Net realisable value is based on estimated selling price less future costs expected to be incurred to sale. Any provisions to impair trading properties below cost are reversed in future periods if market conditions subsequently support a higher fair value but only up to a maximum of the original cost. Property acquisitions are accounted for when legally binding contracts which are irrevocable and effectively unconditional are exchanged. Depreciation Depreciation is calculated to write down the cost to residual value of all tangible fixed assets, excluding investment properties, by equal instalments over their expected useful economic lives over the following periods: Leasehold improvements: Office equipment: 51 length of lease four years REAL ESTATE INVESTORS PLC PRINCIPAL ACCOUNTING POLICIES For the year ended 31 December 2014 Investments Investments in subsidiary undertakings are recorded at cost less provision for impairment. Financing costs The costs of arranging finance for the Company are written off to the profit and loss account over the terms of the associated finance using the effective interest method. Operating leases Annual rentals under operating leases are charged to the profit and loss account as incurred. Deferred tax Deferred tax is recognised on all timing differences where the transactions or events give the Company an obligation to pay more tax in the future, or a right to pay less tax in the future, and have occurred by the balance sheet date. Deferred tax assets are recognised on an undiscounted basis when it is more likely than not that they will be recovered. Deferred tax is measured using the rates of tax that have been enacted or substantively enacted by the balance sheet date. Deferred taxation is not provided on gains recognised on revaluing investment properties. Unprovided deferred taxation will crystallise on the sale of assets at their balance sheet value. Financial instruments Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the entity after deducting all of its financial liabilities. Where the contractual obligations of financial instruments (including share capital) are equivalent to a similar debt instrument, those financial instruments are classed as financial liabilities within the balance sheet. Finance costs and gains or losses relating to financial liabilities are included in the profit and loss account. Finance costs are calculated so as to produce a constant rate of return on the outstanding liability. Where the contractual terms of share capital do not have any terms meeting the definition of a financial liability then this is classed as an equity instrument. Dividends and distributions relating to equity instruments are debited direct to equity. Share warrants and share options All goods and services received in exchange for the grant of any share-based payment are measured at their fair values. Where employees are rewarded using share-based payments, the fair values of employees’ services are determined indirectly by reference to the fair value of the instrument granted to the employee. This fair value is appraised at the grant date and excludes the impact of non-market vesting conditions (for example, profitability and sales growth targets). All equity-settled share based payments and share options are ultimately recognised as an expense in the profit and loss account with a corresponding credit to other reserves. Upon exercise of share warrants or share options the proceeds received net of attributable transaction costs are credited to share capital, and where appropriate share premium. When the share warrants or share options have vested and then lapsed, the amount previously recognised in other reserves is transferred to retained earnings. 52 REAL ESTATE INVESTORS PLC BALANCE SHEET As at 31 December 2014 Fixed assets Tangible assets Investments Note 1 2 Current assets Stock Debtors 3 Cash at bank Creditors: amounts falling due within one year 4 Net current liabilities Total assets less current liabilities Creditors: amounts falling due after more than one year Net assets Capital and reserves Ordinary share capital Share premium account Capital redemption reserve Revaluation reserve Profit and loss account Shareholders' funds 2014 £000 89,168 2,721 91,889 2,365 7,447 3,965 13,777 (25,893) (12,116) 79,773 2013 £000 61,705 4,521 66,226 2,365 8,156 7,198 17,719 (28,865) (11,146) 55,080 5 (13,749) 66,024 (13,992) 41,088 7 8 8 8 8 11,142 15,533 45 8,659 30,645 66,024 7,142 61 45 2,932 30,908 41,088 These financial statements were approved by the Board of Directors on 13 March 2015. . Signed on behalf of the Board of Directors J R A Crabtree – Chairman M H P Daly – Finance Director Company No 5045715 The accompanying principal accounting policies and notes form an integral part of these financial statements. 53 REAL ESTATE INVESTORS PLC NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 1. Tangible fixed assets Cost or valuation: At 1 January 2014 Additions Disposals Revaluation At 31 December 2014 Accumulated depreciation At 1 January 2014 Charge for the period At 31 December 2014 Net book amount At 31 December 2014 At 31 December 2013 Leasehold Investment Properties Improvements £000 £000 Office Equipment £000 61,698 25,638 (4,883) 6,709 89,162 - - 89,162 61,698 108 - - - 108 103 5 108 - 5 54 7 - - 61 52 3 55 6 2 Total £000 61,860 25,645 (4,883) 6,709 89,331 155 8 163 89,168 61,705 Of the revaluation surplus of £6,709,000 the amount credited to the revaluation reserve is £5,727,000 with the balance of £982,000 credited to the profit and loss account. The figures stated above for cost or valuation include valuations as follows: At valuation Investment properties 2014 £000 2013 £'000 89,162 61,698 All of the Company’s investment properties are held as either freehold or long leasehold and are held for use in operating leases. If investment properties had not been revalued they would have been included on the historical cost basis at the following amounts: Cost and net book amount at 31 December Investment properties 2014 £'000 2013 £000 90,610 70,562 In accordance with SSAP 19, the Company’s policy is that investment properties should be valued by an external valuer at least every three years. The valuation at 31 December 2014 has been carried out by DTZ Chartered Surveyors and Gerald Eve LLP, Chartered Surveyors on the basis of fair value on certain properties and by the directors on the remaining property. No provision has been made for deferred taxation assets, in accordance with FRS 19, in respect of the devaluation of investment properties but it is expected that this devaluation will reverse in future years. 54 REAL ESTATE INVESTORS PLC (the "Company") NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 2. Fixed asset investments Cost At 1 January 2014 Provision for impairment At 31 December 2014 Investment in subsidiary Undertakings 2014 £000 2013 £000 4,521 (1,800) 2,721 5,366 (845) 4,521 At 31 December 2014 the Company wholly owned the following subsidiaries: Name Boothmanor Limited Eurocity (Crawley) Limited 3147398 Limited Rightforce Limited Metro Court (WB) Limited Southgate Derby Retail Limited Real Homes One Limited Principal activity Property investment Property investment Property investment Property investment Property investment Property investment Property trading Country of incorporation England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales England and Wales 3. Debtors Trade debtors Amounts owed by subsidiary undertakings Other debtors Deferred tax asset Prepayments and accrued income 4. Creditors: amounts falling due within one year Bank overdraft Bank loans Amounts owed to subsidiary undertakings Trade creditors Other creditors Social security and taxation Accruals and deferred income 2014 £000 685 5,291 700 - 771 7,447 2014 £000 - 23,040 - 444 422 376 1,611 25,893 2013 £000 466 4,429 1,278 640 1,343 8,156 2013 £000 1,702 23,033 1,824 470 194 220 1,422 28,865 Bank loans are secured against the Company’s property assets. The Company’s policy is to settle all agreed liabilities within 30 days of receipt of invoice or provision of goods or services if later. At 31 December 2014 trade creditors represented 34 days (2013: 38 days) purchases based on the total purchases for the year. 55 REAL ESTATE INVESTORS PLC (the "Company") NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 5. Creditors: amounts falling due after more than one year Bank loans Less: deferred arrangement costs 2014 £000 13,816 (67) 13,749 2013 £000 14,154 (162) 13,992 Bank loans are secured against the Company’s property assets and bear interest at rates between 5.3% and 6.7% per annum. The Company borrowings analysis at 31 December 2014 is as follows: In less than one year: Bank borrowings Bank overdraft In more than one year but less than two years: Bank borrowings In more than two years but less than five years: Bank borrowings In more than five years Bank borrowings Deferred arrangement costs Split Current liabilities - bank loans and overdrafts Non current liabilities - bank loans 6. Deferred tax 2014 £000 2013 £000 23,040 - 23,033 1,702 982 1,011 1,067 1,056 11,767 36,856 (67) 36,789 23,040 13,749 36,789 12,087 38,889 (162) 38,727 24,735 13,992 38,727 The Group elected for Real Estate Investment Trust (REIT) status with effect from 1 January 2015. As a result, providing certain conditions are met, the Group’s profits from property investment are exempt from United Kingdom corporation tax. Therefore, there is no provision for deferred tax arising on the revaluation of properties or on unused trading losses, substantially all of which relate to property investment. 7. Share capital Allotted, issued and fully paid: Ordinary shares of 10p each 56 2014 2013 Number Number Of shares Of shares 2014 £000 2013 £000 111,420,598 71,420,598 11,142 7,142 REAL ESTATE INVESTORS PLC (the "Company") NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 7. Share capital (continued) At an Extraordinary general meeting held on 11 April 2014 the Company received shareholder approval to raise funds for expansion by way of placing 40 million shares at 50 pence per share, raising £19.5 million net of expenses. At the Annual General meeting held in June 2010 a resolution was passed approving the adoption of a new Long Term Incentive Plan (LTIP). The proposed LTIP is designed to promote retention and incentivise the executive directors to grow the value of the Group and to maximise returns: • The LTIP has a ten year life from January 2010 to December 2019. • Awards become payable to the extent that shareholder return defined as net asset value (“NAV”) growth adjusted for dividends and other returns to shareholders exceed a compound growth rate of 10% per annum (Hurdle Return). If shareholder returns exceed the Hurdle Return, 20% of such excess will be payable in Ordinary shares under the LTIP. • • Participants will have the opportunity to take up to 30% of the amount accrued under the LTIP at the end of year three, with the portion able to be taken up each year thereafter increasing by 10% each year and the full amount (100%) being available only after the end of the ten year period. • Only executive directors are eligible to participate in the LTIP. • The baseline for the commencement of the LTIP is the NAV per Ordinary share at 31 December 2009 adjusted for the impact of the placing of Ordinary shares in February 2010. • Subject to the time limits set out above, awards may be taken up in the 20 business day period following the announcement of full year or interim results. • Amounts payable will be satisfied in full (save as below) by the issue of Ordinary shares or the grant of zero/nominal cost options to any participant. The price at which shares will be issued will be the higher of NAV per share as reported in the latest full year results and the weighted average mid-market closing price for the first 20 business days following announcement of the latest full year results. On issue, the Ordinary shares will rank pari passu with the existing issued Ordinary shares. • The number of Ordinary shares which can be issued under the LTIP is limited to 10% of the Company’s then issued share capital. Any excess earned above this level will be paid in cash provided that the remuneration committee consider it prudent to do so at that stage, otherwise payment will be deferred until the remuneration committee deem it prudent. • The remuneration committee may from time to time make any alteration to the plan which it thinks fit, including for legal, regulatory or tax reasons, in order to ensure the smooth workings of the plan in line with its objectives. As described in the Directors’ Remuneration Report, two options were issued under the 2010 LTIP on inception. The weighted average fair value of the awards made is £0.59 per option, calculated applying the Black-Scholes option pricing model with a volatility of 21% (based on the weighted average share price movements over the last 3 years), a dividend yield of 0%, a risk free rate of 4%, an expected weighted average life of 5 years, a weighted average exercise price of 0.5p and a market value of underlying shares at the date of the grant of £0.595. As at the date of the grant no further shares were expected to be issued under the LTIP based on forecasts available at that time. At 31 December 2014, no options were expected to vest (2013: no options), therefore the charge to the income statement in the years ended 31 December 2013 and 2014 is £nil. 8. Movement in reserves At 1 January 2014 Profit for the year Premium on issue of new shares Expenses of share issue Dividends Surplus on revaluation of investment properties At 31 December 2014 57 Share premium account £000 Capital redemption reserve £000 Revaluation reserve £000 Profit and loss account £000 61 - 16,000 (528) - - 15,533 45 - - - - 45 2,932 - - - 5,727 8,659 30,908 573 - (836) - 30,645 Total £000 33,946 573 16,000 (528) (836) 5,727 54,882 REAL ESTATE INVESTORS PLC (the "Company") NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 9. Profit for the financial year The Company has taken advantage of section 408 of the Companies Act 2006 and has not included its own profit and loss account in these financial statements. The Company’s profit for the year was £573,000 (2013: loss £474,000). Auditor's remuneration incurred by the Company during the year for audit services totalled £9,000 (2013: £8,000). 10. Directors and employees remuneration Details of Directors’ remuneration are disclosed within the Directors' Remuneration Report on pages 13 and 14. 11. Contingent liabilities There were no contingent liabilities at 31 December 2014 or at 31 December 2013. 12. Capital commitments Capital commitments authorised at 31 December 2014 were £nil (2013: £nil). 13. Related party transactions The company's related parties are other Group companies and certain other companies which are related to certain directors of the Group. During the period the Group paid agency fees of £192,000 (2013: £69,720) in respect of professional services to Bond Wolfe, a partnership in which P P S Bassi is a partner, and rent and service charges of £129,000 (2013: £129,000) to Bond Wolfe Estates Limited, a company in which P P S Bassi is a director and shareholder. During the period the Group paid professional fees of £10,000 (2013: £10,330) to, and received rental income of £52,000 (2013: £52,000) from, CP Bigwood Chartered Surveyors, a company in which P P S Bassi and M H P Daly are directors and shareholders. No amounts were outstanding at 31 December 2014 (2013:£nil). During the period the Group paid dividends to its directors in their capacity as shareholders, as follows: J R Crabtree W Wyatt P London P P S Bassi M H P Daly 2014 £000 2013 £000 1 1 - 69 5 1 - - 90 7 Related party transactions with subsidiary undertakings are not disclosed as 100% of the voting rights are controlled within the group. 58 REAL ESTATE INVESTORS PLC (the "Company") NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2014 14. Operating lease commitments Operating lease commitments relating to land and buildings expire within two to five years and amount to £71,000 (2013: £71,000). Non-cancellable operating lease commitments receivable: Within one year Later than one year but not later than five years Later than five years 2014 £000 903 7,777 24,103 32,783 2013 £000 262 4,947 17,944 23,135 Rent receivable by the Group under current leases from tenants is from commercial and retail property held. 59 REAL ESTATE INVESTORS PLC (the "Company") NOTICE OF ANNUAL GENERAL MEETING Notice is hereby given that the 2015 Annual General Meeting of the Company will be held at Cathedral Place, 3rd Floor, 42-44 Waterloo Street, Birmingham, B2 5QB on 19 June 2015 at 11:00 am for the following purposes: To consider and, if thought fit, to pass the following resolutions 1 to 5, which will be proposed as ordinary resolutions. 1. To receive the audited financial statements for the year ended 31 December 2014, and the reports of the directors and the auditor thereon. 2. To receive and, if thought fit, approve the report of the Remuneration Committee. 3. To re-elect P P S Bassi, who retires by rotation in accordance with the Company’s Articles of Association, as a director. 4. To re-elect P London, who retires in accordance with the Company’s Articles of Association, as a director. 5. To reappoint Grant Thornton UK LLP as auditor of the Company to hold office until the conclusion of the next general meeting at which audited financial statements are laid before the Company and to authorise the directors to fix their remuneration. 6. (i) To generally and unconditionally authorise the directors pursuant to Section 551 of the Companies Act 2006 (the “Act”) to exercise all powers of the Company to allot shares or rights to subscribe for or to convert any security into shares (“Shares”) up to an aggregate nominal amount of £6,214,020 (which represents one third of the issued share capital of the Company), provided that this authority shall expire at the conclusion of the next Annual General Meeting of the Company save that the Company may before such expiry make an offer or agreement which would or might require Shares to be allotted after such expiry and the Board may allot Shares in pursuance of such an offer or agreement as if the authority conferred hereby had not expired; and further, (ii) To generally and unconditionally authorise the directors pursuant to Section 551 of the Act to exercise all powers of the Company to allot Shares in connection with a rights issue in favour of shareholders where the Shares respectively attributable to the interests of all shareholders are proportionate (as nearly as may be) to the respective numbers of shares held by them up to an aggregate nominal amount of £6,214,020 (which represents one third of the issued share capital of the Company), provided that this authority shall expire at the conclusion of the next Annual General Meeting of the Company save that the Company may before such expiry make an offer or agreement which would or might require Shares to be allotted after such expiry and the Board may allot Shares in pursuance of such an offer or agreement as if the authority conferred hereby had not expired. To consider and, if thought fit, pass the following resolutions 7 and 8, which will be proposed as special resolutions. 7. Subject to the passing of resolution 6, to generally empower the directors pursuant to Section 571 of the Act to allot equity securities (within the meaning of Section 560 of the Act) for cash pursuant to the authority conferred by the previous resolution as if Section 561 of the Act did not apply to any such allotment provided that this power shall be limited: (i) to the allotment of equity securities in connection with a rights issue, open offer or otherwise in favour of shareholders where the equity securities respectively attributable to the interests of all shareholders are proportionate (as nearly as may be) to the respective numbers of shares held by them but subject to the directors having a right to make such exclusions or other arrangements in connection with the offering as they deem necessary or expedient: (A) (B) to deal with equity securities representing fractional entitlements; and to deal with legal and practical problems arising in any overseas territory under the laws of any territory or the requirements of a regulatory body or stock exchange or any other matters; and (ii) to the allotment (otherwise than pursuant to sub-paragraph (i) above) of equity securities up to an aggregate nominal amount of £932,103 (which represents five per cent. of the issued share capital of the Company), and this power shall expire at the conclusion of the next Annual General Meeting of the Company save that the Company may before such expiry make an offer or agreement which would or might require equity securities to be allotted after such expiry and the board may allot equity securities in pursuance of such an offer or agreement as if the authority conferred hereby had not expired. 8. To authorise the Company generally and unconditionally for the purposes of Section 701 of the Act to make market purchases (within the meaning of Section 693 of the Act) of ordinary shares of 10 pence each in the capital of the Company (“Ordinary Shares”) provided that: 60 REAL ESTATE INVESTORS PLC (the "Company") NOTICE OF ANNUAL GENERAL MEETING (i) the maximum number of Ordinary Shares hereby authorised to be purchased is 18,642,060 (which represents approximately 10 per cent. of the current issued share capital of the Company); (ii) the minimum price which may be paid for an Ordinary Share is 10 pence (exclusive of expenses) being the nominal value of each such share; and (iii) the maximum price at which an Ordinary Share may be purchased is an amount (exclusive of expenses) equal to 105 per cent. of the average middle market quotations for such shares as derived from the AIM Appendix to the Official List of the London Stock Exchange plc for each of the five business days immediately preceding the date on which the purchase is made, and shall, unless it is (prior to its expiry) duly revoked or is renewed, expire at the conclusion of the next Annual General Meeting, save that the Company may make a contract to purchase Ordinary Shares under this authority before such expiry which will or may be executed wholly or partly after such expiry, and may make purchases of Ordinary Shares pursuant to any such contract as if such authority had not expired. By order of the Board MHP Daly Secretary Dated: 27 May 2015 Notes Registered Office: Cathedral Place, 3rd Floor, 42-44 Waterloo Street, Birmingham, B2 5QB Registered number: 5045715 1. P P S Bassi retires by rotation in accordance with article 23.4 of the Company’s Articles of Association and offers himself for re-election pursuant to resolution 3 set out in this notice of Annual General Meeting. P London was appointed to the board by the directors and retires in accordance with article 23.2 of the Company’s Articles of Association and offers himself for re-election pursuant to resolution 4 set out in this notice of Annual General Meeting. 2. You can only appoint a proxy using the procedures set out in these notes and the notes to the proxy form. A member entitled to attend, speak and vote at the meeting is entitled to appoint one or more proxies to attend, speak and vote instead of him, provided each proxy is appointed to exercise rights attached to different shares. You may not appoint more than one proxy to exercise rights attached to any one share. To appoint more than one proxy you may photocopy the form of proxy. The proxy need not be a member of the Company. Details of how to appoint the Chairman of the set out in the notes to the form of proxy. If meeting or another person as your proxy using the form of proxy are you wish your proxy to speak on your behalf at the meeting you will need to appoint your own choice of proxy (not the Chairman) and give your instructions directly to them. 3. The notes to the form of proxy explain how to direct your proxy how to vote on each resolution. If no voting indication is given, your proxy will vote or abstain from voting at his or her discretion. Your proxy will vote (or abstain from voting) as he or she thinks fit in relation to any other matter which is put before the meeting. Completion of the form of proxy will not preclude a member from attending and voting in person. 4. A form of proxy is enclosed with this notice. To be valid, the form must be deposited at the offices of the Company’s Registrars by hand to Capita Asset Services, The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU or by post to Capita Asset Services, PXS1, 34 Beckenham Road, Beckenham, Kent, BR3 4ZF, not less than 48 hours (excluding, in the calculation of such time period, any part of a day that is not a working day) before the time fixed for holding the meeting or any adjourned meeting. 5. Subject to the following principles, where more than one proxy is appointed, where a form of proxy does not state the number of shares to which it applies (a “blank proxy”) then that proxy is deemed to have been appointed in relation to the total number of shares registered in your name (the member’s “entire holding”). In the event of a conflict between a blank proxy and a form of proxy which does state the number of shares to which it applies (a “specific proxy”), the specific proxy shall be counted first, regardless of the time it was sent or received (on the basis that as far as possible, the conflicting forms of proxy should be judged to be in respect of different shares) and remaining shares will be apportioned to the blank proxy (pro rata if there is more than one). 6. Where there is more than one proxy appointed and the total number of shares in respect of which proxies are appointed is no greater than your entire holding, it is assumed that proxies are appointed in relation to different shares, rather than that conflicting appointments have been made in relation to the same shares. When considering conflicting proxies, later proxies will prevail over earlier proxies, and which proxy is later will be determined on the basis of which proxy is last delivered. Proxies in the same envelope will be treated as sent and delivered at the same time, to minimise the number of conflicting proxies. 61 REAL ESTATE INVESTORS PLC (the "Company") NOTICE OF ANNUAL GENERAL MEETING 7. If conflicting proxies are sent or delivered at the same time in respect of (or deemed to be in respect of) your entire holding, none of them shall be treated as valid. 8. Where the aggregate number of shares in respect of which proxies are appointed exceeds your entire holding and it is not possible to determine the order in which they were sent or delivered (or they were all sent or delivered at the same time), the number of votes attributed to each proxy will be reduced pro rata (on the basis that as far as possible, conflicting forms of proxy should be judged to be in respect of different shares). Where this gives rise to fractions of shares, such fractions will be rounded down. 9. If you appoint a proxy or proxies and then decide to attend the meeting in person and vote, on a poll, using your poll card, then your vote in person will override the proxy vote(s). If your vote in person is in respect of your entire holding then all proxy votes will be disregarded. If, however, you vote at the meeting in respect of less than your entire holding, if you indicate on your polling card that all proxies are to be disregarded, that shall be the case; but if you do not specifically revoke proxies, then your vote in person will be treated in the same way as if it were the last delivered proxy and earlier proxies will only be disregarded to the extent that to count them would result in the number of votes being cast exceeding your entire holding. 10. In relation to note 9 above, in the event that you do not specifically revoke proxies, it will not be possible for the Company to determine your intentions in this regard. However, in light of the aim to include votes wherever and to the fullest extent possible, it will be assumed that earlier proxies should continue to apply to the fullest extent possible. 11. In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior holder will be accepted. Seniority is determined by the order in which the names of the joint holders appear in the Company's register of members in respect of the joint holding (the first-named being the most senior). 12. To change your proxy instructions simply submit a new proxy appointment using the method set out above. Note that the cut-off time for receipt of proxy appointments (see note 4 above) also applies in relation to amended instructions; any amended proxy appointment received after the relevant cut-off time will be disregarded. 13. In order to revoke a proxy instruction you will need to inform the Company by sending a signed notice clearly stating your intention to revoke your proxy appointment to Capita Asset Services at the address set out at note 4. The revocation notice must be received by Capita Asset Services no later than 8.00 am on 17 June 2015. If you attempt to revoke your proxy appointment but the revocation is received after the time specified then your proxy appointment will remain valid. 14. In the case of a member which is a company, the form of proxy and any revocation notice must be executed under its common seal or signed on its behalf by an officer of the company or an attorney for the company. Any power of attorney or any other authority under which the form of proxy and any revocation notice is signed (or a duly certified copy of such power or authority) must be included with the form of proxy and any revocation notice. 15. Pursuant to Regulation 41 of the Uncertified Securities Regulations 2001, the time by which a person must be entered on the register of members in order to have the right to attend, speak and vote at the Annual General Meeting is 1.00 pm on 17 June 2015. Changes to entries on the register of members after that time will be disregarded in determining the right of any person to attend, speak or vote at the meeting. 16. The following documents will be available for inspection at the Company’s registered office address from the date of this notice until the time of the meeting and for at least 15 minutes prior to the meeting and during the meeting: (i) copies of contracts of service of executive directors with the Company; and (ii) copies of the letters of appointment of the non-executive directors of the Company. 17. Except as provided above, members who have general queries about the meeting should contact Marcus Daly, Company Secretary on 0121 212 3446 (no other methods of communication will be accepted). You may not use any electronic address provided either: (i) in this notice of Annual General Meeting; or (ii) any related documents (including the form of proxy), to communicate with the Company for any purposes other than those expressly stated. 62 

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