THE REGIONAL INVESTOR Annual Report and Accounts 2015 F ormed in 2004, REI Plc is a publicly-quoted property investment Company with a portfolio of over £150 million in shops, offices and residential properties, diversified by property type and occupier with a geographical focus on Birmingham and the wider Midlands. STRATEGIC REPORT Financial Highlights At a Glance Chairman’s and Chief Executive’s Statement Our Region Our Portfolio Property Report Finance Director’s Report Key Performance Indicators Directors’ Report Group Strategic Report GOVERNANCE Corporate Governance Report Directors’ Remuneration Report Board of Directors & Management The Team FINANCIAL STATEMENTS Independent Auditor’s Report Consolidated Statement of Comprehensive Income Consolidated Statement of Changes In Equity Company Statement of Changes In Equity Consolidated Statement of Financial Position Company Statement of Financial Position Consolidated Statement of Cash flows Company Statement of Cash flows Notes to the Financial Statements Our Advisers 1 2 4 6 8 14 18 19 20 21 22 24 26 27 28 29 30 30 31 32 33 34 35 59 FRONT COVER: 75–77 COLMORE ROW, REI PLC HEAD OFFICE IV REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 Financial Highlights £12.2m +104% (2014: £6 MILLION) 2.0p +33% (2014: 1.5p) PROFIT BEFORE TAX DIVIDEND PER SHARE i S t r a t e g c r e p o r t £157.5m +50.9% (2014: £104.4 MILLION) £11.9m +54.5% (2014: £7.7 MILLION) GROSS PROPERTY ASSETS CONTRACTED RENTAL INCOME 64.5p +5% (2014: 61.3p) 22.4% +36% (2014: 35.2%) EPRA NAV PER SHARE NET LOAN-TO-VALUE i i F n a n c a l S t a t e m e n t S Operational Highlights ❙ Conversion to a Real Estate Investment Trust (“REIT”*) on 1 January 2015 ❙ £45 million capital raise in April 2015, successfully deployed, acquisitions totalling £57.7 million (2014: £29.4 million) ❙ Overall occupancy 89% and WAULT*** 5.28 years (to break) (2014: 84.6% and 4.4 years) ❙ Acquisitions totalling £57.7 million (2014: £29.4 million) up 96.3% ❙ Property disposals’ proceeds totalling £15.3 million (2014: £7.0 million) including non-core assets as REI continues to recycle capital to improve growth profile of portfolio ❙ Total ownership 1.1 million sq ft (2014: 799,112 sq ft) up 37.6% ❙ 211 tenants (2014: 175) up 20.6% Definitions * reit = real estate investment trusts are listed property investment companies or groups not liable to corporation tax on their rental profits or capital gains from their qualifying activities ** epra = european public real estate association *** WaUlt = Weighted average Unexpired lease term REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 1 GOVERNANCE AT A GLANCE R eal Estate Investors Plc (“REI Plc”) is a Birmingham based publicly-quoted property Company listed on the London Stock Exchange (“AIM”) with a property portfolio of over £150 million. We operate as a Real Estate Investment Trust. 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. We invest directly in real estate in the Midlands, with a focus on Birmingham and the West Midlands, with the view to delivering a progressive dividend payment and capital growth for our shareholders. The Company generates rental income and capital growth, from retail, office and residential land and property, adding value through new lettings, rent reviews, lease renewals, refurbishment, change of use and planning gains. The Company aims to be the best at strategic asset management and to provide the accommodation to allow others to socialise, live and work successfully. Management has over 100 years of combined experience and has made a substantial investment in the Company along with some of the UK’s leading institutional investors and investment companies. REI Plc has been established since 2004 and it has put in place the foundations that will enable the Company to establish itself as the premier property investor within the region over the next decade. CONVERSION TO REAL ESTATE INVESTMENT TRUST IN JANUARY 2015” 2 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 4.5% 56.0% SECTOR BY INCOME 5.6% 50.9% SECTOR BY AREA 39.5% OFFICES RETAIL OTHER 43.5% OFFICES RETAIL OTHER 5.3% 21.9% 72.8% LOCATION BY VALUE CITY CENTRE MIDLANDS OTHER i S t r a t e g c r e p o r t g o V e r n a n c e i i F n a n c a l S t a t e m e n t S Our track record +50.9% £157.5M +54.5% £11.9M £104.4M £75.2M £7.7M £5.8M 2013 2014 2015 2013 2014 2015 GROSS PROPERTY ASSETS CONTRACTED RENTAL INCOME +104% £12.2M +33% 2.0P 1.5P £5.0M £6.0M 1.0P 2013 2014 2015 2013 2014 2015 PROFIT BEFORE TAX DIVIDEND PER SHARE +102% £130.5M +20.7% 70.0P 58.0P 49.5P £64.6M £35.4M 2013 2014 2015 2013 2014 2015 MARKET CAPITALISATION SHARE PRICE REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 3 CHAIRMAN’S AND CHIEF EXECUTIVE’S STATEMENT JOHN CRABTREE OBE non-eXecUtiVe cHairman PAUL BASSI CBE cHieF eXecUtiVe WE REMAIN COMMITTED TO A PROGRESSIVE DIVIDEND POLICY AND THE GROWTH OF OUR PORTFOLIO” Overview - a year of progress on all fronts T his has been an excellent year of progress for shareholders that has resulted in record rent roll, profits, portfolio size and dividend payment. We have continued to invest in our region, in criteria compliant assets that have the potential for capital growth and provide strong rental yields, through active asset management. We stated last year, that for 2015, we anticipated nothing other than a mild ‘pause’ around the general election, providing a window of opportunity, when we acted to secure additional property and that the regional economy would remain robust. We are pleased to see that this is precisely what happened, the economy has continued to grow and property investor demand has remained strong and a positive improvement in occupier demand has surfaced. MORE GROWTH TO COME Despite the economic and political ‘headwinds’, a highly volatile stock market, coupled with the Brexit debate and Euro vote, which might deliver another buying opportunity, we anticipate that economic activity in our region will remain positive and that investor and occupier demand will remain stable, especially as it is likely that the low interest rate environment will remain for 2016. Property investment continues to provide investors with secure returns in uncertain and volatile periods and we therefore anticipate a positive property market going forward. BUOYANT COMMERCIAL SECTOR Investment in the West Midlands commercial property sector topped £2.6 billion last year (up 6% on 2014). The office sector made up almost a third of West Midlands’ investments at £822 million, whilst retail accounted for 28% at £744 million. Investor appetite from institutional investors and fund managers remains positive and new entrants to the marketplace vary from specialist funds to new public companies that are regionally focused. This growing investor appetite has continued to push prices upwards and created yield compression within the marketplace amidst increased competition for assets. Birmingham’s city centre and out-of-town markets continue to thrive, with record-breaking office deals of 970,000 sq ft completed across the year for the city centre market, a significant uplift on the previous high of 886,000 sq ft which was recorded in 2008. SUCCESSFUL STRATEGY BUILDING INCOME AND CAPITAL GROWTH These factors, combined with our active approach to asset management, have contributed towards valuation growth within our portfolio and, whilst we are strategically looking to hold assets which produce income and capital growth, we have capitalised on opportunistic sales, which have been completed above book value. We continue to focus on criteria compliant assets that require active asset management and local knowledge with the potential for capital value and increasing income. This ‘niche’ allows REI Plc to secure quality assets with prospects for rental improvement for which we know there is a ready investment market. 4 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 More interestingly, traditional buyers in a normalised market include private property companies, pension funds and high-net-worth individuals; these remain largely absent. Private property companies have limited support from the banks, with conservative loan-to- value debt availability and limited equity. Pension funds are still re-capitalising by building up profits and high-net-worth individuals appear to have a lack of confidence in direct property investment. However, we envisage that all of these potential investors will gradually re-enter the marketplace, adding further price pressure on assets. Occupier and rental growth potential is vastly improved, having remained absent over the last few years and we are beginning to experience regular competition for space, with the additional benefit of reduced requirement for incentives. Investor appetite, rental growth, occupancy improvement and the availability of debt, will positively improve capital values and rental levels over the next few years, and we believe that the Company will be a beneficiary of market normalisation. We remain confident that we will continue to grow the portfolio further over the course of the next few years with the focus on income-producing property. Our near-term milestone is to establish a portfolio of assets totalling approximately £200 million, which will underpin our commitment to a progressive quarterly dividend policy going forward. RESULTS We are now seeing the benefits of our strategy and our focus on criteria compliant assets that offer strong rental income with capital growth potential. Our profits are in line with management expectations at £12.2 million and up 104% on 2014. The Company is a well-established and recognised Birmingham-based Midlands investor with a property portfolio of £157.5 million, up 50.9% over the year, with contracted rental income at £11.9 million, up 54.5%. The £45 million fundraising in April 2015, has been key to the growth of the Company and will underpin further growth from rental income and capital uplift potential. Our February 2016, £30 million facility at 1.75% above Libor, with RBS, will further support future acquisitions. Our significant cash and bank facilities will allow us to grow the portfolio over the next few years, which will underpin our ability to deliver a progressive dividend policy. A new purchase in Wythall totalling £2.45 million has already been completed in Q1 2016 and we have a number of additional purchases in our pipeline. DIVIDEND The Board has committed to a progressive dividend policy and an important factor in our decision to convert to a REIT was to support our dividend policy. Our interim dividend of 1p in respect of H1 2015, was declared in September and our final dividend of 1p, provides a total dividend in respect of 2015 at 2.0p, an increase of 33%. In line with our progressive dividend policy, we will also be paying future dividends on a quarterly basis, commencing in 2016. The proposed dividend timetable is as follows: DIVIDEND TIMETABLE Ex-dividend date: Record date: 24 March 2016 29 March 2016 Dividend payment date: 29 April 2016 FINANCE AND BANKING The banking marketplace is beginning to normalise and we now have key banking relationships with Lloyds, Aviva, Santander and Royal Bank of Scotland. These provide us with support and facilities that our present circumstances require, and all our banks have confirmed their appetite to support REI Plc further. i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S OUTLOOK - BUILDING ON A SUCCESSFUL GROWTH STRATEGY We have enjoyed progressively positive results over concurrent years, together with a growing dividend payment. We anticipate continued growth in our portfolio and dividend in 2016, and further rental and capital growth over the coming few years. The property marketplace is beginning to see the financial crisis distressed assets finally being made available to the marketplace by the large US equity houses that acquired volume assets and loan books from the main UK lenders. These opportunities are tailor made for REI as many of these assets cannot support traditional bank debt, require asset management and therefore are the perfect ‘cash buyer’s’ opportunity. We have a strong cash position and excellent secured bank facilities, including the new £30 million, 5-year facility with Royal Bank of Scotland, which together with our existing facilities, provide the platform to grow the business meaningfully and help secure additional assets that will support our progressive dividend policy as a REIT, and the growth of our portfolio to over £200 million during 2016. Our region is in the early stages of its next phase of economic growth, underpinned by a number of supporting factors, not least, the highest level of future inward investment the region has ever seen; building on the established new business and industrial prosperity that we now enjoy and is clearly evidenced by the renewed buoyancy in new job creation across the region. We certainly believe that our investment strategy will benefit further from the economic prosperity of the region. OUR STAKEHOLDERS As always, our continued progress has only been possible due to the support of our staff, advisers, tenants and shareholders, for which we thank them and look forward to the continued growth and prosperity of REI Plc. JOHN CRABTREE CHAIRMAN 11 March 2016 PAUL BASSI CHIEF EXECUTIVE 11 March 2016 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 5 GOVERNANCE OUR REGION W e 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. The regeneration of our region £150 MILLION GRAND CENTRAL SHOPPING COMPLEX OPENED 1.8 MIILION SQ FT NEW OFFICES, SHOPS, BARS, RESTAURANTS AND 4* HOTEL DUE TO OPEN IN PARADISE SCHEME £150 MILLION RESORTS WORLD COMPLEX OPENED ITS DOORS IN 2015 UK’S #1 INVESTABLE CITY FOR 2ND YEAR RUNNING £29 BILLION EXPORTS FROM WEST MIDLANDS DURING 2015 20,000 NEW JOBS CREATED IN 2015 IN THE CITY 14,152 START-UP COMPANIES REGISTERED IN BIRMINGHAM 17.6% INCREASE IN DEALS IN MIDLANDS IN 2015 97% INCREASE IN TAKE-UP OF OFFICE SPACE IN THE CITY 10.2 MILLION RECORD PASSENGERS THROUGH BIRMINGHAM AIRPORT IN 2015 6 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 40% OF THE CITY’S POPULATION IS UNDER 25 £1.5 BILLION EXPECTED BOOST TO THE LOCAL ECONOMY FROM HS2 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S 4.3 MILLION WORKING AGE PEOPLE WITHIN ONE HOUR OF CITY 300,000 POPULATION INCREASE IN WEST MIDLANDS OVER THE LAST DECADE BEST QUALITY OF LIFE OF ANY UK CITY OUTSIDE OF LONDON ONE Did you know? 487,065 VEHICLES SOLD BY JAGUAR LAND ROVER IN 2015 OF THE TOP TEN CITIES IN THE WORLD ACCORDING TO ROUGH GUIDE 2015 12,500 OVER 30s MOVED TO BIRMINGHAM LAST YEAR 13-YEAR HIGH IN OFFICE CONSTRUCTION MORE MILES OF CANALS THAN VENICE REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 7 GOVERNANCE OUR PORTFOLIO R EI Plc has a wide range of occupiers from major national and regional multiple retailers to government and corporate office occupiers. We do not have a material reliance on any single occupier or building and we are therefore able to manage the portfolio in a secure and stable manner. It is our intention to treat all our occupiers as long-term clients of REI Plc and to provide them with their growing and often changing requirements and, at all times, offer the services of a professional, dedicated and experienced landlord. REI PLC HAVE TOTAL OWNERSHIP OF OVER 1 MILLION SQ FT” 211 TOTAL NUMBER OF OCCUPIERS Midland regional portfolio M54 WOLVERHAMPTON M54 WALSALL DUDLEY M6 TOLL M42 BIRMINGHAM M42 BROMSGROVE M40 M6 COVENTRY M40 WARWICK 8 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 Birmingham city centre portfolio 1 2 3 4 5 i S t r a t e g c r e p o r t YORK HOUSE GREAT CHARLES STREET 40 ST PAUL’S SQUARE 75-77 COLMORE ROW GATEWAY HOUSE, 50-53 HIGH STREET 104/106 COLMORE ROW 6 7 8 9 10 i i F n a n c a l S t a t e m e n t S 102 COLMORE ROW 6 BENNETTS HILL 37A WATERLOO STREET 24 BENNETTS HILL 33 BENNETTS HILL 2 City centre portfolio 1 3 5 6 7 8 10 9 4 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 9 COLMORE ROWCOLMORE ROWWATERLOO STHOLLIDAY STPARADISE CIRCUS QUEENSWAYHILL STPINFOLD STNAVIGATION STTEMPLE STNEEDLESS ALLEYBENNETTS HILLCORPORATION STMOOR ST QUEENSWAYMOOR STJAMES WATT QUEENSWAYPARK STNEW STNEW STSTEPHENSON STUNION STBULL STCARRS LNCHERRY STST PHILLIP’S PLCANNON STGREAT WESTERN ARCADEHIGH STTEMPLE ROWEDMUND STBARWICK STCORNWALL STLIONEL STFLEET STLIONEL STGREAT CHARLES STREET QUEENSWAYA38 SUFFOLK STREET QUEENSWA38 QUEENSWAYAYSTWATER WATER STHENRIETTA STCHARLOTTE STCOX STLIONEL STSHADWELL STCHURCH STLIVERY STLIVERY STBULL STLIVERY STWEAMAN STSNOW HILL QUEENSWAYPRINTING HOUSE STWHITTALL STNEWTON STNEWTON STCHAPEL STDALTON STDALE ENDALBERT STCORPORATION STSTEELHOUSE LNNEWHALL STNEWHALL STLUDGATE HILLNEWHALL STSTHE PRIORY MQUEENSWAYOAOLLBRK QUEENSWAYST PHILLIP’SSQUAREVICTORIASQUARETOWNHALLCOUNCILHOUSECHAMBERLAINSQUAREBULLRINGROTUNDASQUAREST PAUL’SBIRMINGHAMNEW STREETBIRMINGHAMMOOR STREETBIRMINGHAMSNOW HILLCOLMORE ROWCOLMORE ROWWATERLOO STPARADISE CIRCUS QUEENSWAYHOLLIDAY STNAVIGATION STHILL STPINFOLD STTEMPLE STNEEDLESS ALLEYBENNETTS HILLCORPORATION STMOOR ST QUEENSWAYJAMES WATT QUEENSWAYMOOR STPARK STNEW STNEW STSTEPHENSON STUNION STBULL STCARRS LNCHERRY STST PHILLIP’S PLGREAT WESTERN ARCADECANNON STHIGH STTEMPLE ROWEDMUND STBARWICK STCORNWALL STLIONEL STFLEET STLIONEL STGREAT CHARLES STREET QUEENSWA38 QUEENSWAYAYA38 SUFFOLK STREET QUEENSWWATER STCHARLOTTE STCHURCH STLIVERY STLIVERY STBULL STSNOW HILL QUEENSWAYWEAMAN STWHITTALL STPRINTING HOUSE STNEWTON STNEWTON STCHAPEL STDALTON STALBERT STCORPORATION STSTEELHOUSE LNNEWHALL STNEWHALL STLUDGATE HILLNEWHALL STTHEPRIORYQUEENSWAYMALLBROOKQUEENWYSAST PHILLIP’SSQUAREVICTORIASQUARETOWNHALLCOUNHOUSECILCHAMBERLAINSQUAREBULLRINGROTUNDABIRMINGHAMNEW STREETBIRMINGHAMMOOR STREETBIRMINGHAMSNOW HILLCOX STBROOK STCAROLINE STST PAUL’SSQUAREDALE ENDCOLMORE ROWCOLMORE ROWWATERLOO STHOLLIDAY STPARADISE CIRCUS QUEENSWAYHILL STPINFOLD STNAVIGATION STTEMPLE STNEEDLESS ALLEYBENNETTS HILLCORPORATION STMOOR ST QUEENSWAYMOOR STJAMES WATT QUEENSWAYPARK STNEW STNEW STSTEPHENSON STUNION STBULL STCARRS LNCHERRY STST PHILLIP’S PLCANNON STGREAT WESTERN ARCADEHIGH STTEMPLE ROWEDMUND STBARWICK STCORNWALL STLIONEL STFLEET STLIONEL STGREAT CHARLES STREET QUEENSWAYA38 SUFFOLK STREET QUEENSWA38 QUEENSWAYAYSTWATER WATER STHENRIETTA STCHARLOTTE STCOX STLIONEL STSHADWELL STCHURCH STLIVERY STLIVERY STBULL STLIVERY STWEAMAN STSNOW HILL QUEENSWAYPRINTING HOUSE STWHITTALL STNEWTON STNEWTON STCHAPEL STDALTON STDALE ENDALBERT STCORPORATION STSTEELHOUSE LNNEWHALL STNEWHALL STLUDGATE HILLNEWHALL STSTHE PRIORY MQUEENSWAYOAOLLBRK QUEENSWAYST PHILLIP’SSQUAREVICTORIASQUARETOWNHALLCOUNCILHOUSECHAMBERLAINSQUAREBULLRINGROTUNDASQUAREST PAUL’SBIRMINGHAMNEW STREETBIRMINGHAMMOOR STREETBIRMINGHAMSNOW HILLCOLMORE ROWCOLMORE ROWWATERLOO STPARADISE CIRCUS QUEENSWAYHOLLIDAY STNAVIGATION STHILL STPINFOLD STTEMPLE STNEEDLESS ALLEYBENNETTS HILLCORPORATION STMOOR ST QUEENSWAYJAMES WATT QUEENSWAYMOOR STPARK STNEW STNEW STSTEPHENSON STUNION STBULL STCARRS LNCHERRY STST PHILLIP’S PLGREAT WESTERN ARCADECANNON STHIGH STTEMPLE ROWEDMUND STBARWICK STCORNWALL STLIONEL STFLEET STLIONEL STGREAT CHARLES STREET QUEENSWA38 QUEENSWAYAYA38 SUFFOLK STREET QUEENSWWATER STCHARLOTTE STCHURCH STLIVERY STLIVERY STBULL STSNOW HILL QUEENSWAYWEAMAN STWHITTALL STPRINTING HOUSE STNEWTON STNEWTON STCHAPEL STDALTON STALBERT STCORPORATION STSTEELHOUSE LNNEWHALL STNEWHALL STLUDGATE HILLNEWHALL STTHEPRIORYQUEENSWAYMALLBROOKQUEENWYSAST PHILLIP’SSQUAREVICTORIASQUARETOWNHALLCOUNHOUSECILCHAMBERLAINSQUAREBULLRINGROTUNDABIRMINGHAMNEW STREETBIRMINGHAMMOOR STREETBIRMINGHAMSNOW HILLCOX STBROOK STCAROLINE STST PAUL’SSQUAREDALE ENDCOLMORE ROWCOLMORE ROWWATERLOO STHOLLIDAY STPARADISE CIRCUS QUEENSWAYHILL STPINFOLD STNAVIGATION STTEMPLE STNEEDLESS ALLEYBENNETTS HILLCORPORATION STMOOR ST QUEENSWAYMOOR STJAMES WATT QUEENSWAYPARK STNEW STNEW STSTEPHENSON STUNION STBULL STCARRS LNCHERRY STST PHILLIP’S PLCANNON STGREAT WESTERN ARCADEHIGH STTEMPLE ROWEDMUND STBARWICK STCORNWALL STLIONEL STFLEET STLIONEL STGREAT CHARLES STREET QUEENSWAYA38 SUFFOLK STREET QUEENSWA38 QUEENSWAYAYSTWATER WATER STHENRIETTA STCHARLOTTE STCOX STLIONEL STSHADWELL STCHURCH STLIVERY STLIVERY STBULL STLIVERY STWEAMAN STSNOW HILL QUEENSWAYPRINTING HOUSE STWHITTALL STNEWTON STNEWTON STCHAPEL STDALTON STDALE ENDALBERT STCORPORATION STSTEELHOUSE LNNEWHALL STNEWHALL STLUDGATE HILLNEWHALL STSTHE PRIORY MQUEENSWAYOAOLLBRK QUEENSWAYST PHILLIP’SSQUAREVICTORIASQUARETOWNHALLCOUNCILHOUSECHAMBERLAINSQUAREBULLRINGROTUNDASQUAREST PAUL’SBIRMINGHAMNEW STREETBIRMINGHAMMOOR STREETBIRMINGHAMSNOW HILLCOLMORE ROWCOLMORE ROWWATERLOO STPARADISE CIRCUS QUEENSWAYHOLLIDAY STNAVIGATION STHILL STPINFOLD STTEMPLE STNEEDLESS ALLEYBENNETTS HILLCORPORATION STMOOR ST QUEENSWAYJAMES WATT QUEENSWAYMOOR STPARK STNEW STNEW STSTEPHENSON STUNION STBULL STCARRS LNCHERRY STST PHILLIP’S PLGREAT WESTERN ARCADECANNON STHIGH STTEMPLE ROWEDMUND STBARWICK STCORNWALL STLIONEL STFLEET STLIONEL STGREAT CHARLES STREET QUEENSWA38 QUEENSWAYAYA38 SUFFOLK STREET QUEENSWWATER STCHARLOTTE STCHURCH STLIVERY STLIVERY STBULL STSNOW HILL QUEENSWAYWEAMAN STWHITTALL STPRINTING HOUSE STNEWTON STNEWTON STCHAPEL STDALTON STALBERT STCORPORATION STSTEELHOUSE LNNEWHALL STNEWHALL STLUDGATE HILLNEWHALL STTHEPRIORYQUEENSWAYMALLBROOKQUEENWYSAST PHILLIP’SSQUAREVICTORIASQUARETOWNHALLCOUNHOUSECILCHAMBERLAINSQUAREBULLRINGROTUNDABIRMINGHAMNEW STREETBIRMINGHAMMOOR STREETBIRMINGHAMSNOW HILLCOX STBROOK STCAROLINE STST PAUL’SSQUAREDALE ENDGOVERNANCE “DISPOSAL PROCEEDS ARE RECYCLED INTO NEW ACQUISITIONS WITH BETTER GROWTH PROSPECTS.” OUR PORTFOLIO 85-89 COLMORE ROW A n attractive Grade II listed building, located in a prime position in Birmingham City centre, situated on the junction of Colmore Row and Newhall Street. The property which was in receivership was acquired by REI Plc in December 2012 for £4 million. Occupiers included: Malcolm Hollis LLP, DTE Leonard Curtis, Fleet Milne Residential, Chubb Insurance and BDP. During the period of ownership and in line with the Company’s active asset management strategy, REI secured new lettings and lease renewals to the Royal College of Surgeons, Assicurazioni Generali and Reuben Colley Fine Arts. In July 2015, the property was sold to a UK institutional fund for £7.85 million, a sum considerably above book value. 26,429 SQ FT TOTAL NET AREA REI PLC BENEFITS FROM A UNIQUE MARKET INSIGHT WITH OVER 100 YEARS OF COMBINED MANAGEMENT EXPERIENCE” 10 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 11 GOVERNANCE OUR PORTFOLIO 33 BENNETTS HILL & THE FORMER BANKING HALL A n impressive Grade II listed period building, constructed in 1835, this property was the original branch of Midland Bank and is located in the heart of Birmingham’s business district. REI Plc acquired the property from the receivers for £1.575 million in 2014. Within a matter of months, change of use consent had been secured from Offices (B1) to Leisure (A3). During 2015, REI Plc oversaw the refurbishment of the façade of this beautiful and historic building. In 2015, Loungers Limited signed a 25-year lease at £135,000 p.a. to secure the former Banking Hall. During the same year, Discovery Group opted to take a 10-year lease at £45,000 p.a. to occupy the office space adjoining the Banking Hall. The Company has benefited from significant capital growth on this asset. 12,572 SQ FT TOTAL NET AREA A PROFESSIONAL, DEDICATED AND EXPERIENCED LANDLORD” 12 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S “REI PLC HAS BUILT UP A PORTFOLIO OF QUALITY ASSETS CONCENTRATED IN THE CENTRAL BUSINESS DISTRICT” REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 13 GOVERNANCE PROPERTY REPORT O ur portfolio has grown by 50.9% to £157.5 million (2014: £104.4 million) and remains spread across our geographical focus of the Midlands, with a strong concentration on Birmingham City Centre and the West Midlands. As a result of institutional and UK funds refocusing from London to UK regions, we have seen an improvement in investment values and competition for assets, and have benefited from rising values. We remain focused on assets that require active management, letting risk and refurbishment, and these assets are not targeted by institutions and funds, and we have therefore continued to build our portfolio with only limited competition, with the benefit of our cash resources and bank facilities. We only seek acquisitions that meet our criteria in improving locations with refurbishment and redevelopment potential, income enhancement and often within close proximity to other REI Plc owned property. We have a strong pipeline of potential new purchases and during the period, we totalled new purchases of £57.7 million and sales of £15.3 million. 150 Birmingham Road, West Bromwich Acquired from a receivership sale in May 2015, it comprises a 15,840 sq ft high quality office building, with a substantial warehouse. There are a number of ancillary buildings including a small modular office building and a detached two bedroom residential property. Following acquisition, we have sold the rear element at a profit and are in the process of negotiating terms with a number of possible occupiers to take a new lease on the remaining office element. Virginia House, Worcester REI Plc acquired this office in June 2015. The office building is well-occupied and located in the centre of Worcester in close proximity to the expanding Heart of Worcester College. It comprises a multi-let property and let to a variety of tenants. The building comprises 15,332 sq ft with a low average passing rent of £8.59 per sq ft. We bought the property at a significant discount to the level which the property was marketed, equating to £78 per sq ft, with strong prospects for capital performance, and a net initial yield of 10.47%. Brandon Court, Coventry We bought this well-established 33,566 sq ft office park in December 2015 at a price of £5.125 million representing an initial yield of 8.32%. The investment benefits from a strong tenant line-up with 71% of the income let to blue-chip tenants and WAULT of 11.5 years to expiry and 7.2 years to break options. The purchase includes a potential development plot of 0.28 acre, which offers scope for future added value. Bearwood Shopping Centre, Smethwick In May 2015, the Company acquired Bearwood Shopping Centre, in Smethwick for a total consideration of £8.65 million, reflecting a net initial yield of 7.49%. The 58,268 sq ft retail parade, comprises a major food store and nine retail units with the additional benefit of a 120 space surface car park. Occupiers include Aldi, Argos, Poundland, Greggs, Card Factory and Lloyds Pharmacy, with a WAULT of 10.5 years. Acocks Green Shopping Centre, Acocks Green, Birmingham In August 2015 we acquired Acocks Green Shopping Centre for £8.0 million from NAMA. The property comprises a 60,457 sq ft retail scheme in Acocks Green on the outskirts of Solihull and Birmingham, providing an income of £808,084 and a yield of 10.48% at purchase. The scheme is anchored by Wilkinson, Boots, Argos and Lloyds Bank, with a WAULT at purchase of 3.7 years. Jasper Retail Park, Tunstall, Stoke on Trent Our retail warehouse acquisitions during the reporting period includes Jasper Retail Park, Tunstall which was acquired in September 2015 for £11 million which represents an initial yield of 7.68%. The 72,149 sq ft retail warehouse scheme comprises six retail warehouse units and is let to Matalan, Argos, Next, Shoezone and Pizza Hut. The property was marketed at a higher level and the purchase price represents a discount, with good prospects for capital improvement through market demand for this type of investment. PROPERTY ACQUISITIONS Throughout the year we have witnessed a discount for good high street retail across the region and we have taken advantage of this position by acquiring four high street retail investments with a combined average yield of 8.67%. In addition, we have seen good value in well located regional offices. We have acquired average net initial yields of 9.46% and capital value prices of £133 per sq ft. 40 St Paul’s Square, Birmingham We acquired this office property in March 2015. The building is located in Birmingham’s Jewellery Quarter, where property values have historically traded at a discount to central business district values. The acquisition represented an initial yield of 10.19% and incorporated a vacant office suite of 1,872 sq ft at the time of acquisition. Following completion of the purchase, we immediately let the vacant office suite. The property is now fully let and offers good prospects for future rental and capital growth, as the area is rapidly improving. 36 Great Charles Street, Birmingham In March 2015 we acquired 36 Great Charles Street, a 24,552 sq ft office building in an established but fringe city location at a cost of £1.85 million, with the intention to complete a refurbishment programme. Shortly after the acquisition, we were approached by a London-based property Company with an offer of £2.5 million for our recently acquired interest. Having considered all relevant options, we agreed to sell the asset (completing in June 2015) in order to take an immediate profit and recycle capital into alternative opportunities. Castlegate House, Castlegate Way, Dudley We bought this well let modern office investment in June 2015. It is located on the entrance to a busy mixed-use out-of-town park, with occupiers including Rentokil, Iconics, Premier Inn, Tesco Extra, Nandos and Showcase Cinema. The 21,375 sq ft building is arranged over two floors to grade A specification. It is fully let to Towergate Underwriting Group Ltd, trading as Footman James, the classic car insurance specialists, on a 10-year lease from 17 November 2014, with an option to determine at year five on 17 November 2019, at a passing rent of £235,125 per annum. The property was acquired for £2.44 million, which represents a net initial yield of 9.11% and a capital value of £114 per sq ft, and therefore providing good medium income return with prospects for longer-term capital growth. 14 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S PROPERTY SALES As our portfolio grows, we are beginning to recycle more capital and this year £15.3 million of cash proceeds were realised through five disposals, where it was deemed that our asset management strategy had been completed or that the risk profile had changed. Sales included historic non-core assets and all properties were sold at levels above our book value. With rising demand from institutional investors, the Birmingham office investment market has witnessed significant capital value improvement in the recent past. REI Plc has taken advantage of improving investor demand with the sale of 85-89 Colmore Row, Birmingham, which was sold for £7.85 million, having acquired the building in December 2012 for £4 million. During 2015 we sold five properties: ❙ One of which was a core asset (85-89 Colmore Row) ❙ Two were outside the region (non-core portfolio) ❙ Two were fully occupied and had therefore reached their full strategic potential Our strategic view going forward is to retain existing assets for income and future capital growth and to grow our overall portfolio and generate significant income to support our growing dividend policy. GATEWAY HOUSE BIRMINGHAM REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 15 GOVERNANCE PROPERTY REPORT CONTINUED 25-26 DUDLEY STREET, WOLVERHAMPTON REI PORTFOLIO Birmingham city centre Other Midlands Total core Non core Portfolio Value £m 34.5 114.5 149.0 % 21.9 Sq ft Contracted rent £ ERV £ Net initial yield % Equivalent yield % Occupancy % 156,938 1,989,973 2,670,232 5.45 6.79 80.80 72.7 886,065 9,356,675 10,269,416 94.6 1,043,003 11,346,648 12,939,648 7.72 7.20 5.91 7.13 8.08 7.87 9.74 7.82 90.70 89.20 86.45 89.08 8.5 5.4 55,265 525,216 683,876 Total portfolio 157.5 100.00 1,098,268 11,871,864 13,623,524 16 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 Our acquisition criteria Acquisitions: AREA ❙ Birmingham ❙ West Midlands ❙ Wider Midlands SECTOR ❙ Shops ❙ Offices ❙ Residential ❙ Land LOT SIZE ❙ £500,000 - £20 million YIELD TARGETS ❙ 8-20% Growth: INCOME ❙ The Company generates rental income and capital growth DIVIDEND ❙ We are committed to a progressive dividend policy STATUS ❙ Vacant/part vacant/ fully let ❙ Underperforming/ institutional/ orphan assets OPPORTUNITY ❙ Assets that cannot support traditional debt, short leased, vacant and distressed sales OFF-MARKET ❙ Assets secured through a privileged network where REI Plc provides a speedy exchange and completion PORTFOLIO ❙ By purchasing criteria-compliant properties and applying asset management techniques we generate capital growth i S t r a t e g c r e p o r t Adding value: ASSET MANAGEMENT ❙ Lettings ❙ Lease renewals/rent reviews etc. ❙ Change of use ❙ Refurbishment i i F n a n c a l S t a t e m e n t S Risk and resource: CASH RESOURCES ❙ All acquisitions are made from existing cash resources and banking facilities. REI Plc is able to transact on the basis that contracts are exchanged within 7-10 days. One of our greatest strengths is our ability to move quickly by recognising value and being able to perform on agreed transactions, a result of our comprehensive property market expertise and ready access to capital. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 17 GOVERNANCE FINANCE DIRECTOR’S REPORT Overview O ur main objectives for the year were to allocate the proceeds of the placing of £45 million raised in April of this year, continue our progressive dividend policy, and increase our profit before tax, earnings per share and net assets per share. All of these objectives have been achieved. MARCUS DALY FCA Finance Director Shareholders’ funds increased to £117.9 million at 31 December 2015 (2014: £64.6 million) and the NAV per share increased: Basic NAV – 63.3p (2014: 57.9p) EPRA NAV – 64.5p (2014: 61.3p) EPRA NNNAV – 62.8p (2014: 57.9p) FINANCE AND BANKING Total drawn debt at 31 December was £44 million (2014: £43 million) with undrawn facilities of £2 million (2014: £Nil). As previously mentioned, during the year the Group agreed a new £9 million facility with Santander at 2.25% above LIBOR and in February 2016 a new £30 million facility with Royal Bank of Scotland at 1.75% above LIBOR. The weighted average cost of debt was 5.9% (2014: 6.0%) and the weighted average debt maturity was 5.8 years (2014: 6.3 years). The loan-to-value (“LTV”) at 31 December was 28.0% (2014: 41.2%) and the LTV net of cash was 22.4% (2014: 35.2%). LONG TERM INCENTIVE PLAN (“LTIP”) On 8 June 2015 the terms of the LTIP were revised and previous options cancelled. The LTIP is designed to promote retention and to incentivise the Executive Directors to grow the value of the Group and to maximise returns (see page 25). A provision has been made in the accounts of £300,000 (2014: £Nil) in respect of the LTIP. TAXATION The Group converted to a REIT on 1 January 2015. Under REIT status the Group does not pay tax on its rental income profits or on gains from the sale of investment properties. The tax charge for the year is in respect of bank interest received and the movement on the deferred tax asset in respect of the financial instruments. The Group continues to meet all of the REIT requirements to maintain REIT status. RESULTS FOR THE YEAR Profit before tax (IFRS) totalled £12.2 million (2014: £6.0 million), buoyed by a surplus on sale of investment properties of £1.7 million (2014: £277,000) and a surplus on revaluation of investment properties of £8.6 million (2014: £6.8 million), together with a profit on the market value of our interest rate hedging instruments of £669,000 (2014: loss £1.4 million). In April 2015 we raised £45 million (£43.7 million net of expenses) to capitalise on the market opportunities that were evident to us, which we then used to acquire investment properties totalling £57.7 million during the year on criteria compliant properties. Rental income for the year was up 38% to £8.4 million (2014: £6.1 million) but the full benefit of these purchases will be realised in 2016. The investment properties are revalued externally at 31 December and generated a surplus on revaluation of £8.6 million. The decision to dispose of certain properties during the year resulted from properties reaching maturity, receiving an offer that could not be refused and continuing to dispose of the “legacy” portfolio which we inherited and is out of area. We continue to review our overhead base and administrative expenses of £3.1 million (2014: £2.5 million) rose mainly as a result of increase in employee numbers, a bonus provision plus employers’ National Insurance of £732,000 (2014: £627,000) and a provision for costs of the Long Term Incentive Plan of £300,000 (2014: £Nil). Interest costs for the year reduced to £2.6 million (2014: £2.7 million) and the weighted average cost of debt also reduced to 5.9% (2014: 6.0%) as a result of paying off loans at expensive rates on the disposal of certain properties and the new facility taken out with Santander during the year at 2.25% over LIBOR. In February 2016 the Group agreed a new £30 million facility with Royal Bank of Scotland at 1.75% above LIBOR, which will again assist in reducing the average cost of financing costs. Earnings per share rose to: Basic – 7.46p (2014: 4.05p) Diluted – 7.40p (2014: 4.05p) EPRA – 0.8p (2014: loss 0.4p) RECORD CONTRACTED RENTAL INCOME, PROFITS, DIVIDEND AND OCCUPANCY” 18 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 KEY PERFORMANCE INDICATORS 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 all have moved favourably this year. 2014 4.05p i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S DIVIDEND Under the REIT status the Group is required to distribute at least 90% of rental income taxable profits arising each financial year by way of a Property Income Distribution (“PID”). An interim dividend of 1p per share was paid in October and the Board proposes a final dividend of 1p per share payable in April 2016 making a total of 2p for the year (2014: 1.5p) an increase of 33%. Both of these dividends were paid as ordinary dividends and the allocation of future dividends between PID and non-PID will continue to vary. As a result of the increase in the Group’s shareholding following the placing in April 2015 the dividend was not totally covered for 2015, but following the acquisition of investment properties of £57.7 million during the year, future dividends will be fully covered. POST-BALANCE SHEET EVENT In February 2016 the Group arranged a new £30 million facility with Royal Bank of Scotland at 1.75% above LIBOR, which will be used to continue the acquisition of criteria compliant investment properties in the current year. MARCUS DALY FINANCE DIRECTOR 11 March 2016 2015 7.46p EARNINGS PER SHARE +84.2% 2014 £6.0M 2015 £12.2M PROFIT BEFORE TAX +104% 2014 2015 57.9p 63.3p NET ASSETS PER SHARE +9.3% REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 19 GOVERNANCE DIRECTORS’ REPORT The Directors present their report together with the audited consolidated financial statements for the year ended 31 December 2015. ❙ state whether applicable IFRSs have been followed, subject to any material departures disclosed and explained in the financial statements; and DIRECTORS The Directors who served during the year were as follows: JRA Crabtree Chairman – Non-Executive Director W Wyatt P London PPS Bassi MHP Daly Non-Executive Director Non-Executive Director Chief Executive Finance Director JRA Crabtree and MHP Daly 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 19 February 2016: Invesco Perpetual UK Strategic Income Fund Caledonia Investments J O Hambro Capital Management Majedie Asset Management CF Ruffer Total Return Fund Ruffer Absolute Return Fund Standard Life Investments P P S Bassi Invesco Perpetual UK Equity Pension Fund City Financial Old Mutual Global Investors Henderson Volantis Capital Number 18,623,417 18,304,812 17,916,666 15,410,520 10,598,883 10,000,000 9,866,113 9,658,333 8,148,249 7,958,332 6,340,132 5,746,666 % 9.99 9.82 9.61 8.27 5.69 5.36 5.29 5.18 4.37 4.27 3.40 3.08 OTHER MATTER Financial risk management objectives and policies are included in note 15 to the financial statements. ❙ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company and Group will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s and Group’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and Group and enable them to ensure that the financial statements comply with the Companies Act 2006. STATEMENT OF DIRECTORS’ RESPONSIBILITIES They are also responsible for safeguarding the assets of the Company and Group 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 and 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 75-77 Colmore Row, Birmingham, B3 2AP on 5 May 2016 at 11.30 am. REAL ESTATE INVESTMENT TRUST (“REIT”) With effect from 1 January 2015, the Group converted to REIT status under which the Group is not liable to corporation tax on its rental income or capital gains from qualifying activities. 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 MARCUS DALY SECRETARY 11 March 2016 Company No 5045715 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 Company and Group financial statements in accordance with International Financial Reporting Standards (“IFRS”s) 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 Company and 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; 20 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S GROUP STRATEGIC REPORT 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 page 2 for the review of the business which forms part of this Strategic Report). 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 Mitigation ❙ Tenant default ❙ Change in demand for space ❙ Market pricing affecting value FINANCIAL ❙ ❙ Reduced availability or increased cost of debt Interest rate sensitivity ❙ ❙ 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 with bank covenants ❙ ❙ PEOPLE ❙ Retention/recruitment ❙ Remuneration structure reviewed ❙ Regular assessment of performance KEY PERFORMANCE INDICATORS (“KPIs”) 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. 2015 7.46p £12.2m 63.3p 2014 4.05p £6.0m 57.9p Indicator Earnings per share Profit before tax – actual Net assets per share By order of the Board MARCUS DALY SECRETARY 11 March 2016 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 21 GOVERNANCE CORPORATE GOVERNANCE REPORT 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. 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 (‘Code”) (September 2014) 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. DIRECTORS The composition of the Board is set out on page 20. 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, JRA 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 cash flows. ❙ 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 £20 million facility with Lloyds Banking Group is due for renewal in October 2016. 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. ❙ In February 2016, the Group agreed a new £30 million facility with Royal Bank of Scotland. For these reasons, the Directors continue to adopt the going concern basis in preparing the financial statements. 22 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 23 GOVERNANCE DIRECTORS’ REMUNERATION REPORT 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 marketplace. The Group’s policies are to pay Executive Directors a salary at market levels for comparable jobs in the sector whilst recognising the relative size of the Group. The Executive Directors do not receive any benefits apart from their basic salaries, bonuses and LTIP awards. 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 2015 was as follows: Salary in lieu of benefits £000 87 50 - - - 137 Salary £000 350 200 - - 25 575 Fees £000 Bonus £000 Share -based payment expense £000 - - 30 25 - 55 350 200 - - - 550 175 100 - - - 275 Employers’ National Insurance contributions £000 121 69 - - 2 192 Total £000 962 550 30 25 25 1,592 2015 total £000 1,083 619 30 25 27 1,784 Share options 2015 number ‘000 875 500 - - - 2014 £000 881 501 30 25 7 1,444 1,375 Share options 2014 number ‘000 - - - - - - PPS Bassi MHP Daly JRA Crabtree W Wyatt P London 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. 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. 24 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 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). On 8 June 2015, the terms of the LTIP were revised and previous options cancelled. 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. ❙ Performance conditions: i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S ❙ ❙ 50% of the award subject to absolute NAV growth plus dividends with threshold vesting – 30% of this part of the award – at 8.5% annual growth including dividends and full vesting at 14.0% annual growth. 50% subject to absolute total shareholder return (share price growth plus dividends) with threshold vesting – 30% of this part of the award – at 8.5% annual growth and full vesting at 14.0% ❙ The baseline for the commencement of the LTIP is 60p per share. ❙ 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 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. ❙ Conditional awards of shares made each year. ❙ Awards vest after three years subject to continued employment and meeting objective performance conditions. On 8 June 2015, the Group granted each of PPS Bassi and MHP Daly an option under the scheme which entitles them to subscribe for or acquire Ordinary Shares in the Company at a price of 10p 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. Approved by the Board of Directors PETER LONDON CHAIRMAN, REMUNERATION COMMITTEE 11 March 2016 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 25 GOVERNANCE BOARD OF DIRECTORS & MANAGEMENT JOHN CRABTREE OBE DL D.UNIV non-eXecUtiVe cHairman WILLIAM WYATT non-eXecUtiVe Director PETER LONDON non-eXecUtiVe Director William joined Caledonia in 1997 from Close Brothers Group Plc. He was appointed a Director in 2005 and CEO in 2010. As well as Caledonia and REI Plc, he is a Director of Cobehold S.A., Newmarket Racecourses and a Trustee of The Rank Foundation. Peter is currently Chairman of EFG Independent Financial Advisers Limited, a wholly-owned subsidiary of EFG Private Bank Limited. He has a lifetime’s experience in providing Independent Financial Advice to high-net-worth individuals and sold his IFA Company to EFG in 2007. Peter is also a Non- Executive Chairman of a number of property related companies. John has a variety of business, community and charitable interests, predominantly in the West Midlands. Until 2003, he was senior partner of Wragge & Co – the leading Birmingham-based national firm of solicitors. He is currently Chairman of Glenn Howells Architects, Staffline Group plc, SLR Management Limited, Birmingham Hippodrome Theatre Trust, Brandauer Holdings Limited and the charity, Sense. John is a former President of Birmingham Chamber of Commerce & Industry, previous High Sheriff of the West Midlands, and a Deputy Lieutenant. In 2014, Government Secretary Eric Pickles named John as Chairman of the Birmingham Improvement Panel, charged with supporting the council as it pursues vital reforms. PAUL BASSI CBE DL D.UNIV DSC cHieF eXecUtiVe MARCUS DALY FCA Finance Director Marcus is a Chartered Accountant and has 20 years’ experience in advising clients on strategic matters and corporate planning, particularly in the property sector. He has responsibility for all financial and Group accounting matters, together with corporate finance matters. Marcus is also Non- Executive Chairman of the Tipton & Coseley Building Society, and formerly Non-Executive Director of CP Bigwood Chartered Surveyors. Paul is Non – Executive Chairman of Bond Wolfe and formerly Non-Executive Chairman of CP Bigwood Chartered Surveyors. Paul was formerly the Regional Chairman & Strategy Adviser to Coutts Bank (West Midlands), former Director of the Birmingham Hippodrome and past President of the Birmingham Chamber of Commerce. Paul was appointed High Sheriff for the County of West Midlands for 2009 and Deputy Lieutenant. Paul has received Honorary Doctorates from both Birmingham City and Aston University, and was awarded a CBE in the 2010 New Year’s Honours List. 26 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 THE TEAM i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S ANNA DURNFORD eXecUtiVe aSSiStant to tHe BoarD Anna has nearly 17-years’ experience within the legal, financial, accountancy and property sectors. Anna started her career in financial services, before joining Ernst & Young LLP as PA to the managing partner in Birmingham. Anna joined REI Plc in 2007, and provides Executive support to the Board and oversees operations within the business, to include regulatory announcements and investor relations. IAN CLARK BSC (HONS) MRICS aSSet management ANDREW OSBORNE BSC (HONS) MRICS inVeStment Ian is a qualified Chartered Surveyor with over 20-years’ experience in the property market and is responsible for co-ordinating asset management strategy across the portfolio. After qualifying with a niche practice, Ian joined GVA Grimley, acting for institutional landlords. Prior to joining REI, for 10 years, Ian worked for Argent Estates Limited as Asset Manager and was responsible for the Asset Management of the 1.5 million sq ft Brindleyplace Estate. Andrew specialises in investment acquisition and disposals of commercial properties having worked in commercial property since 1994, qualifying as a Chartered Surveyor in 1997. Most recently a Senior Asset Manager at Square Metre Properties, on behalf of Goldman Sachs, he has previously been a Director at Reef Property Asset Management, Regional Director of Highcross and a Director of Kenmore Property Group . He began his career at Mason Philips as an Investment Surveyor, before working in the commercial markets team at CBRE and as a Property Fund Manager at Canada Life. CATHERINE GEE propertY management DONNA MOONEY receptioniSt/ aDminiStrator Catherine joined REI Plc in February 2015 having spent eight years with Northwood Investors (formally Highcross Strategic Advisers), where she was involved in the day-to-day administration and management of properties across all sectors. Her skills and experience bring a broad range of property related support in areas of Health and Safety, system training and property/asset management. Donna has had a long and varied career as a Personal Assistant within insurance, advertising and accountancy, most recently supporting members of the UK&I Leadership team within Corporate Finance and Tax at Ernst & Young LLP. Donna joins REI Plc to take up position as front of house/administrator and to provide additional support to the Executive team. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 27 GOVERNANCE INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF REAL ESTATE INVESTORS PLC We have audited the financial statements of Real Estate Investors plc for the year ended 31 December 2015 which comprise the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the Company statement of changes in equity, the consolidated statement of financial position, the Company statement of financial position, the consolidated statement of cash flows, the Company statement of cash flows and the related notes. The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European Union and as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. 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 page 20, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s 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 financial statements give a true and fair view of the state of the Group’s and Parent Company’s affairs as at 31 December 2015 and of the Group’s profit for the year then ended; the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements 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 Strategic Report and the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the 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. DAVID WHITE SENIOR STATUTORY AUDITOR For and on behalf of Grant Thornton UK LLP Statutory Auditor, Chartered Accountants Birmingham 11 March 2016 28 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2015 Revenue Cost of sales Gross profit Administrative expenses Surplus on sale of investment property Change in fair value of investment properties Profit from operations Finance income Finance costs Profit/(loss) 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 The results of the Group for the period related entirely to continuing operations. The accompanying notes form an integral part of these financial statements. i S t r a t e g c r e p o r t Note 9 5 5 16 3 6 7 7 2015 £000 8,381 (1,477) 6,904 (3,072) 1,687 8,552 14,071 113 (2,609) 669 12,244 (157) 12,087 7.46p 7.40p 2014 £000 8,016 (2,452) 5,564 (2,542) 277 6,767 10,066 60 (2,672) (1,445) 6,009 (1,960) 4,049 4.05p 4.05p i i F n a n c a l S t a t e m e n t S REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 29 GOVERNANCE CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2015 At 1 January 2014 Issue of new shares Premium on issue of new shares Expenses of share issue Dividends Transactions with owners Profit for the year and total comprehensive income At 31 December 2014 Issue of new shares Premium on issue of new shares Expenses of share issue Share-based payment Dividends Transactions with owners Profit for the year and total comprehensive income Share capital £000 7,142 4,000 – – – 4,000 – Share premium account £000 61 – 16,000 (528) – 15,472 – 11,142 15,533 7,500 – – – – 7,500 – – 37,500 (1,312) – – 36,188 – Capital redemption reserve £000 Other reserve £000 45 – – – – – – 45 – – – – – – – – – – – – – – – – – – 300 – 300 – Retained earnings £000 34,630 – – – (836) Total £000 41,878 4,000 16,000 (528) (836) (836) 18,636 4,049 4,049 37,843 64,563 – – – – (2,700) (2,700) 12,087 7,500 37,500 (1,312) 300 (2,700) 41,288 12,087 At 31 December 2015 18,642 51,721 45 300 47,230 117,938 COMPANY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2015 At 1 January 2014 Issue of new shares Premium on issue of new shares Expenses of share issue Dividends Transactions with owners Profit for the year and total comprehensive income At 31 December 2014 Issue of new shares Premium on issue of new shares Expenses of share issue Share-based payment Dividends Transactions with owners Profit for the year and total comprehensive income Share capital £000 7,142 4,000 – – – 4,000 – Share premium account £000 61 – 16,000 (528) – 15,472 – 11,142 15,533 7,500 – – – – 7,500 – – 37,500 (1,312) – – 36,188 – Capital redemption reserve £000 Other reserve £000 45 – – – – – – 45 – – – – – – – – – – – – – – – – – – 300 – 300 – Retained earnings £000 31,238 – – – (836) Total £000 38,486 4,000 16,000 (528) (836) (836) 18,636 5,145 5,145 35,547 62,267 – – – – (2,700) (2,700) 11,512 7,500 37,500 (1,312) 300 (2,700) 41,288 11,512 At 31 December 2015 18,642 51,721 45 300 44,359 115,067 The accompanying notes form an integral part of these financial statements. 30 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 2015 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 Provision for current taxation Trade and other payables Non-current Bank loans Financial liabilities Total liabilities Net assets Equity Share capital Share premium account Capital redemption reserve Other reserve Retained earnings Total equity Net assets per share Note 2015 £000 2014 £000 8 9 10 17 12 13 15 14 15 15 18 171 155,092 16 806 156,085 2,380 3,385 8,777 14,542 170,627 (20,499) (23) (4,554) (25,076) (23,585) (4,028) (27,613) (52,689) 117,938 18,642 51,721 45 300 47,230 117,938 63.3p 171 102,017 6 940 103,134 2,366 3,745 6,274 12,385 115,519 (24,054) (18) (3,245) (27,317) (18,942) (4,697) (23,639) (50,956) 64,563 11,142 15,533 45 – 37,843 64,563 57.9p These financial statements were approved and authorised for issue by the Board of Directors on 11 March 2016. Signed on behalf of the Board of Directors JOHN CRABTREE CHAIRMAN Company No 5045715 MARCUS DALY FINANCE DIRECTOR The accompanying notes form an integral part of these financial statements. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 31 GOVERNANCE COMPANY STATEMENT OF FINANCIAL POSITION FOR THE YEAR ENDED 31 DECEMBER 2015 Assets Non-current Investment properties Property, plant and equipment Investments Deferred tax Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Liabilities Current Bank loans Provision for current taxation Trade and other payables Net current liabilities Non-current Bank loans Financial liabilities Total liabilities Net assets Equity Ordinary Share capital Share premium account Capital redemption reserve Other reserve Retained earnings Total equity Note 2015 £000 2014 £000 2013 £000 9 10 11 17 12 13 15 14 15 15 18 145,160 16 2,423 806 148,405 2,380 5,930 6,590 14,900 163,305 (20,334) (22) (4,186) (24,542) (19,668) (4,028) (23,696) (48,238) 115,067 18,642 51,721 45 300 44,359 115,067 89,162 6 2,721 940 92,829 2,365 7,447 3,965 13,777 106,606 61,698 7 4,521 1,290 67,516 2,365 7,516 7,198 17,079 84,595 (23,040) – (2,853) (24,735) – (4,130) (25,893) (28,865) (13,749) (4,697) (13,992) (3,252) (18,446) (17,244) (44,339) (46,109) 62,267 38,486 11,142 15,533 45 – 35,547 62,267 7,142 61 45 – 31,238 38,486 These financial statements were approved and authorised for issue by the Board of Directors on 11 March 2016. Signed on behalf of the Board of Directors JOHN CRABTREE CHAIRMAN Company No 5045715 MARCUS DALY FINANCE DIRECTOR The accompanying notes form an integral part of these financial statements. 32 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2015 Cash flows from operating activities Profit after taxation Adjustments for: Depreciation Net surplus on valuation of investment property Surplus on sale of investment property Share-based payment Finance income Finance costs (Profit)/loss on financial liabilities at fair value through profit and loss Income tax charge (Increase)/decrease in inventories Decrease in trade and other receivables Increase 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 increase/(decrease) 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 NOTES: Cash and cash equivalents consist of cash in hand and balances with banks only. The accompanying notes form an integral part of these financial statements. 2015 £000 2014 £000 12,087 4,049 3 (8,552) (1,687) 300 (113) 2,609 (669) 157 (14) 360 1,291 5,772 (2,609) 3,163 (58,175) (13) 15,339 113 (42,736) 43,688 (2,700) 7,000 (5,912) 42,076 2,503 6,274 8,777 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 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 33 GOVERNANCE COMPANY STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2015 Cash flows from operating activities Profit after taxation Adjustments for: Depreciation Net surplus on valuation of investment property Surplus on sale of investment property Share-based payment Provision against investments Finance income Group dividends Finance costs (Profit)/loss on financial liabilities at fair value through profit and loss Income tax charge/(credit) Increase in inventories Decrease 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 Group dividends 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 increase/(decrease) 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 NOTES: Cash and cash equivalents consist of cash in hand and balances with banks only. The accompanying notes form an integral part of these financial statements. 2015 £000 2014 £000 11,512 5,145 3 (8,175) (1,020) 300 298 (108) – 2,279 (669) 156 (14) 1,517 1,333 7,412 (2,279) 5,133 (58,175) (13) 11,372 – 108 (46,708) 43,688 (2,700) 7,000 (3,788) 44,200 2,625 3,965 6,590 8 (6,709) (277) – 1,800 (55) (1,800) 2,308 1,445 (290) – 709 (1,277) 1,007 (2,308) (1,301) (25,638) (7) 5,160 1,800 55 (18,630) 19,472 (836) 514 (2,452) 16,698 (3,233) 7,198 3,965 34 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2015 1. ACCOUNTING POLICIES The 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. These are the first IFRS financial statements prepared in respect of the Parent Company. The effects of the transition from the previous financial statements prepared under the UK Generally Accepted Accounting Practice is detailed in note 24. i S t r a t e g c r e p o r t The principal accounting policies of the Group are set out below and are consistent with those applied in the 2014 financial statements, except where new standards have been issued and applied retrospectively. Further details of these standards and their application by the Group are set out on page 39. 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: i i F n a n c a l S t a t e m e n t S ❙ The significant cash balances the Group holds and the low levels of historic and projected operating cash flows. ❙ 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 £20 million facility with Lloyds Banking Group is due for renewal in October 2016. 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. ❙ In February 2016, the Group agreed a new £30 million facility with Royal Bank of Scotland. 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. No statement of comprehensive income is presented for the Company as permitted by Section 408 of the Companies Act 2006. The Company’s profit for the financial year was £11,512,000 (2014: £5,145,000). Investments Investments in subsidiary undertakings are recorded at cost less provision for impairment. 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. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 35 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 1. ACCOUNTING POLICIES CONTINUED 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 end of the lease, unless it is reasonably certain that the break option will 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, on completion. 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. 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 are irrevocable and effectively unconditional, on completion. 36 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S 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. 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. 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, for 2015 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. 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. 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 com- prehensive 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. 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 change in value. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 37 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 1. ACCOUNTING POLICIES CONTINUED 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 reserve represents 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. 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. 38 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 Share-based payments The company has a Long-Term Incentive Plan for certain of its employees. Employee services received, and the corresponding increase in equity, are measured by reference to the fair value of the equity instruments at the date of grant, excluding the impact of any non-market vesting conditions. The fair value of share options is estimated on the date of grant using a binomial valuation model, according to the characteristics of the option, and is based on certain assumptions. Those assumptions include, among others, the dividend growth rate, expected volatility, and the expected life of the options. Management then apply the fair value to the number of options expected to vest. The resulting fair value is amortised through the statement of comprehensive income on a straight-line basis over the vesting period with a corresponding credit to other reserves. The charge is reversed if it is likely that any non-market-based criteria will not be met. If a category of share options is cancelled, this is accounted for as an acceleration of vesting and any remaining fair value is recognised in full at the date of cancellation. i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S 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 new provisions of the following amended standards but there is no material impact on the amounts reported or the disclosures in the financial statements: ❙ Annual Improvements to IFRSs 2011–2013 cycle 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 (IASB effective date 1 January 2018)^^ IFRS 14 Regulatory Deferral Accounts (effective 1 January 2016)^^ && IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018)^^ IFRS 16 Leases effective 1 January 2019)^^ ❙ Defined Benefit Plans: Employee Contributions (Amendments to IAS 19) (IASB effective date 1 July 2014)$$ (Endorsed) ❙ Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations (IASB effective date 1 January 2016) (Endorsed) ❙ Clarification of Acceptable Methods of Depreciation and Amortisation – Amendments to IAS 16 and IAS 38 (IASB effective date 1 January 2016) (Endorsed) ❙ Annual Improvements to IFRSs 2010–2012 Cycle (IASB effective date generally 1 July 2014)$$ (Endorsed) ❙ Annual Improvements to IFRSs 2012–2014 Cycle (effective 1 January 2016) (Endorsed) ❙ Amendments to IAS 16 and IAS 41: Bearer Plants (effective 1 January 2016) (Endorsed) ❙ Amendments to IAS 27: Equity Method in Separate Financial Statements (effective 1 January 2016) (Endorsed) ❙ Amendments to IFRS 10, IFRS 12 and IAS 28: Investment Entities: Applying the Consolidation Exception (effective 1 January 2016)^^ ❙ Disclosure Initiative: Amendments to IAS 1 Presentation of Financial Statements (effective 1 January 2016) (Endorsed) ❙ Disclosure Initiative: Amendments to IAS 7 Statement of Cash Flows (effective 1 January 2017)^^ ❙ Sale or Contribution of Assets between an Investor and its Associate or Joint Venture – Amendments to IFRS 10 and IAS 28 (effective 1 January 2016)** ❙ Amendments to IAS 12: Recognition of Deferred Tax assets for Unrealised Losses (effective 1 January 2017)^^ $$ EU mandatory effective date is financial years starting on or after 1 February 2015. ^^ Not adopted by the EU (as at 16 February 2016). ** Endorsement postponed indefinitely. && It has been decided not to launch the endorsement process – The EC will wait for a completely new standard. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 39 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 1. ACCOUNTING POLICIES CONTINUED 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 and Company have a deferred tax asset of £806,000 at 31 December 2015 (2014: £940,000) which relates to financial instruments as detailed in note 16. The Directors monitor the interest rate swap to assess the reversal of the deferred tax asset. Surrender premiums The Group is required to judge whether amounts due under lease surrenders are sufficiently irrevocable that income can be accrued. Judgement 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 judgements that have been made are as follows: REIT status The Group and Company elected for REIT status with effect from 1 January 2015. As a result, providing certain conditions are met, the Group and Company’s profit from property investment and gains are exempt from UK corporation tax. In the Directors’ opinion the Group and Company have met these conditions. Investment entity status Following the conversion of the Group to REIT status during 2015, the Directors have considered the criteria of the International Accounting Standards Board’s publication ‘Investment Entities – Amendments to IFRS 10, IFRS 12 and IAS 27’ and are satisfied that the Group does not meet the definitions of an investment entity and as such it remains appropriate to consolidate all of the subsidiaries. 40 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S 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 Surplus 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 2015 £000 8,152 229 – 8,381 (1,477) – – (1,477) (3,072) 1,687 8,552 2014 £000 5,392 754 1,870 8,016 (951) (1,411) (90) (2,452) (2,542) 277 6,767 14,071 170,627 10,066 115,519 2015 £000 113 (2,609) (3) (157) 2014 £000 60 (2,672) (8) (1,960) 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 3% (2014: 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: Fees payable to the Company’s auditor for the audit of the Company’s annual accounts Fees payable to the Company’s auditor for other services Audit of the accounts of the subsidiaries Depreciation of owned property and equipment Operating lease payments 4. DIRECTORS AND EMPLOYEES Staff costs during the period were as follows: Wages and salaries Social security costs 2015 £000 23 20 3 144 2014 £000 17 21 8 129 2015 £000 1,573 233 1,806 2014 £000 1,473 172 1,645 The average number of employees (including Executive Directors) of the Group during the period was seven (2014: six), all of whom were engaged in administration. 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 24 and 25. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 41 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 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 REIT exempt income and gains Actual tax charge Tax charge comprises: Current tax Deferred tax charge (note 17) 2015 £000 113 2014 £000 60 (2,609) (2,672) 2015 £000 12,244 20% 2,449 – (2,292) 157 23 134 157 2014 £000 6,009 20% 1,202 758 – 1,960 – 1,960 1,960 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. Basic earnings per share Diluted earnings per share Earnings £000 2015 Average number of shares 12,087 161,968,543 12,087 163,343,543 Earnings per share p 7.46 7.40 Earnings £000 4,049 4,049 2014 Average number of shares 100,023,337 100,023,337 Earnings per share p 4.05 4.05 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 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 2014 Shares Number Earnings per share p 100,023,337 4.05 Earnings per share p 7.46 2015 Earnings £000 Shares Number 12,087 161,968,543 (8,552) (1,687) – – (669) 134 Earnings £000 4,049 (6,767) (277) 55 90 1,445 1,047 EPRA earnings/(loss) 1,313 161,968,543 0.81 (358) 100,023,337 (0.36) 42 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 EPRA NAV per share 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 2015 and 31 December 2015 Accumulated impairment losses At 1 January 2015 and 31 December 2015 2015 2014 Net assets £000 Shares Number 117,938 186,420,598 1,375,000 – 117,938 187,795,598 – – 4,028 (806) 121,160 187,795,598 – – (4,028) 806 Net asset value per share p 63.3 62.8 64.5 Net assets £000 Shares Number 64,563 – 64,563 4,697 (940) 68,320 (4,697) 940 111,420,598 – 111,420,598 – – 111,420,598 – – i S t r a t e g c r e p o r t Net asset value per share p 57.9 57.9 61.3 117,938 187,795,598 62.8 64,563 111,420,598 57.9 Goodwill £000 171 – 171 i i F n a n c a l S t a t e m e n t S Net book amount at 31 December 2015 and 31 December 2014 The Directors have reviewed the carrying value of the goodwill at the year end and consider no impairment provision is required. 9. INVESTMENT PROPERTIES Group 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 is reconciled as follows: Carrying amount at 1 January 2014 Additions – acquisition of new properties Additions – subsequent expenditure Disposals Change in fair value Carrying amount at 31 December 2014 Additions – acquisition of new properties Additions – subsequent expenditure Disposals Change in fair value Carrying amount at 31 December 2015 The figures stated above for the gross carrying amount include valuations as follows: At professional valuation At Directors’ valuation £000 70,601 29,438 94 (4,883) 6,767 102,017 57,689 486 (13,652) 8,552 155,092 £000 146,747 8,345 155,092 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 43 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 9. INVESTMENT PROPERTIES CONTINUED 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 2015 £000 2014 £000 153,298 108,964 Rental income from investment properties in the year ended 31 December 2015 was £8,381,000 (2014: £6,146,000) and direct operating expenses in relation to those properties were £1,296,000 (2014: £923,000). Direct operating expenses in relation to those properties which did not generate rental income in the period were £181,000 (2014: £28,000). Company Carrying amount at 1 January 2014 Additions Disposals Revaluation Carrying amount at 31 December 2014 Additions Disposals Revaluation Carrying amount at 31 December 2015 The figures stated above for cost or valuation include valuations as follows: At valuation £000 61,698 25,638 (4,883) 6,709 89,162 58,175 (10,352) 8,175 145,160 Investment properties 2015 £000 2014 £000 145,160 89,162 All of the Group and Company’s investment properties are held as either freehold or long leasehold and are held for use in operating leases. The Group and Company uses the fair value model for all of their investment properties. In accordance with IAS 40, the Group and Company’s policy is that investment properties should be valued by an external valuer at least every three years. The valuation at 31 December 2015 has in the main been carried out by Cushman and Wakefield (formerly DTZ), Gerald Eve LLP and Boddy & Edwards, independent professional valuers, on certain properties and the Directors on the remaining properties. All professional valuers have recent experience in the location and type of properties held. 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 2015 £000 2014 £000 141,207 90,610 44 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S 10. PROPERTY, PLANT & EQUIPMENT Group and Company Gross carrying amount At 1 January 2013 Additions At 1 January 2014 and 31 December 2014 Additions At 31 December 2015 Depreciation and impairment At 1 January 2013 Charge for the year At 31 December 2013 Charge for the year At 31 December 2014 Charge for the year At 31 December 2015 Net book carrying amount At 31 December 2015 At 31 December 2014 At 31 December 2013 11. INTERESTS IN SUBSIDIARIES Cost At 1 January Provision for impairment At 31 December Leasehold improvements £000 Office equipment £000 108 – 108 3 111 94 9 103 5 108 – 108 3 – 5 54 7 61 10 71 50 2 52 3 55 3 58 13 6 2 Total £000 162 7 169 13 182 144 11 155 8 163 3 166 16 6 7 Investment in subsidiary undertakings 2015 £000 2,721 (298) 2,423 2014 £000 2013 £000 4,521 (1,800) 2,721 5,366 (845) 4,521 At 31 December 2015 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 The Group has control over each of these subsidiaries by virtue of its 100% shareholding in each. The provision for impairment is a result of the underlying property asset in the subsidiary being disposed of and therefore the carrying value of the investment is reduced to reflect the underlying net assets. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 45 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 12. INVENTORIES Properties and land held for trading Group and Company Company 2015 £000 2,380 2014 £000 2013 £000 2,366 2,366 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 (2014: £nil), is pledged as security for bank loans. The amount of inventories recognised as a charge in the year ended 31 December 2015 is £Nil (2014: £1,411,000), which is before charging an impairment of £Nil (2014: £90,000). 13. TRADE AND OTHER RECEIVABLES Trade receivables Amounts owed by subsidiary undertakings Other receivables Prepayments and accrued income Group Company 2015 £000 2,007 – 410 968 3,385 2014 £000 2,115 – 710 920 3,745 2015 £000 701 3,992 370 867 5,930 2014 £000 685 5,291 700 771 7,447 2013 £000 466 4,429 1,278 1,343 7,516 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 £28,000 (2014: £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 Increase in provision Debts written-off At 31 December Group and Company 2015 £000 20 87 (79) 28 2014 £000 95 11 (86) 20 2013 £000 30 77 (12) 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 At 31 December Group and Company 2015 £000 8 25 33 2014 £000 14 90 104 2013 £000 8 44 52 46 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S 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: Group Trade receivables Other receivables Prepayments and accrued income Cash and cash equivalents Company Trade receivables Loans receivable Other receivables Prepayments and accrued income Cash and cash equivalents Loans and receivables £000 2,007 410 – 8,777 11,194 2015 Non- financial assets £000 – – – 867 – 867 Balance sheet total £000 Loans and receivables £000 701 3,992 370 867 6,590 12,520 685 5,291 700 – 3,965 10,641 Loans and receivables £000 701 3,992 370 – 6,590 11,653 2015 Non- financial assets £000 – – 968 – 968 2014 Non- financial assets £000 – – – 771 – 771 Balance sheet total £000 Loans and receivables £000 2,007 410 968 8,777 12,162 2,115 710 – 6,274 9,099 Balance sheet total £000 Loans and receivables £000 685 5,291 700 771 3,965 466 4,429 1,278 – 7,198 11,412 13,371 2014 Non- financial assets £000 – – 920 – 920 2013 Non- financial assets £000 – – – 1,343 – 1,343 Balance sheet total £000 2,115 710 920 6,274 10,019 Balance sheet total £000 466 4,429 1,278 1,343 7,198 14,714 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 47 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 14. TRADE AND OTHER PAYABLES Trade payables Amounts owed to subsidiary undertakings Other payables Social security and taxation Accruals and deferred income Group Company 2015 £000 1,017 – 184 613 2,740 4,554 2014 £000 508 – 309 446 1,982 3,245 2015 £000 850 126 118 604 2,488 4,186 2014 £000 444 – 422 376 1,611 2,853 2013 £000 470 1,824 194 220 1,422 4,130 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: Group 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 2015 2014 Financial liabilities at fair value through profit and loss £000 Other financial liabilities at amortised cost £000 Non-financial liabilities £000 Balance sheet total £000 Financial liabilities at fair value through profit and loss £000 Other financial liabilities at amortised cost £000 Non-financial liabilities £000 Balance sheet total £000 – – – – – – – – 4,028 4,028 4,028 20,499 – 1,017 184 – 1,761 23,461 23,585 – 23,585 47,046 – 23 – – 613 979 20,499 23 1,017 184 613 2,740 1,615 25,076 – – – 23,585 4,028 27,613 1,615 52,689 – – – – – – – – 4,697 4,697 4,697 24,054 – 508 309 – 1,182 26,053 18,942 – 18,942 44,995 – 18 – – 446 800 1,264 – – – 1,264 24,054 18 508 309 446 1,982 27,317 18,942 4,697 23,639 50,956 48 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 Company 2015 2014 2013 Financial liabilities at fair value through profit and loss £000 Other financial liabilities at amortised cost £000 Non- financial liabilities £000 Balance sheet total £000 Financial liabilities at fair value through profit and loss £000 Other financial liabilities at amortised cost £000 Financial liabilities at fair value through profit and loss £000 Other financial liabilities at amortised cost £000 Non- financial liabilities £000 Balance sheet total £000 Non- financial liabilities £000 Balance sheet total £000 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S 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 – 20,334 – 20,334 – – – – – – 850 244 – 22 – – 604 22 850 244 604 1,509 979 2,488 – 22,937 1,605 24,542 – – – – – – – 23,040 – 23,040 – 444 422 – 811 – – – 376 – 444 422 376 800 1,611 24,717 1,176 25,893 – – – – – – – 24,735 – 24,735 – 470 194 – 800 26,199 – – – 220 622 842 – 470 194 220 1,422 27,041 – 19,668 – 4,028 4,028 19,668 – 19,668 4,028 – – 23,696 – 4,697 13,749 – 4,697 13,749 – – – 13,749 4,697 – 3,252 13,992 – 18,446 3,252 13,992 – – – 13,992 3,252 17,244 4,028 42,605 1,605 48,238 4,697 38,466 1,176 44,339 3,252 40,191 842 44,285 15. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group and Company’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 and Company’s investment strategy and the short-term working capital requirements of the business. The main risks arising from the Group and Company’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 and Company’s principal financial assets are bank balances and trade and other receivables. The Group and Company’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 or Company 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. The Group and Company’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 2015 £000 8,777 2,417 11,194 2014 £000 6,274 2,825 9,099 The Group and Company 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 policy is to deal only with creditworthy counterparties. The Group and Company’s management consider 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 or Company are not exposed to any significant risk exposure to any single counterparty or any group of counterparties having similar characteristics. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 49 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 15. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES CONTINUED Liquidity risk The Group and Company seek to manage financial risk by ensuring sufficient liquidity is available to meet foreseeable needs and to invest cash assets safely and profitably. The Group and Company do this by taking out loans with banks to build up cash resources to fund property purchases. Bank loans and overdrafts The Group and Company borrowings analysis (all of which are undiscounted) at 31 December 2015 is as follows: In less than one year: 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 Split Current liabilities – bank loans Non-current liabilities – bank loans – financial liabilities at fair value through profit and loss Group 2015 £000 2014 £000 2015 £000 Company 2014 £000 2013 £000 20,499 24,054 20,334 23,040 24,735 520 8,689 14,525 4,028 48,261 (149) 48,112 2,264 1,577 15,201 4,697 47,793 (100) 47,693 350 8,149 11,318 4,028 44,179 (149) 44,030 982 1,011 1,067 1,056 11,767 4,697 41,553 (67) 12,087 3,252 42,141 (162) 41,486 41,979 Group 2015 £000 2014 £000 2015 £000 Company 2014 £000 2013 £000 20,499 24,054 20,334 23,040 24,735 23,585 4,028 48,112 18,942 4,697 47,693 19,668 4,028 44,030 13,749 4,697 41,486 13,992 3,252 41,979 Maturity of financial liabilities The gross contractual cash flows relating to non-derivative financial liabilities are as follows: Group 2015 £000 2014 £000 2015 £000 Company 2014 £000 In less than one year 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 1,017 184 1,741 22,794 25,736 1,676 11,840 20,028 59,280 508 309 1,182 27,438 29,437 2,129 4,347 20,973 56,886 850 244 1,509 22,375 24,978 1,258 10,585 15,080 51,901 50 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 2013 £000 470 194 800 24,994 26,458 444 422 811 24,994 26,671 1,711 1,104 3,092 3,772 15,607 47,081 16,552 47,886 In February 2008 the Group and Company 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 2015 the fair value of this arrangement based on a valuation provided by the Group’s bankers was a liability of £4,028,000 (2014: £4,697,000). All of the interest rate swap agreements terminate within five years (2014: within five years). i S t r a t e g c r e p o r t Borrowing facilities The Group and Company has undrawn committed borrowing facilities at 31 December 2015 of £2,000,000 (2014: £nil). Market risk interest rate risk The Group and Company finance their 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 or Company 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. The interest rate exposure of the financial liabilities of the Group and Company at 31 December 2015 was: i i F n a n c a l S t a t e m e n t S Bank loans 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 Fixed until March 2031 Fixed until March 2027 Cap and collar agreement until January 2018 Variable rate 6.300 6.600 6.230 6.295 6.550 6.040 6.270 5.780 5.470 5.160 4.95% cap May 2016 October 2019 October 2019 January 2019 August 2028 January 2030 March 2030 May 2030 March 2031 March 2027 January 2018 Loan arrangement fees Group 2015 £000 – 10,000 645 – – 4,082 708 1,455 728 9,615 10,000 7,000 44,233 (149) 44,084 2014 £000 1,170 10,000 691 823 686 4,247 719 1,475 743 9,842 10,000 2,700 43,096 (100) 42,996 Company 2014 £000 – 10,000 691 – 686 – 719 1,475 743 9,842 10,000 2,700 2013 £000 1,702 10,000 734 – 716 – 729 1,493 757 10,058 10,000 2,700 36,856 (67) 38,889 (162) 36,789 38,727 2015 £000 – 10,000 645 – – – 708 1,455 728 9,615 10,000 7,000 40,151 (149) 40,002 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 (2014: + half a percentage point) with effect from the beginning of the year: Decrease in result after tax and equity 2015 £000 35 2014 +0.5% £000 13 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 interrelates with other factors affecting investment property values. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 51 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 15. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES CONTINUED Capital risk management The Group and Company’s objectives when managing capital are: ❙ ❙ ❙ ❙ ❙ ❙ ❙ to safeguard the ability to continue as a going concern, so that they continue to provide returns and benefits for shareholders; to ensure that key bank covenants are not breached; to maintain sufficient facilities for operating cash flow needs and to fund future property purchases; to support the Group and Company’s stability and growth; to provide capital for the purpose of strengthening the 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 and Company statements 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 (i.e. as prices) or indirectly (i.e. 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 2014 Income statement – loss At 3I December 2014 Income statement – surplus At 31 December 2015 Level 1 £000 Level 2 £000 Level 3 £000 Total £000 – – – – – 3,252 1,445 4,697 (669) 4,028 – – – – – 3,252 1,445 4,697 (669) 4,028 The fair value of the Group and Company’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. 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. 52 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S 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 2015. Investment property: Group – held to earn rentals and for capital appreciation Company – held to earn rentals and for capital appreciation The reconciliation of the carrying value of non-financial assets classified within level 3 are as follows: At 1 January 2015 Acquired during the year Disposals during the year Gains recognised in profit and loss – increase in fair value At 31 December 2015 Level 1 £000 Level 2 £000 Level 3 £000 Total £000 – – – – 155,092 145,160 155,092 145,160 Investment properties Group £000 Company £000 102,017 58,175 (13,652) 8,552 89,162 58,175 (10,352) 8,175 155,092 145,160 Fair value of the Group and Company’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 cash flow 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 the income capitalisation tech- nique 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. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 53 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 17. DEFERRED TAXATION The movement in deferred taxation assets is as follows: At 1 January Income statement (note 6) At 31 December The deferred tax asset arising from temporary differences can be summarised as follows: Unused trading losses Financial instrument Group and Company Company 2015 £000 940 (134) 806 2014 £000 2,900 (1,960) 2013 £000 736 554 940 1,290 Group and Company Company 2015 £000 – 806 806 2014 £000 – 940 940 2013 £000 640 650 1,290 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 as the interest rate swap liability will ultimately reverse regardless of movements in future interest rates. 18. SHARE CAPITAL Allotted, issued and fully paid: Ordinary Shares of 10p 2015 Number of shares 2015 £000 2014 Number of shares 2014 £000 2013 Number of shares 2013 £000 186,420,598 18,642 111,420,598 11,142 71,420,598 7,142 At an Extraordinary General Meeting held on 13 April 2015 the Company received shareholder approval to raise funds for expansion by way of placing 75 million shares at 60 pence per share, raising £43.7 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). On 8th June 2015, the terms of the LTIP were revised and previous options cancelled. As the previous options were deemed unlikely to be exercised, as in previous years there was no charge made to the profit and loss account on cancellation. 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. ❙ Performance conditions: • 50% of the award subject to absolute NAV growth plus dividends with threshold vesting – 30% of this part of the award – at 8.5% annual growth including dividends and full vesting at 14.0% annual growth. • 50% subject to absolute total shareholder return (share price growth plus dividends) with threshold vesting – 30% of this part of the award – at 8.5% annual growth and full vesting at 14.0%. ❙ The baseline for the commencement of the LTIP is 60p per share. ❙ 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 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. ❙ Conditional awards of shares made each year. ❙ Awards vest after three years subject to continued employment and meeting objective performance conditions. 54 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 On 8 June 2015, the Group granted certain employees an option under the scheme which entitles them to subscribe for or acquire Ordinary Shares in the Company at a price of 10p 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, and the total award is capped at a maximum value of shares at the time of exercise, not a specific number of shares. The weighted average fair value of the awards made is £0.59 per option, the binomial option pricing model with a volatility of 25% (based on the weighted average share price movements over the last three years), a dividend yield of 5.5%, a risk-free rate of 1.5%, an expected weighted average life of five years, a weighted average exercise price of 0.5p and a market value of underlying shares at the date of the grant of £0.60. The number of shares under option at the year end is estimated as 1,375,000. As the award has a maximum value the actual number of shares which will be issued when the option is exercised will depend on the market value of the shares at the time of exercise. In total, £300,000 (2014: £nil) of employee remuneration expense, all of which relates to equity-settled share-based payment transactions, has been included in profit or loss and credited to other reserve. i S t r a t e g c r e p o r t 19. OPERATING LEASE COMMITMENTS Operating lease commitments relating to land and buildings expire within two to five years and amount to £71,000 (2014: £71,000). i i F n a n c a l S t a t e m e n t S Non-cancellable operating lease commitments receivable: Within one year Later than one year but not later than five years Later than five years 2015 £000 1,464 16,877 38,888 57,229 2014 £000 998 8,844 26,819 36,661 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 2015 or at 31 December 2014. 21. CAPITAL COMMITMENTS Capital commitments authorised at 31 December 2015 were £nil (2014: £nil). 22. PENSION SCHEME There was no pension scheme for the benefit of employees or Directors in operation at 31 December 2015 or 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 Company’s related parties are its key management personnel, certain other companies which are related to certain Directors of the Group and its subsidiary undertakings. 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 24 and 25. During the period the Company and Group paid agency fees of £205,000 (2014: £192,000) in respect of professional services to Bond Wolfe, a partnership in which PPS Bassi is a partner, and rent and service charges of £144,000 (2014: £129,000) to Bond Wolfe Estates Limited, a company in which PPS Bassi is a Director and shareholder. At 31 December 2015, the Company owed £169,175 to Bond Wolfe (2014: Nil). During the period the Company and Group paid professional fees of £Nil (2014: £10,000) to, and received rental income of £52,000 (2014: £52,000) from, CP Bigwood Chartered Surveyors, a Company in which PPS Bassi and MHP Daly were Directors and shareholders. During the period the Company’s transactions with subsidiary companies related to inter-company dividends and repayment of loans. Details of amounts outstanding at 31 December 2015 are shown in notes 13 and 14. REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 55 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 23. RELATED-PARTY TRANSACTIONS CONTINUED During the period the Company paid dividends to its Directors in their capacity as shareholders, as follows: JRA Crabtree W Wyatt P London PPS Bassi MHP Daly 2015 £000 3 2 1 162 16 2014 £000 1 1 – 69 5 24. FIRST-TIME ADOPTION OF IFRS These financial statements for the year ended 31 December 2015 are the first the Parent Company has prepared in accordance with IFRS as adopted in the EU. For periods up to and including the year ended 31 December 2014 the Company prepared its financial statements in accordance with UK Generally Accepted Accounting Practice (“UK GAAP”). Accordingly, the Company has prepared financial statements which comply with IFRSs as adopted in the EU applicable for periods ending on or after 31 December 2015, together with the comparative data as at 1 January 2014 and for the year ended 31 December 2014, as described in the summary of significant accounting policies. In preparing these financial statements, the Company opening statement of financial position was prepared as at 1 January 2014 (thereby restating the comparatives). This note explains principal adjustments made by the Company in restating its UK GAAP financial statements, including the statement of financial position as at 1 January 2015 and the financial statements as at and for the year ended 31 December 2015. The first-time adoption of IFRS has resulted in the recognition of a financial liability of £4,028,000 (2014: £4,697,000) in respect of the interest rate swap agreement, recognition of the associated deferred tax asset on the interest rate swap agreement, and recognising the value of investment properties at fair value through profit and loss rather than through a revaluation reserve. Reconciliation of total comprehensive income for the year ended 31 December 2014 Revenue Cost of sales Gross profit Administrative and establishment expenses Surplus on sale of investment properties Net surplus on valuation of investment properties Profit from operating activities Finance income Group dividends Provision against cost of investments Finance costs Loss on financial liabilities at fair value Taxation Profit for the year UK GAAP £000 Restatement £000 IFRS as at 31 December 2014 £000 5,451 (960) 4,491 (2,284) 277 982 3,466 55 1,800 (1,800) (2,308) – 1,213 (640) 573 – – – – – 5,727 5,727 – – – – (1,445) 4,282 290 4,572 5,451 (960) 4,491 (2,284) 277 6,709 9,193 55 1,800 (1,800) (2,308) (1,445) 5,495 (350) 5,145 56 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S Reconciliation of equity as at 1 January 2014 (date of transition) Assets Non-current assets Investment property Property, plant and equipment Investments Deferred tax Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Equity and liabilities Equity Share capital Share premium account Capital redemption reserve Revaluation reserve Profit and loss account Total equity Liabilities Current liabilities Short-term borrowings Trade and other payables Non-current liabilities Long-term borrowings Fair value of hedge Total liabilities Total equity and liabilities UK GAAP £000 Restatement £000 IFRS as at 1 January 2014 £000 61,698 7 4,521 – 66,226 2,365 8,156 7,198 17,719 83,945 7,142 61 45 2,932 30,908 41,088 24,735 4,130 28,865 13,992 – 13,992 42,857 83,945 – – – 1,290 1,290 – (640) – (640) 650 – – – (2,932) 330 (2,602) – – – – 3,252 3,252 3,252 650 61,698 7 4,521 1,290 67,516 2,365 7,516 7,198 17,079 84,595 7,142 61 45 – 31,238 38,486 24,735 4,130 28,865 13,992 3,252 17,244 46,109 84,595 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 57 GOVERNANCE NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 DECEMBER 2015 UK GAAP £000 Restatement £000 IFRS as at 31 December 2014 £000 89,162 6 2,721 – 91,889 2,365 7,447 3,965 13,777 105,666 11,142 15,533 45 8,659 30,645 66,024 23,040 2,853 25,893 13,749 – 13,749 39,642 – – – 940 940 – – – – 89,162 6 2,721 940 92,829 2,365 7,447 3,965 13,777 940 106,606 – – – (8,659) 4,902 (3,757) – – – – 4,697 4,697 4,697 11,142 15,533 45 – 35,547 62,267 23,040 2,853 25,893 13,749 4,697 18,446 44,339 105,666 940 106,606 24. FIRST-TIME ADOPTION OF IFRS CONTINUED Reconciliation of equity as at 31 December 2014 Assets Non-current assets Investment properties Property, plant and equipment Investments Deferred tax Current assets Inventories Trade and other receivables Cash and cash equivalents Total assets Equity and liabilities Equity Share capital Share premium account Capital redemption reserve Revaluation reserve Retained earnings Total equity Liabilities Current liabilities Bank loans Trade and other payables Non-current liabilities Bank loans Financial liabilities Total liabilities Total equity and liabilities 58 REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 i S t r a t e g c r e p o r t i i F n a n c a l S t a t e m e n t S OUR ADVISERS Company registration number: 5045715 Registered office: Auditor: Solicitor: Nominated adviser: Broker: Banker: Registrar: 75-77 Colmore Row, Birmingham B3 2AP Grant Thornton UK LLP Chartered Accountants Registered Auditor Colmore Plaza 20 Colmore Circus Birmingham B4 6AT Gateley Plc One Eleven Edmund Street Birmingham B3 2HJ Smith & Williamson Corporate Finance Limited 25 Moorgate London EC2R 6AY Liberum Capital Limited Ropemaker Place, Level 12 25 Ropemaker Street London EC2Y 9LY Lloyds Banking Group 125 Colmore Row Birmingham B3 3SF Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU REAL ESTATE INVESTORS PLC Annual Report and Accounts 2015 59 GOVERNANCE NOTES Real Estate Investors Plc 2nd Floor 75/77 Colmore Row Birmingham B3 2AP Telephone: 0121 212 3446 Fax: 0121 212 1415 Web: www.reiplc.com