Annual Report 2006 - Tamar European Industrial Fund
Annual Report 2006 - Tamar European Industrial Fund
Annual Report 2006 - Tamar European Industrial Fund
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Kenmore <strong>European</strong><br />
<strong>Industrial</strong> <strong>Fund</strong> Limited<br />
<strong>2006</strong><br />
<strong>Annual</strong> report and accounts for the<br />
period ended 31 December <strong>2006</strong>
Contents<br />
Company Summary<br />
1 Financial Highlights<br />
2 Performance Summary<br />
3 Chairman’s Statement<br />
5 Investment Manager<br />
6 Investment Manager’s Review<br />
9 Portfolio Statistics<br />
10 Property Portfolio<br />
11 Board of Directors<br />
12 <strong>Report</strong> of the Directors<br />
16 Directors’ Responsibility Statement<br />
17 Independent Auditors’ <strong>Report</strong><br />
18 Income Statements<br />
19 Balance Sheets<br />
20 Statements of Changes in Equity<br />
21 Cash Flow Statements<br />
22 Notes to the Accounts<br />
33 Notice of <strong>Annual</strong> General Meeting<br />
34 Shareholder Information<br />
Corporate Information<br />
This document is important and relates to certain matters on which voting action is required. Shareholders who are in<br />
any doubt as to what action to take should consult an appropriate independent adviser immediately.<br />
If any shareholder has sold or transferred all their shares in the Company, he or she should pass this document to the<br />
person through whom the transfer or sale was effected for onwards transmission to the transferee or purchaser.
Company Summary<br />
The Company<br />
The Company is a limited liability, closed-ended, Guernsey registered investment company. Its shares<br />
are listed on the Official List of the UK Listing Authority and traded on the London Stock Exchange. It was<br />
incorporated on 25 August <strong>2006</strong> and its shares were admitted to listing on 25 September <strong>2006</strong>.<br />
At 31 December <strong>2006</strong> total assets less current liabilities were £315 million and shareholders’ funds were<br />
£140 million.<br />
Objective<br />
The investment objective of the Company is to provide Ordinary Shareholders with an attractive level<br />
of income together with the potential for income and capital growth. Its investment policy is to focus on<br />
investments in industrial real estate assets primarily across Western and Northern <strong>European</strong> jurisdictions<br />
(but with no investments being made in the United Kingdom). The Investment Manager expects the<br />
investments will be made primarily in France, Benelux, Germany, Italy, Iberia and Scandinavia.<br />
Management<br />
At launch the Board appointed Kenmore Financial Services Limited as Investment Managers.<br />
The investment management agreement appointing them is for an initial three year period ending on<br />
25 September 2009 and, with effect from that date, may be terminated by either party by giving not less<br />
than 12 months’ notice. Further details of the investment management agreement are provided in the<br />
Notes to the Accounts.<br />
Capital Structure<br />
At admission on 25 September <strong>2006</strong>, the Company had a capital structure comprising 140 million<br />
Ordinary Shares. Ordinary shareholders are entitled to all dividends declared by the Company and to all<br />
the Company’s assets after repayment of liabilities including its borrowings. Borrowings consist of bank<br />
facilities provided by The Royal Bank of Scotland plc, Hypo Real Estate Bank International AG and DnB<br />
NOR Bank ASA, the latter being refinanced with borrowings from Hypo Real Estate Bank International AG<br />
since the period end.<br />
Status<br />
The Company’s shares are eligible for ISAs and PEP transfers and for inclusion within SASS and SIPPS.<br />
Website<br />
The Company’s internet address is: www.kenmoreeifund.com<br />
Financial Highlights<br />
• Share price increased by 12.75 per cent to 112.75 pence at 31 December <strong>2006</strong>.<br />
• Adjusted net asset value before deferred tax liabilities per share increased by 9.0 per cent from 95.5<br />
pence at launch to 104.1 pence at 31 December <strong>2006</strong>.<br />
• Dividend announced in respect of the period of 1.5 pence per share.<br />
Kenmore <strong>European</strong> <strong>Industrial</strong> <strong>Fund</strong> Limited Share Price from Launch<br />
114<br />
112<br />
110<br />
108<br />
106<br />
104<br />
102<br />
100<br />
25 Sept 31 Oct 30 Nov 31 Dec 06<br />
Reconciliation of net asset value per accounts to adjusted net asset value:<br />
Total Per share<br />
£’000 Pence<br />
Net asset value per accounts 140,409 100.3p<br />
Adjustments:<br />
Deferred tax liabilities (see note 10(a)) 2,583 1.8p<br />
Unrecognised deferred tax adjusted for within initial purchase price consideration 4,845 3.5p<br />
Unrecognised deferred tax contingently adjusted for<br />
within initial purchase price consideration (see note 10(b)) (2,135) (1.5)p<br />
Adjusted net asset value 145,702 104.1p<br />
Reconciliation of net asset value per accounts to adjusted net asset value<br />
after deferred tax liabilities and contingent deferred tax:<br />
Total Per share<br />
£’000 Pence<br />
Net asset value per accounts 140,409 100.3p<br />
Adjustments:<br />
Unrecognised deferred tax liabilities (see note 10(b)) (29,948) (21.4)p<br />
Unrecognised deferred tax adjusted for within initial purchase price consideration 4,845 3.5p<br />
Adjusted net asset value after deferred tax liabilities and contingent deferred tax 115,306 82.4p<br />
The above adjusted net asset values (‘NAV’) are based on the NAV per accounts which is calculated in accordance with International<br />
Financial <strong>Report</strong>ing Standards issued by, or adopted by, the International Accounting Standards Board (the ‘‘IASB’’) and interpretations<br />
issued by the International Financial <strong>Report</strong>ing Standards Committee. In order to reconcile these to the published accounts it is<br />
necessary to adjust for those items identified above.<br />
1
Performance Summary<br />
Returns (from launch on 25 September <strong>2006</strong>) 31 December <strong>2006</strong><br />
Growth in adjusted net asset value per share 9.0%<br />
Ordinary Share price 12.75%<br />
FTSE All-Share Index 9.1%<br />
Capital Values Launch<br />
31 December 25 September<br />
<strong>2006</strong> <strong>2006</strong> % Change<br />
Total assets less current liabilities (£000’s) 314,994 276,204 +13.3<br />
Adjusted net asset value 104.1p 95.5p +9.0<br />
Ordinary Share price 112.75p 100.00p +12.8<br />
FTSE All-Share Index 3,221.42 2,969.82 +8.5<br />
Premium to adjusted net asset value per share 8.3% 4.7% -<br />
Gearing ‡ 54.3% 51.2% -<br />
Earnings and Dividends (from incorporation to 31 December <strong>2006</strong>) †<br />
Earnings per Ordinary Share 3.5p<br />
Dividends announced per Ordinary Share 1.5p<br />
Highs/Lows (since launch on 25 September <strong>2006</strong>) Highs Lows<br />
Ordinary Share price 112.75p 100.00p<br />
Premium (to adjusted net asset value per share at launch) 18.1% 4.7%<br />
‡ Gearing: Secured bank loans (after interest rate swaps) ÷ total assets (less current liabilities).<br />
† Including dividends announced but not paid in respect of the period to 31 December <strong>2006</strong>.<br />
Source: Datastream.<br />
2<br />
Chairman’s Statement<br />
It gives me great pleasure to report the first results of the Kenmore <strong>European</strong> <strong>Industrial</strong> <strong>Fund</strong> (the “<strong>Fund</strong>” / “Company”)<br />
for the period from incorporation to 31 December <strong>2006</strong>.<br />
The <strong>Fund</strong> was launched in September <strong>2006</strong> with a successful fund raising of £140 million. Shortly after Admission<br />
to the London Stock Exchange on 25 September <strong>2006</strong>, it acquired a seed portfolio of 70 properties costing £212.7<br />
million, subsequently augmented by further acquisitions in the reporting period. The <strong>Fund</strong>’s investment objective is to<br />
provide investors with an attractive level of income together with the potential for capital growth. The <strong>Fund</strong> will focus<br />
on industrial assets in western and northern Europe excluding the UK, primarily in France, Germany, Benelux, and<br />
Scandinavia.<br />
Results<br />
On Admission, the prospectus suggested that the adjusted net assets of the <strong>Fund</strong> would be 95.5 pence excluding<br />
deferred tax on unrealised investment gains. On the same basis I am delighted to report that net assets per share<br />
excluding deferred tax have increased to 104.1 pence, a rise of 9.0%. The value of the portfolio acquired on Admission<br />
has increased 3.4% with each country showing gains measured against the <strong>Fund</strong>’s acquisition cost.<br />
The table below shows the movement in adjusted net asset value per share:<br />
NAV per Share (Pence)<br />
Admission, excluding deferred tax 95.5<br />
Uplift from valuation gains 5.6<br />
Expensing of acquisition costs (0.9)<br />
Uplift from balance of retained profits 1.2<br />
Improvement in mark to market of debt 0.8<br />
Deferred tax charge for the period 1.9<br />
As at 31 December <strong>2006</strong>, excluding deferred tax 104.1<br />
Including (both recognised and unrecognised) deferred tax, NAV per share is 82.4 pence which compares to the<br />
pro-forma figure on Admission of 78.0 pence.<br />
Profits before tax in the period from incorporation to 31 December <strong>2006</strong> were £7.7 million.<br />
The share price has performed well in the period under review. The shares were admitted to trading at 100 pence<br />
and have traded at a premium consistently since then. We believe that investor demand has been stimulated by the<br />
prospects of an attractive dividend and potential capital growth and the level of liquidity has been encouraging. The<br />
Company also joined the FTSE small cap index in October <strong>2006</strong>.<br />
Portfolio<br />
In addition to the portfolio acquired shortly after Admission, the Company acquired 10 assets at a cost of £65 million<br />
(excluding acquisition costs) in the period to 31 December <strong>2006</strong>. As at the balance sheet date, the Company held<br />
properties at a market value of £288 million, representing approximately 70% of the total expected portfolio size.<br />
Since 31 December, the Company has continued to build the portfolio and, as at 27 February, has acquired a further 4<br />
properties costing £10.5 million. There is a further pipeline of 10 acquisitions totalling £61.1 million which the Board has<br />
approved for purchase which, if completed as expected, will result in the <strong>Fund</strong> being approximately 90% invested.<br />
Information on the portfolio and the pipeline of assets is contained in the Investment Manager’s Review.<br />
Gearing<br />
At an Extraordinary General Meeting of the Company on 18 October <strong>2006</strong>, members approved a change to the Articles<br />
to remove the restriction that, at time of Admission, the maximum permitted borrowings of the Company should be no<br />
greater than 65% of gross assets. The maximum permitted borrowing of the Company is now 75% of gross assets.<br />
The aim of the Board, as stated in the prospectus, is to keep borrowings at approximately 70% of gross assets when<br />
fully invested. During this period, with the acquisition of the portfolio the level of gearing may fall below this level.<br />
3
Chairman’s Statement<br />
As at 31 December <strong>2006</strong>, the Company had drawn £172 million of debt from its facilities to finance the acquisition<br />
of the portfolio. The Company has hedged the risk of interest rate increases by the use of derivative instruments.<br />
On acquiring the seed portfolio, the Company also acquired certain debt facilities which were described in the<br />
prospectus. Arrangements in Norway have been refinanced following the year-end and the swapped element of the<br />
facilities replaced with new five year arrangements. The refinancing of the Belgian and Dutch seed assets has also<br />
been completed with new hedging arrangements implemented.<br />
As at the date of this statement, a total of 94% of the Company’s debt has been protected against adverse movements<br />
in interest rates. Although interest rates across Europe have increased since flotation, the blended cost of money based<br />
on debt drawn to date is currently 4.06% and the <strong>Fund</strong> is now well protected by the hedging instruments in place.<br />
The results reflect an improvement in the mark to market value of the Company’s hedge instruments since Admission<br />
of £1.1 million.<br />
Dividends<br />
In launching the <strong>Fund</strong>, the board stated that, in the absence of unforeseen circumstances, it expected to pay a total<br />
dividend of 7.5 pence per share in the period from Admission to 31 December 2007, representing an annualised<br />
dividend of 6 pence per share.<br />
I am delighted to report that, in light of the strong progress made, the board has decided to declare a first dividend<br />
of 1.5 pence per share, which will be paid on 25 April 2007 to shareholders on the register on 10 April 2007.<br />
Shareholder Communication<br />
The Board considers it important that shareholders are kept regularly informed of the progress of the <strong>Fund</strong>. The<br />
adjusted Net Asset Value per share will be published quarterly.<br />
Corporate Governance<br />
The Company is registered in Guernsey. As such, it is not formally required to comply with the Combined Code on<br />
Corporate Governance. However, the directors intend to comply with the Code, and our statement on compliance is<br />
contained in this annual report.<br />
Prospects<br />
The west <strong>European</strong> and Scandinavian industrial property markets have performed well in recent years.<br />
The markets on which the Company focuses have generally been characterised by consistent tenant demand, limited<br />
development of new stock and an increase in investor demand for industrial/warehouse investments. We see these<br />
conditions continuing, alongside other market dynamics. These include the active management of secondary assets<br />
and hardening yields over the next 12 months, as a result of ongoing investor demand.<br />
Against this background, the application of the Investment Manager’s specialist asset management skills and the<br />
understanding of local market dynamics will be a key factor in driving the Company’s performance. The continuing<br />
ability to source acquisitions through a local network of contacts is also of primary importance.<br />
The Kenmore <strong>European</strong> <strong>Industrial</strong> <strong>Fund</strong> already has an attractive income profile which, including acquisitions in the<br />
pipeline, has a yield of 7.6%, and a portfolio which has already delivered capital growth of 3.4% over the reporting<br />
period to December <strong>2006</strong>. A robust pipeline of further acquisitions has also been identified. The Board believes that<br />
the <strong>Fund</strong> is well on course to build on this sound foundation as the Investment Manager continues to create and<br />
manage a diversified portfolio with strong potential for income and capital growth.<br />
Giles Weaver<br />
Chairman<br />
4<br />
Investment Manager<br />
Kenmore Financial Services Limited is the Investment Manager of the Company and the Luxembourg Subsidiary (and<br />
their subsidiaries) pursuant to the Investment Management Agreement. The Investment Manager is responsible for<br />
advising the Group on the overall management of the Group’s investments and for managing the Group’s cash and<br />
investments in fixed income instruments in accordance with the Company’s investment objective and policy and subject<br />
to the overall control and supervision of the Directors.<br />
The Directors have satisfied themselves that the Investment Manager has procedures in place to address potential<br />
conflicts of interest.<br />
Kenmore Property Group Limited (‘‘Kenmore’’) is the parent company of the Investment Manager. Kenmore was<br />
founded in 1986. Its principal activities are property trading, development and fund management. Kenmore currently<br />
has offices in Edinburgh, London, Manchester, Birmingham, Bristol, Leeds, Stockholm, Paris and Dubai. In addition<br />
to its office network it currently has ten joint venture partners with four of these being in Europe. The Kenmore Group<br />
has 57 full time and attached staff in total and encompasses all the disciplines associated with property investment<br />
management: research, acquisitions, disposals, development, finance, property management and administration.<br />
5
Investment Manager’s Review<br />
Property Market Review<br />
In <strong>2006</strong>, total industrial investment market activity was approximately equal to that in 2005, accounting for 5% of total<br />
investment activity. Germany accounted for 20% of all <strong>European</strong> investment activity. A lack of investment supply is<br />
the key constraint to growth in market size, however, investor demand remains high and this mismatch is expected to<br />
further fuel yield compression.<br />
Supply in the industrial sector remains constrained which in turn has contributed to rental stability. As a result of<br />
stronger macro economic performance across Europe and improving tenant demand, rent stability remains strong with<br />
the potential for rental growth in the short-to-medium term. In general terms, caution from developers and investors<br />
regarding new construction, in particular speculative development, means that there is a limited threat from both oversupply<br />
and downward pressure on rents.<br />
France<br />
In <strong>2006</strong>, take-up in the Ile de France area has continued to recover with almost 950,000 square metres of leasing<br />
activity. Rental levels remain constant and despite low levels of demand / activity in the fourth quarter, the prognosis<br />
for 2007 is positive with rents expected to remain stable and demand to return to normal levels seen over the past two<br />
years. Lack of investment stock has led to a slowdown in activity over the past two years and this is expected to remain<br />
true in 2007, but will also continue to fuel yield compression.<br />
Germany<br />
The steady recovery of the German economy continues to fuel occupier activity and is expected to keep in-line with<br />
new supply. Despite some downward pressure in and around Dusseldorf, rents are expected to be stable in 2007.<br />
Essen and Dortmund have experienced high levels of demand in <strong>2006</strong>. In investment terms, <strong>2006</strong> was a record year<br />
for Germany with particularly strong interest in the warehouse sector. Yields in Germany are still trading at 50 basis<br />
points above the average for the rest of Europe.<br />
Belgium<br />
Leasing activity in <strong>2006</strong> was very active, especially along the Antwerp-Brussels corridor running through Mechelen.<br />
Take-up in Antwerp has been at record levels, but this is not a consistent story across Belgium - northern Brabant has<br />
seen modest take-up of 30,000 square metres. In terms of investment transactions, <strong>2006</strong> was a record year after the<br />
slow down in 2005. Notably, investors in <strong>2006</strong> showed strong interest in all sectors of industrial property not just larger<br />
units as had been the case in previous years.<br />
The Netherlands<br />
Strong export growth has boosted the Netherlands economy driving improved performance in the industrial market.<br />
Increasing levels of container freight have resulted in strong demand for warehousing in and around Rotterdam. While<br />
there remains high levels of vacancy across the Netherlands industrial market (15% in Rotterdam) much of this is<br />
structural vacancy in older poorly designed units. Rents have stabilised in the past twelve months and with increasing<br />
tenant demand there is the potential for rental growth. Due to limited supply of investment opportunities, <strong>2006</strong> saw<br />
a slow down in investment transactions compared to 2005. Strong demand and limited supply is expected to lead<br />
to further yield contraction in 2007. Despite limited supply there remains strong interest from both domestic and<br />
international investors.<br />
Norway<br />
Occupier demand, in part driven by a strong oil-based economy, has increased significantly in <strong>2006</strong>. Rents are<br />
stable and new supply remains limited, in part due to a shortage in construction capacity. Despite being outside the<br />
Eurozone, investor interest continues to increase, though many international investors are not yet represented in Norway<br />
and the local investors remain a strong force in the market place.<br />
Sweden<br />
An improving market economy is fuelling a rapid growth in stock with 300,000 square metres of warehouse space to<br />
be delivered in 2007. Tenant expansion was a key aspect of the market in <strong>2006</strong>. Growth in supply off-set by strong<br />
demand has led to stable rental levels and this trend is expected to continue in 2007. Interest for industrial/warehouse<br />
investments remains very high for prime properties and as a result of limited investment supply the secondary market<br />
is also increasingly attractive to international investors. This is expected to fuel yield compression in 2007. In <strong>2006</strong><br />
Sweden saw 8% of the <strong>European</strong> industrial investment market, a marginal increase on 2005.<br />
6<br />
Investment Manager’s Review<br />
Finland<br />
The industrial leasing market remains strong with stable demand and a very low market vacancy. New supply is<br />
constrained and there is very limited speculative development, therefore, rents are stable with the promise of rental<br />
growth in the short-to-medium term. Finland has seen strong growth in interest from international investors across all<br />
asset classes. As elsewhere in Europe, market activity has been limited by a lack of product. Due to perceived lack<br />
of market transparency Finland has traditionally not been favoured by international investors. However, this is now<br />
changing with many investors focusing strongly on Finland. Nevertheless, yields are still significantly higher than<br />
elsewhere in Europe.<br />
Portfolio Overview<br />
As at 31st December <strong>2006</strong> the total portfolio was valued at over £286.76m and the seed portfolio increased from<br />
£212.7m to £219.7m, a rise of over 3%. By value the portfolio breaks down across six countries as follows: France<br />
49%, Norway 24%, Netherlands 11%, Belgium 7%, Sweden 5% and Germany 4%. This shows a reduction in exposure<br />
to France of 17%, an increase in Norway and Belgium and the first assets bought in Germany.<br />
The portfolio comprises 80 properties, 658,000 square metres with 390 individual leases. The current portfolio rent is<br />
£21.5m (NOI) reflecting a net yield of 7.5% with a void of 12.5% by area and reversionary yield of 8.65%.<br />
Belgium France Germany Netherlands Norway Sweden Total<br />
Number of Assets 3 57 2 4 10 4 80<br />
Number of Tenancies 20 284 8 4 56 18 390<br />
Total Area (sqm) 66,333 261,168 89,916 97,652 92,830 50,196 658,095<br />
Average Lot Size £’000 £6,554 £2,449 £6,070 £7,662 £6,932 £3,727 £33,394<br />
Value (per sqm) £296 £534 £135 £314 £747 £297 £435<br />
Area/Tenancy (sqm) 3,317 920 11,240 24,413 1,658 2,789 1,687<br />
Area/Asset (sqm) 22,111 4,582 44,958 24,413 9,283 12,549 8,226<br />
During the reporting period, the portfolio saw 15 new leases signed or renewed, representing 3.5% of gross income and<br />
31,579 sqm, and 19 tenants vacate premises, representing 3.7% of gross income and 30,515 sqm; the income of the<br />
seed portfolio dropped by 0.9% and occupancy of the whole portfolio increased by just under 1% due to purchases.<br />
It is worth noting that the French market had a relatively soft final quarter in terms of leasing and experienced high rental<br />
increases as construction price indexation rose to 8%. We intend to use this unsustainable indexation to induce tenants<br />
to commit to longer lease terms in return for a reduction to market rental levels. The portfolio as a whole is performing<br />
within the business plan.<br />
Transactions<br />
Between launch and 31st December <strong>2006</strong>, a total of 10 properties were purchased at a cost of £65m excluding<br />
purchaser’s costs of 4.4% on average. The total net operating income for the new properties was £5.6m providing a net<br />
initial yield of 8.2% and a reversionary yield of 8.8%. These additional investments take the fund to approximately 70%<br />
invested by cost. No sales were undertaken.<br />
The properties acquired include:<br />
• Drammen, Norway (£13.95m; 7.1%; 18,177 sqm) – a well-let distribution unit which offers an opportunity to take a<br />
surrender on release to the under tenants. The location is likely to improve as the main Oslo port is relocated.<br />
• Dortmund, Germany (£9.68m; 12.4%; 81,438 sqm) – a well-located multi let industrial estate predominantly (70%) let<br />
to Edeka. This provides the opportunity of redeveloping and reletting to a number of current under-tenants as Edeka<br />
will not renew their lease.<br />
• Aarschot, Belgium (£11.7m; 7.6%; 31,600 sqm) - a multi let industrial estate located in the prime Antwerp-Germany<br />
distribution corridor. The property is currently under-rented and has the opportunity to develop a further 6,300 sqm.<br />
The assets acquired were valued at 31st December <strong>2006</strong> at £67,046,227, approximately 0.6% less than their gross<br />
purchase price.<br />
7
Investment Manager’s Review<br />
Outlook<br />
As a general statement on the industrial/warehouse market, we anticipate more of the same, increasing investor<br />
interest putting downward pressure on yields, steady but cautious tenant demand and supply in check through lack of<br />
development.<br />
However, the market dynamics have changed slightly over the quarter. The significant rise in interest rates has reduced<br />
the arbitrage between cost of money and property yields. This has occurred at the same time as there are more<br />
entrants into the market place. Unfortunately, investment stock levels have not increased commensurately as the sector<br />
is comparatively immature and corporates are only slowly releasing real estate assets from their balance sheets.<br />
While we are well within business plan in terms of purchase yield and hedged interest rate, future purchases will be<br />
more difficult to secure at those yields experienced historically, although this should indicate potential for capital growth<br />
within the existing portfolio. Furthermore, the continued rise in construction costs will either push prime rents upward<br />
or continue to act as a hold over new development – either way the existing stock could potentially experience rental<br />
growth.<br />
We continue to see excellent off-market opportunities through our office network and well established contacts in our<br />
target markets.<br />
Rob Brook<br />
Kenmore Financial Services Limited<br />
Investment Manager<br />
8<br />
Portfolio Statistics<br />
Geographical Analysis as at 31 December <strong>2006</strong> Tenure Analysis as at 31 December <strong>2006</strong><br />
NETHERLANDS 11%<br />
GERMANY 4%<br />
Lease Expiry Profile<br />
At 31 December <strong>2006</strong> the average lease length for the portfolio, assuming all break options are exercised, was 3.8<br />
years.<br />
80%<br />
70%<br />
60%<br />
50%<br />
40%<br />
30%<br />
20%<br />
10%<br />
0<br />
FRANCE 49%<br />
0-5 years<br />
NORWAY 24%<br />
Top Ten Tenants at 31 December <strong>2006</strong><br />
SWEDEN 5%<br />
BELGIUM 7%<br />
5-10 years 10-15 years 15+ years<br />
LEASEHOLD 2%<br />
FREEHOLD 98%<br />
Passing Rent % Total Portfolio<br />
Tenant £’000s Passing Rent<br />
Kuehne + Nagel Logistics 1,674 7.8%<br />
EDEKA 1,127 5.2%<br />
Bauda AS 970 4.5%<br />
Kuehne + Nagel Chilled Logistics 677 3.1%<br />
STS 526 2.4%<br />
Grunnarbeid AS 459 2.1%<br />
I.N.A. 444 2.1%<br />
Nexans Distribution 405 1.9%<br />
Bongs Konvolutter 398 1.8%<br />
Black & Decker 338 1.6%<br />
7,018 32.5%<br />
9
Property Portfolio<br />
As at 31 December <strong>2006</strong><br />
Property Country Initial Market % of Total Assets<br />
Yield value (less Current<br />
£’000s Liabilities)<br />
Marshallweg 1, Veghel Netherlands 7.19% 22,825 7.3%<br />
Svelvikveien 59B, Drammen Norway 6.85% 14,384 4.6%<br />
Nieuwlandlaan, Aarschot Belgium 8.72% 10,908 3.5%<br />
Brackler-Hellweg, Dortmund Germany 14.67% 9,426 3.0%<br />
Leiraveien 13B, Skedsmo Norway 6.02% 9,101 2.9%<br />
Croissy Beaubourg France 7.79% 8,867 2.8%<br />
Östmarkveien 27, Oslo Norway 6.88% 7,788 2.5%<br />
Banvakten 1, Borlange Sweden 5.37% 6,476 2.1%<br />
Nanterre France 6.79% 6,363 2.0%<br />
Vestvollveien 10, Skedsmo Norway 8.88% 6,338 2.0%<br />
Ten largest property holdings 102,476 32.7%<br />
Prof Birkelandsvei 36, Oslo Norway 7.93% 6,231 2.0%<br />
Vikelvfaret, Trondheim Norway 7.80% 5,929 1.9%<br />
Bry-sur-Marne France 9.03% 4,915 1.6%<br />
John G. Mattesonsvei 4, Oslo * Norway 8.64% 4,829 1.5%<br />
Holterkollveien 3, Frogn Norway 7.29% 4,681 1.5%<br />
Runnenbergweg 12,14 / Talhoutweg 2, Vaassen Netherlands 9.38% 4,585 1.5%<br />
Lisses Porges France 7.40% 4,558 1.5%<br />
Bekkeveien 161, Stokke Norway 9.30% 4,550 1.5%<br />
Industrielaan 9, Olen Belgium 9.49% 4,525 1.4%<br />
Oostkaai, Merksem Belgium 10.22% 4,228 1.4%<br />
Twenty largest property holdings 151,507 48.5%<br />
Vastra 8, Helsingborg Sweden 11.32% 4,049 1.3%<br />
Bois-Chaland, Lisses France 8.33% 4,033 1.3%<br />
Combs La Ville France 6.48% 3,966 1.3%<br />
Fontenay Neuilly France 7.92% 3,892 1.2%<br />
St. Michel sur Orge France 7.93% 3,737 1.2%<br />
Rue de L’Equerre, St Ouen l’Aumône France 8.04% 3,636 1.2%<br />
Bredmyra 10-12, Sarpsborg Norway 8.47% 3,608 1.2%<br />
Herblay France 8.31% 3,488 1.1%<br />
Norrahammar, Jönköping Sweden 13.76% 3,470 1.1%<br />
Neuilly Plaisance France 7.57% 3,461 1.1%<br />
Thirty largest property holdings 188,847 60.5%<br />
Other properties 99,008 29.5%<br />
Price adjustment related to deferred tax liabilities (4,845) (0.1)%<br />
Total property portfolio 283,010 89.9%<br />
Other non-current assets and net current assets 31,984 10.1%<br />
Total assets (less current liabilities) 314,994 100.0%<br />
* Leasehold property<br />
10<br />
Board of Directors<br />
Giles Weaver (Chairman)<br />
Aged 60, is currently Chairman of Charter Pan-<strong>European</strong> Trust PLC and Helical Bar PLC. He is a nonexecutive<br />
director of Aberdeen Asset Management PLC, Gartmore SICAV, Anglo & Overseas PLC, Investec<br />
High Income Trust PLC, Isotron PLC, James Finlay Ltd., ISIS Property Trust 2 Ltd. and Henderson Far East<br />
Income Trust plc. He was formerly chairman of Murray Johnstone Ltd. and a director of Ivory & Sime PLC.<br />
Jonathan Gamble<br />
Aged 39, is currently a director of Asset Risk Consultants Limited, which provides investment consulting<br />
services. He has worked professionally in London, Australia and Singapore as a dealer for Morgan Stanley<br />
and Société Générale before moving to Guernsey. He serves on the boards of a number of companies.<br />
Helen Green<br />
Aged 44, is a chartered accountant and a partner in Saffery Champness, a UK top 20 firm of chartered<br />
accountants. She joined the firm in 1984, qualified as a chartered accountant in 1988 and became a<br />
partner in the London office in 1997. Since November 2000 she has been based in the Guernsey office<br />
where she is a client liaison director responsible for trust and company administration. Helen serves on the<br />
boards of a number of companies in various jurisdictions.<br />
John Kennedy<br />
Aged 55, has over 30 years’ experience in the property market. He is Chairman of Kenmore and has<br />
worked professionally in Scotland, Australia and the West Indies. He qualified as a chartered surveyor in<br />
1973, formed Kenmore Investments Limited 20 years ago and ran his own building company before turning<br />
exclusively to commercial property trading, development and investment. He is a prior winner of Property<br />
Week Personality of the Year and Entrepreneur of the Year.<br />
Christopher Spencer<br />
Aged 56. Christopher Spencer qualified as a chartered accountant in London in 1975. Following two years<br />
post qualification work in Bermuda he moved to Guernsey. Mr Spencer, who specialised in audit and<br />
fiduciary work, was managing partner/director of the Guernsey Practice of Pannell Kerr Forster (Guernsey)<br />
Limited and Praxis Fiduciaries Limited from 1990 until his retirement in May 2000. Mr Spencer is a nonexecutive<br />
Director of a number of hedge funds, funds of hedge funds and other investment and insurance<br />
companies.<br />
11
<strong>Report</strong> of the Directors<br />
The Directors present their report and accounts of the<br />
Group for the period from incorporation on 25 August<br />
<strong>2006</strong> to 31 December <strong>2006</strong> (the “period”).<br />
Results and Dividends<br />
The results for the period are set out in the attached<br />
accounts. The Company has not paid any interim<br />
dividends during the period ended 31 December <strong>2006</strong>. It<br />
is the policy of the Directors to declare and pay dividends<br />
as interim dividends. The Directors do not therefore<br />
recommend a final dividend.<br />
Principal Activity and Status<br />
The Company is a Guernsey registered company and<br />
during the period carried on business as a property<br />
investment company. A review of the business during the<br />
period is contained in the Chairman’s Statement and the<br />
Investment Manager’s Review.<br />
Directors<br />
The Directors who held office during the period and<br />
their interests in the shares of the Company as at 31<br />
December <strong>2006</strong> (all of which were beneficial) were:<br />
Ordinary Shares<br />
CGH Weaver 200,000<br />
JJ Gamble -<br />
HF Green 5,000<br />
JAB Kennedy *1,500,000<br />
CP Spencer 15,000<br />
* Held within a group pension scheme of which Mr<br />
Kennedy is a member.<br />
There have been no changes in the above interests<br />
between 31 December <strong>2006</strong> and 27 February 2007.<br />
Biographical details of each of the Directors are shown<br />
on page 11. In accordance with the Company’s Articles<br />
of Association each Director will retire at the <strong>Annual</strong><br />
General Meeting, being the first such meeting following<br />
his appointment and, being eligible, offers himself<br />
for re-election. As stated in the section on Corporate<br />
Governance starting on page 13, an evaluation of the<br />
performance of individual Directors was not carried out<br />
during the period but will be undertaken during 2007.<br />
However, the Board believes that the performance of<br />
each Director continues to be effective and demonstrates<br />
commitment to the role.<br />
12<br />
During the period the Directors received the following<br />
emoluments in the form of fees:<br />
CGH Weaver 12,370<br />
JJ Gamble 7,068<br />
HF Green 7,068<br />
JAB Kennedy 7,068<br />
CP Spencer 8,836<br />
Total 42,410<br />
There are no service contracts in existence between the<br />
Company and any Directors but each of the Directors<br />
was appointed by a letter of appointment which sets out<br />
the main terms of their appointment.<br />
Management<br />
Kenmore Financial Services Limited (the Investment<br />
Manager) provides management services to the<br />
Company. A summary of the Investment Management<br />
Agreement is given in note 2 to the accounts.<br />
Since the period end, the Management Engagement<br />
Committee has reviewed the appropriateness of the<br />
Investment Manager’s appointment. In carrying out<br />
the review the Committee considered the investment<br />
performance of the Company during the period and the<br />
capability and resources of the Investment Manager<br />
to deliver satisfactory investment performance. It<br />
also considered the length of the notice period of the<br />
Investment Management Agreement and the fees<br />
payable to the Investment Manager, together with the<br />
standard of the other services provided.<br />
Following this review, it is the Directors’ opinion that the<br />
continuing appointment of the Investment Manager on<br />
the terms agreed is in the interests of shareholders as a<br />
whole.<br />
Substantial Interests in Share Capital<br />
At 27 February 2007 the following holdings representing<br />
more than 3 per cent of the Company’s issued share<br />
capital had been notified to the Company.<br />
No. of Ordinary Percentage<br />
Shares Held Held<br />
Rathbone Brothers Plc 13,808,713 9.86%<br />
Kenmore Investments<br />
Limited 10,500,000 7.50%<br />
Uberior Europe Limited 7,000,000 5.00%<br />
The Independent<br />
Investment Trust Plc 5,000,000 3.57%<br />
£<br />
<strong>Report</strong> of the Directors<br />
Corporate Governance<br />
As a Guernsey registered company, the<br />
Company is not required to comply with the<br />
Combined Code on Corporate Governance<br />
issued by the Financial <strong>Report</strong>ing Council in<br />
July 2003 (‘the Code’).<br />
However, it is the Company’s policy to comply with best<br />
practice on good corporate governance that is applicable<br />
to investment companies.<br />
Arrangements in respect of corporate governance have<br />
therefore been made by the Board, which it believes are<br />
appropriate for the Company. Except as disclosed in the<br />
following two paragraphs, the Company believes that it<br />
complied with the provisions of the Code throughout the<br />
period. Since the Board consists entirely of non-executive<br />
Directors, the provisions of the Code in respect of<br />
Directors’ remuneration are not relevant to the Company<br />
except in so far as they relate to non-executive Directors.<br />
No Director has a service contract with the Company.<br />
Their letters of appointment, dated 5 September <strong>2006</strong>,<br />
state that their appointment and any subsequent<br />
termination or retirement shall be subject to the<br />
provisions of the Articles of Association which require<br />
that all Directors retire by rotation at least every three<br />
years. The Board considers that it is not appropriate for<br />
the Directors to be appointed for a specified term as<br />
recommended by Code provision A.7.2, nor for a Senior<br />
Independent Director to be appointed as recommended<br />
by Code provision A.3.3, nor, at present, for there to<br />
be a Nomination Committee as recommended by<br />
Code provision A.4.1. The Company has not so far<br />
established a separate remuneration committee as<br />
the Board is satisfied that any relevant issues can be<br />
properly considered by the Board or by the established<br />
committees.<br />
In addition, the Board did not consider it appropriate to<br />
carry out an evaluation of the performance of the Board,<br />
Committees and individual Directors during the first<br />
accounting period and the Company is therefore not<br />
able to provide the disclosure recommended by Code<br />
provision A.6.1. However, a performance evaluation will<br />
be undertaken during 2007.<br />
Mr Weaver is Chairman. Mr Kennedy is an executive<br />
director of Kenmore, which is the ultimate parent<br />
company of the Investment Manager. He is not therefore<br />
considered to be an independent Director. All other<br />
Directors are considered by the Board to be independent<br />
of the Investment Manager. New Directors will receive an<br />
induction from the Investment Manager and Secretary on<br />
joining the Board and all Directors receive other relevant<br />
training as necessary.<br />
The Company has no executive directors or employees.<br />
The Investment Management Agreement sets out<br />
the matters over which the Investment Manager has<br />
authority and the limits beyond which Board approval<br />
must be sought. All other matters, including strategy,<br />
investment and dividend policies, gearing, and corporate<br />
governance procedures, are reserved for the approval of<br />
the Board of Directors. The Board currently meets at least<br />
quarterly and receives full information on the Company’s<br />
investment performance, assets, liabilities and other<br />
relevant information in advance of Board meetings.<br />
The Audit Committee, chaired by Mr Spencer, meets<br />
bi-annually and operates within clearly defined terms<br />
of reference and comprises all the Directors except<br />
for Mr Kennedy. The duties of the Audit Committee in<br />
discharging its responsibilities include reviewing the<br />
<strong>Annual</strong> and Interim Accounts; the system of internal<br />
controls; and the terms of appointment of the auditors<br />
together with their remuneration. It is also the forum<br />
through which the auditors report to the Board of<br />
Directors. The objectivity of the auditors is reviewed by<br />
the Audit Committee which also reviews the terms under<br />
which the external auditors are appointed to perform<br />
non-audit services. The Committee reviews the scope<br />
and results of the audit, its cost effectiveness and the<br />
independence and objectivity of the auditors, with<br />
particular regard to non-audit fees. Such fees amounted<br />
to £31,000 for the period ended 31 December <strong>2006</strong> and<br />
related to agreed procedures in respect of the completion<br />
accounts for the acquisition of the seed portfolio.<br />
Notwithstanding the provision of such services, the Audit<br />
Committee considers KPMG Channel Islands Limited to<br />
be independent of the Company and that the provision of<br />
such non-audit services is not a threat to the objectivity<br />
and independence of the conduct of the audit. The Audit<br />
Committee held its first meeting on 27 February 2007.<br />
13
<strong>Report</strong> of the Directors <strong>Report</strong> of the Directors<br />
The Management Engagement Committee, chaired<br />
by Mr Weaver, comprises the full Board, except for Mr<br />
Kennedy, and reviews the performance of the Investment<br />
Manager and the continuing ability of Directors to act<br />
independently of any substantial shareholder, and their<br />
associates. The Management Engagement Committee<br />
will hold its first meeting during 2007.<br />
The table below sets out the number of Board and<br />
Committee meetings held during the period from the<br />
Company’s launch to 31 December <strong>2006</strong> and the number<br />
of meetings attended by each Director.<br />
Board of Directors Meetings held / attended<br />
CGH Weaver 3 / 3<br />
JJ Gamble 3 / 3<br />
HF Green 3 / 3<br />
JAB Kennedy 3 / 3<br />
CP Spencer 3 / 3<br />
Individual Directors may, at the expense of the Company,<br />
seek independent professional advice on any matter<br />
that concerns them in the furtherance of their duties. The<br />
Company maintains appropriate Directors’ and Officers’<br />
liability insurance. After making enquiries, and bearing in<br />
mind the nature of the Company’s business and assets,<br />
the Directors consider that the Company has adequate<br />
resources to continue in operational existence for the<br />
foreseeable future. For this reason, they continue to adopt<br />
the going concern basis in preparing the accounts.<br />
Principal Risks and Uncertainties<br />
The Company invests in real estate in Europe and<br />
Scandinavia. It is therefore exposed to variations in<br />
market conditions for such assets and to responses<br />
to market conditions, to local and national economic<br />
conditions, changes to the currency and interest rate<br />
profiles, tax rates and other future events. In addition<br />
the Company will also face risks from breach of laws or<br />
regulations, poor selection of assets, failure of systems or<br />
procedures in any of the countries in which the Company<br />
operates, actions leading to central management and<br />
control of the assets being regarded as taxable in the UK.<br />
The Investment Manager through its active management<br />
and review processes will seek to minimise these risks<br />
wherever possible, and the Board through its review of<br />
the Manager’s work will seek to identify any additional<br />
exposures.<br />
The Board uses a number of key performance indicators<br />
to assist in measuring the performance of the Company.<br />
14<br />
These are:<br />
• the running yield on the portfolio;<br />
• the cost of the Company’s debt;<br />
• the performance of the share price and its relativity to<br />
NAV per share excluding deferred tax; and<br />
• the dividend yield.<br />
Internal Controls<br />
The Board is responsible for the Company’s system<br />
of internal control and for reviewing its effectiveness,<br />
consistent with the guidance by the Turnbull Committee.<br />
The process is based principally on the Investment<br />
Manager’s approach to internal control.<br />
The Board will review at its regular series of meetings a<br />
report from the Investment Manager on the procedures it<br />
has undertaken to ensure compliance with the investment<br />
guidelines of the Company and the management of the<br />
portfolio of assets within the Company. At each Board<br />
meeting the Board monitors the investment performance<br />
of the Company in comparison to its stated objective. The<br />
Board also reviews the Company’s activities since the last<br />
Board meeting to ensure that the Investment Manager<br />
adheres to the agreed investment policy and approved<br />
investment guidelines and, if necessary, approves<br />
changes to such policy and guidelines. In addition, at<br />
each Board meeting, the Board receives reports from<br />
the Secretary in respect of compliance matters and<br />
duties performed on behalf of the Company. By their<br />
nature these procedures can provide reasonable, but not<br />
absolute, assurance against material misstatement or<br />
loss.<br />
The Board has reviewed the need for an internal audit<br />
function. The Board has decided that the systems and<br />
procedures employed by the Investment Manager and<br />
the Secretary and the work carried out by the Company’s<br />
external auditors, provide sufficient assurance that a<br />
sound system of internal control, which safeguards<br />
the Company’s assets, is maintained. An internal audit<br />
function specific to the Company is therefore considered<br />
unnecessary.<br />
Relations with Shareholders<br />
The Company welcomes the views of shareholders<br />
and places great importance on communication with<br />
its shareholders. The Board receives regular reports on<br />
the views of shareholders and the Chairman and other<br />
Directors are available to meet shareholders if required.<br />
Any requests for meetings should be made to the<br />
Administrator.<br />
Directors’ Authority to Buy Back Shares<br />
The Company did not purchase any shares for<br />
cancellation during the period.<br />
The Directors will seek renewal of the current authority<br />
of the Company to make market purchases of up to<br />
14.99 per cent of the issued Ordinary Share Capital<br />
and Special Resolution 1, as set out in the notice of the<br />
<strong>Annual</strong> General Meeting, seeks renewal of such authority<br />
until the earlier of the <strong>Annual</strong> General Meeting in 2008<br />
and 15 August 2008. Any buy back of Ordinary Shares<br />
will be made subject to Guernsey law and within any<br />
guidelines established from time to time by the Board<br />
(which will take into account the income and cash flow<br />
requirements of the Company). The making and timing<br />
of any buy backs will be at the absolute discretion of<br />
the Board. Purchases of Ordinary Shares will only be<br />
made through the market for cash at prices below the<br />
prevailing net asset value of the Ordinary Shares (as last<br />
calculated) where the Directors believe such purchases<br />
will enhance shareholder value. The purchases will only<br />
be made in accordance with the rules of the UK Listing<br />
Authority which provide that the price to be paid must<br />
not be more than the higher of (i) five per cent above the<br />
average market value of the Shares for the five business<br />
days prior to the day the purchase is made and (ii) the<br />
“Buy-back” Regulation price, being the higher of the last<br />
independent trade and the highest current independent<br />
bid.<br />
It is intended that buy backs will only be made if to do<br />
so will represent an attractive investment opportunity for<br />
ongoing shareholders not participating in any such buy<br />
backs. Accordingly, purchases of Shares will only be<br />
made through the market for cash at prices below the<br />
prevailing Net Asset Value per Share of the remaining<br />
Shares.<br />
Auditors<br />
KPMG Channel Islands Limited have expressed<br />
their willingness to continue in office as auditors and<br />
a resolution proposing their re-appointment will be<br />
submitted at the <strong>Annual</strong> General Meeting.<br />
Approved by the Board on 27 February 2007.<br />
Jonathan Gamble Helen Green<br />
Director Director<br />
15
Directors’ Responsibility Statement Independent Auditors’ <strong>Report</strong><br />
The Directors are responsible for preparing the Directors’ <strong>Report</strong> and the Group and parent Company<br />
financial statements for each financial period which give a true and fair view of the state of affairs of the<br />
Group and the parent Company and of the profit or loss of the Group and the parent Company for that<br />
period and which are in accordance with applicable laws. In preparing those financial statements the<br />
Directors are required to:<br />
• select suitable accounting policies and then apply them consistently;<br />
• make judgements and estimates that are reasonable and prudent;<br />
• state whether applicable accounting standards have been followed subject to any material departures<br />
disclosed and explained in the financial statements; and<br />
• prepare the financial statements on the going concern basis unless it is appropriate to presume that the<br />
Group will not continue in business.<br />
The Directors are responsible for keeping proper accounting records which disclose with reasonable<br />
accuracy at any time the financial position of the Group and which enable them to ensure that the financial<br />
statements have been properly prepared in accordance with the Companies (Guernsey) Law, 1994. They<br />
are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for<br />
the prevention and detection of fraud and other irregularities.<br />
16<br />
Independent Auditors’ <strong>Report</strong> to the Members of Kenmore <strong>European</strong> <strong>Industrial</strong> <strong>Fund</strong> Limited<br />
We have audited the Group and parent Company financial statements (the ‘‘financial statements’’) of Kenmore<br />
<strong>European</strong> <strong>Industrial</strong> <strong>Fund</strong> Limited for the period ended 31 December <strong>2006</strong> which comprise the Consolidated<br />
and Company Income Statements, the Consolidated and Company Balance Sheets, the Consolidated and<br />
Company Statements of Changes in Equity, the Consolidated and Company Cash Flow Statements and the<br />
related notes. These financial statements have been prepared under the accounting policies set out therein.<br />
This report is made solely to the Company’s members, as a body, in accordance with section 64 of The<br />
Companies (Guernsey) Law, 1994. Our audit work has been undertaken so that we might state to the<br />
Company’s members those matters we are required to state to them in an auditor’s report and for no other<br />
purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other<br />
than the Company and the Company’s members as a body, for our audit work, for this report, or for the<br />
opinions we have formed.<br />
Respective Responsibilities of Directors and Auditors<br />
The Directors are responsible for preparing the Directors’ <strong>Report</strong> and the financial statements in accordance<br />
with applicable Guernsey law and International Financial <strong>Report</strong>ing Standards (IFRSs) as set out in the<br />
Statement of Directors’ Responsibilities above.<br />
Our responsibility is to audit the financial statements in accordance with relevant legal and regulatory<br />
requirements and International Standards on Auditing (UK and Ireland).<br />
We report to you our opinion as to whether the financial statements give a true and fair view and are properly<br />
prepared in accordance with The Companies (Guernsey) Law, 1994. We also report to you if, in our opinion,<br />
the company has not kept proper accounting records, or if we have not received all the information and<br />
explanations we require for our audit.<br />
We read the Directors’ <strong>Report</strong> and consider the implications for our report if we become aware of any<br />
apparent misstatements within it.<br />
We read the other information accompanying the financial statements and consider whether it is consistent<br />
with those statements. We consider the implications for our report if we become aware of any apparent<br />
misstatements or material inconsistencies with the financial statements.<br />
Basis of Audit Opinion<br />
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued<br />
by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to<br />
the amounts and disclosures in the financial statements. It also includes an assessment of the significant<br />
estimates and judgements made by the Directors in the preparation of the financial statements, and of<br />
whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and<br />
adequately disclosed.<br />
We planned and performed our audit so as to obtain all the information and explanations which we<br />
considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the<br />
financial statements are free from material misstatement, whether caused by fraud or other irregularity or<br />
error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the<br />
financial statements.<br />
Opinion<br />
In our opinion the financial statements:<br />
• give a true and fair view, in accordance with IFRSs, of the state of the Group’s and the parent Company’s<br />
affairs as at 31 December <strong>2006</strong> and of the Group’s and the parent Company’s profit for the period then<br />
ended; and<br />
• have been properly prepared in accordance with The Companies (Guernsey) Law, 1994.<br />
KPMG Channel Islands Limited<br />
Guernsey, Channel Islands 27 February 2007<br />
17
Income Statements Balance Sheets<br />
For the period from 25 August <strong>2006</strong> to 31 December <strong>2006</strong><br />
Revenue<br />
Notes Company Group<br />
£’000 £’000<br />
Rental income - 5,193<br />
Other income - 522<br />
Gains on investments<br />
Unrealised gains on revaluation of investment properties 8 - 5,072<br />
Total income - 10,787<br />
Expenditure<br />
Other expenses 2a, 3 (170) (3,001)<br />
Total expenditure (170) (3,001)<br />
Net operating profit/(loss) before finance costs (170) 7,786<br />
Net finance costs<br />
Interest revenue receivable 2,029 677<br />
Finance costs 4 (720) (762)<br />
1,309 (85)<br />
Net profit from ordinary activities before taxation 1,139 7,701<br />
Taxation on profit on ordinary activities 5 - (2,804)<br />
Net profit for the period 1,139 4,897<br />
Basic earnings per share 3.5p<br />
The accompanying notes are an integral part of this statement.<br />
18<br />
As at 31 December <strong>2006</strong><br />
Notes Company Group<br />
£’000 £’000<br />
Non-current assets<br />
Property, plant and equipment - 3<br />
Investment properties 8 - 283,010<br />
Investment in subsidiary undertakings 9 682 -<br />
Trade and other receivables 11a 143,554 2,135<br />
Deferred tax assets 10 - 159<br />
144,236 285,307<br />
Current assets<br />
Trade and other receivables 11b 18 16,723<br />
Cash and cash equivalents 12 25,294 33,581<br />
25,312 50,304<br />
Total assets 169,548 335,611<br />
Current liabilities<br />
Trade and other payables 13 (32,924) (20,617)<br />
Non-current liabilities<br />
Loans and borrowings 14 - (172,002)<br />
Deferred tax liabilities 10 - (2,583)<br />
- (174,585)<br />
Total liabilities (32,924) (195,202)<br />
Net assets 136,624 140,409<br />
Represented by:<br />
Share capital 15 - -<br />
Share premium 15 2,985 2,985<br />
Special distributable reserve 15 132,500 132,500<br />
Translation reserve 15 - 27<br />
Revenue reserve 15 1,139 4,897<br />
Equity shareholders’ funds 136,624 140,409<br />
Net asset value per share 100.3p<br />
The accounts on pages 18 to 32 were approved by the Board of Directors on 27 February 2007 and signed<br />
on its behalf by:<br />
J J Gamble H F Green<br />
Director Director<br />
The accompanying notes are an integral part of this statement.<br />
19
Statements of Changes in Equity Cash Flow Statements<br />
For the period from 25 August <strong>2006</strong> to 31 December <strong>2006</strong><br />
Income and expense recognised directly in equity<br />
Company Group<br />
£’000 £’000<br />
Foreign currency translation differences for foreign operations - 27<br />
- 27<br />
Net profit for the period 1,139 4,897<br />
Issue of ordinary share capital, net of issue costs 135,485 135,485<br />
Total changes in equity for the period 136,624 140,409<br />
For the period from 25 August <strong>2006</strong> to 31 December <strong>2006</strong><br />
Cash flows from operating activities<br />
Notes Company Group<br />
£’000 £’000<br />
Net profit from ordinary activities before taxation 1,139 7,701<br />
Adjustments for:<br />
Unrealised gains on revaluations of investment properties - (5,072)<br />
Depreciation on other fixed assets - 1<br />
Increase in operating trade and other receivables (18) (16,723)<br />
Increase in operating trade and other payables 32,924 19,970<br />
Taxation paid - (216)<br />
Net cash inflow from operating activities 34,045 5,661<br />
Cash flows from investing activities<br />
Purchases of investment properties 8 - (275,170)<br />
Development expenditure 8 - (2,258)<br />
Purchase of other fixed assets 8 - (4)<br />
Investment in subsidiaries 9 (682) -<br />
Increase in non-current trade and other receivables 11a (143,554) (2,135)<br />
Net cash outflows from investing activities (144,236) (279,567)<br />
Cash flows from financing activities<br />
The accompanying notes are an integral part of this statement. The accompanying notes are an integral part of this statement.<br />
20<br />
Proceeds from issue of ordinary share capital 15 140,000 140,000<br />
Issue costs of ordinary share capital 15 (4,515) (4,515)<br />
Receipt of borrowings 14 - 172,002<br />
Net cash inflow from financing activities 135,485 307,487<br />
Net increase in cash and cash equivalents 25,294 33,581<br />
Opening cash and cash equivalents - -<br />
Closing cash and cash equivalents 25,294 33,581<br />
21
Notes to the Accounts<br />
1. Accounting policies<br />
A summary of the principal accounting policies, all of which have been applied consistently throughout the period, is set<br />
out below.<br />
(a) Basis of Accounting<br />
The consolidated accounts have been prepared in accordance with International Financial <strong>Report</strong>ing Standards issued<br />
by, or adopted by, the International Accounting Standards Board (the ‘‘IASB’’), interpretations issued by the International<br />
Financial <strong>Report</strong>ing Interpretations Committee, applicable legal and regulatory requirements of Guernsey Law and the<br />
Listing Rules of the UK Listing Authority. The Company considers that it has complied (and intends to continue to comply)<br />
with the conditions applicable to property investment companies set out in paragraph 15.5.15R of the Listing Rules of the<br />
United Kingdom Listing Authority.<br />
No International Financial <strong>Report</strong>ing Standards have been adopted early, however it is likely that any Standards issued, but<br />
that are not yet effective, would only require changes in disclosure and not result in changes to the accounting policies for<br />
recognition and measurement.<br />
(b) Basis of Consolidation<br />
The consolidated accounts comprise the accounts of the Company and all of its subsidiaries, being entities controlled by<br />
the Company, drawn up to 31 December each year.<br />
Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from<br />
the date on which control is transferred out of the Group.<br />
These consolidated financial statements are presented in sterling, which is the Company’s functional currency. All financial<br />
information presented in sterling has been rounded to the nearest thousand.<br />
(c) Revenue Recognition<br />
Rental income, excluding VAT, arising on investment properties is accounted for in the Income Statement on a straight-line<br />
basis over the lease term of ongoing leases. Lease incentives granted are recognised as an integral part of the total rental<br />
income.<br />
Interest income is accounted for on an accruals basis.<br />
(d) Expenses<br />
Expenses are accounted for on an accruals basis. The Group’s investment management and administration fees, finance<br />
costs and all other expenses are charged through the Income Statement.<br />
(e) Taxation<br />
Deferred income tax is provided, using the liability method, on temporary differences at the balance sheet date between<br />
the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax<br />
liabilities are measured at the tax rates that are expected to apply to the period when the liability is settled, based on tax<br />
rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.<br />
As required by IAS 12, deferred income tax is not recognised on temporary differences at the time of initial recognition<br />
arising from transactions treated as asset acquisitions. The aggregate amount of such deferred income tax is disclosed as<br />
unrecognised deferred income tax.<br />
Deferred income tax assets are only recognised if it is considered more likely than not that there will be suitable profits from<br />
which the future reversal of the underlying timing differences can be deducted.<br />
(f) Investment Properties<br />
Freehold investment properties, or the equivalent, are initially recognised at cost, being the fair value of consideration<br />
given, including transaction costs associated.<br />
Leasehold investment properties, or the equivalent, are initially recognised at the lower of fair value and the present value<br />
of minimum lease payments.<br />
After initial recognition, investment properties are measured at fair value, with unrealised gains and losses recognised in<br />
the Income Statement. Fair value is based on the open market valuation provided by Savills SA, chartered surveyors, at the<br />
balance sheet date.<br />
On derecognition, realised gains and losses on disposals of investment properties are recognised in the Income Statement.<br />
Recognition and derecognition occurs on the exchange of signed contracts between a willing buyer and a willing seller.<br />
22<br />
Notes to the Accounts<br />
1. Accounting policies (continued)<br />
(f) Investment Properties (continued)<br />
In the case of development expenditure, cost includes the cost of materials and direct labour and any other costs directly<br />
attributable to bringing the asset to a working condition for its intended use. Cost also includes capitalised borrowing costs<br />
up to the point of practical completion.<br />
(g) Derivative Financial Instruments<br />
The Group holds derivative financial instruments to hedge its interest rate exposures. Derivatives are recognised initially<br />
at fair value; attributable transaction costs are recognised in the Income Statement when incurred. Subsequent to initial<br />
recognition, derivatives are measured at fair value. Hedge accounting is not applied to derivative instruments and changes<br />
in fair value are recognised in the Income Statement.<br />
(h) Share Issue Expenses<br />
Incremental external costs directly attributable to the equity transaction that would have otherwise not been incurred are<br />
written off against the Share Premium Account.<br />
All other expenses relating to the launch of the Company not directly attributable to the issue of equity are expensed<br />
through the Income Statement.<br />
(i) Segmental <strong>Report</strong>ing<br />
The Directors are of the opinion that the Group is engaged in a single segment of business being property investment<br />
business, in one geographical area, Europe (excluding the United Kingdom).<br />
(j) Cash and Cash Equivalents<br />
Cash at bank and short term deposits that are held to maturity are carried at amortised cost. Cash and cash equivalents<br />
consist of cash in hand and short term deposits in banks with an original maturity of three months or less.<br />
(k) Trade and Other Receivables<br />
Trade receivables, which are generally due for settlement at the relevant quarter end are recognised and carried at the<br />
original invoice amount. As impairment events are identified, provisions are made on either a specific or collective basis,<br />
as may be applicable.<br />
(l) Interest-Bearing Borrowings<br />
All non-current borrowings are initially recognised at cost, being fair value of the consideration received, net of arrangement<br />
costs associated with the borrowing. After initial recognition, all interest bearing borrowings are subsequently measured<br />
at amortised cost using the effective yield method. The effective yield method recognises interest in the Income Statement<br />
in the period to which it relates. Amortised cost is calculated by taking into account any loan arrangement costs and any<br />
discount or premium on settlement.<br />
(m) Foreign Exchange<br />
1. Foreign currency transactions<br />
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates<br />
at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are<br />
retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary<br />
items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for<br />
effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange<br />
rate at the end of the period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at<br />
fair value are retranslated to the functional currency at the exchange rate at the date the fair value was determined. Foreign<br />
currency differences arising on retranslation are recognised in profit or loss.<br />
2. Foreign operations<br />
The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are<br />
translated to sterling at exchange rates at the reporting date. The income and expenses of foreign operations are translated<br />
to sterling at exchange rates at the dates of the transactions.<br />
Foreign currency differences are recognised directly in equity. When a foreign operation is disposed of, in part or in full, the<br />
relevant amount in equity is transferred to the Income Statement.<br />
(n) Use of Estimates and Judgements<br />
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect<br />
the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results<br />
may differ from these estimates.<br />
23
Notes to the Accounts<br />
2. Fees<br />
Group<br />
(a) Investment management fees 504<br />
Under the terms of the Investment Management Agreement, Kenmore Financial Services Limited (the Investment<br />
Manager) is entitled to a base fee equal to 0.75 per cent per annum of the aggregate value of the real estate assets of<br />
the Group, until such time that 90 per cent of the fund is committed or invested and thereafter equal to 0.90 per cent per<br />
annum of the aggregate value of the real estate assets of the Group. The base fee rate will reduce to 0.85 per cent per<br />
annum to the extent that such assets exceed £550 million and to 0.75 per cent per annum to the extent that such assets<br />
exceed £700 million.<br />
The base fee is payable quarterly in arrear and, in respect of each calendar quarter, will be calculated by reference to<br />
the time weighted average of the aggregate value of the real estate assets of the Group for the relevant quarter.<br />
Performance fee<br />
In addition, the Investment Manager is entitled to a performance fee in respect of each performance period if the<br />
growth in net asset value (excluding deferred tax on unrealised capital gains or losses in the Property Portfolio plus<br />
dividend returns, at the end of that performance period) exceeds 10 per cent per annum and, further, if the Company<br />
has met its stated dividend policy during such performance period.<br />
The performance fee rate is set at 20 per cent of such outperformance. The trigger for a performance fee payment for<br />
each period is subject to a ‘‘high water mark’’ which is reset every 3 years, such that the 10 per cent hurdle applies to<br />
the previous highest financial period end NAV within each consecutive 3 year period.<br />
50 per cent of the performance fee, if payable in respect of any performance period, will be paid in cash. An amount<br />
equal to the remaining 50 per cent in ordinary shares in the Company will be set aside and paid to the Investment<br />
Manager if the Company has met its stated dividend policy for a period of 2 years commencing at the end of the<br />
performance period in respect of which the performance fee provisionally accrued.<br />
The issue price of any shares to be issued to the Investment Manager shall be the higher of the average market price<br />
of the shares over 20 Business Days prior to the end of the financial period in respect of which the performance fee<br />
was earned and the published NAV (calculated excluding any deferred tax on capital gains) as at the end of such<br />
performance period.<br />
The first performance period shall be the period from Admission to 31 December 2007 and, thereafter, the performance<br />
period shall be each 12 month period ending on 31 December. No fee has been accrued in the period to 31 December<br />
<strong>2006</strong>. At each interim reporting date the Board will consider the need to make an accrual for any fee due under the<br />
Investment Management Agreement taking into account performance to date and their view of the outlook for the<br />
balance of each performance period.<br />
Termination<br />
The Investment Management Agreement may be terminated by either the Company or the Investment Manager on not<br />
less than twelve months’ notice in writing but so as not to expire prior to 25 September 2010. Pursuant to the terms of<br />
the Investment Management Agreement, the Company and the Investment Manager agree to review the terms of such<br />
agreement on the fourth anniversary of the Investment Management Agreement.<br />
(b) Valuers’ fees<br />
The valuers, Savills SA, have agreed to provide valuation services in respect of the property portfolio.<br />
24<br />
£’000<br />
Notes to the Accounts<br />
3. Other expenses<br />
Company Group<br />
£’000 £’000<br />
Direct operating expenses of let rental property - 1,446<br />
Investment management fees (see note 2(a)) - 504<br />
Provision for bad debts - 235<br />
Valuation and other professional fees 30 427<br />
Directors’ fees 42 42<br />
Auditors remuneration for:<br />
- audit 38 92<br />
- other services to the Group - -<br />
Other 60 255<br />
In addition to the above, the auditors received £31,000 for services provided in connection with the launch<br />
of the Company. This expense is set against the proceeds from the share issue.<br />
170 3,001<br />
4. Finance costs Company Group<br />
£’000 £’000<br />
Interest on borrowings - 1,962<br />
Unrealised gains on interest rate swaps - (1,092)<br />
Other interest 720 (108)<br />
720 762<br />
5. Taxation Company Group<br />
£’000 £’000<br />
Current income tax charge - 221<br />
Deferred income tax relating to origination and reversal of temporary differences (see note 10) - 2,583<br />
Total tax charge - 2,804<br />
A reconciliation of the income tax charge applicable to the results from ordinary activities at the statutory income tax<br />
rate to the charge for the period is as follows:<br />
Company Group<br />
£’000 £’000<br />
Net profit from ordinary activities before taxation 1,139 7,701<br />
Income tax at following - 2,460<br />
applicable tax rates 0% 31.94%<br />
Effects of:<br />
Capital gains on revaluation of investment properties not taxable - (2,532)<br />
Tax exempt income - (56)<br />
Non-deductible expenses - 12<br />
Losses not utilised - 100<br />
Other timing differences - 237<br />
Total tax charge - 221<br />
25
Notes to the Accounts<br />
5. Taxation (continued)<br />
The group applicable income tax rate represents a blended rate across the tax jurisdictions in which the group<br />
operates.<br />
The Company is exempt from Guernsey taxation on dividend income derived outside Guernsey under the Income<br />
Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. A fixed annual fee of £600 is payable to the States of Guernsey in<br />
respect of this exemption. No charge to Guernsey taxation will arise on capital gains.<br />
The Directors intend to conduct the Company’s affairs such that the management and control is not exercised in<br />
the United Kingdom and so that the Company does not carry on any trade in the United Kingdom. Accordingly, the<br />
Company will not be liable for United Kingdom taxation on its income or gains other than certain income deriving from a<br />
United Kingdom source. The Company’s subsidiaries are subject to local income tax on income arising on the property<br />
portfolio after deduction of its allowable debt financing costs and other allowable expenses, dependent upon the<br />
residence of each subsidiary.<br />
As noted in accounting policy note 1(e), deferred income tax is not recognised on temporary differences at the time of<br />
initial recognition arising from transactions treated as asset acquisitions. This policy is different from that used in the<br />
pro-forma financial information contained in the prospectus dated 8 September <strong>2006</strong> which recognised deferred tax on<br />
such differences on the balance sheet in order to calculate net assets per share.<br />
6. Dividends<br />
An interim dividend of 1.5 pence per share, totalling £2,100,000 will be paid on 25 April 2007 to shareholders on the<br />
register on 10 April 2007. Although this payment relates to the period ended 31 December <strong>2006</strong>, under International<br />
Financial <strong>Report</strong>ing Standards it will be accounted for in the year ending 31 December 2007, being the year during<br />
which it becomes unconditionally payable.<br />
7. Earnings per share<br />
The earnings per Ordinary Share are based on the net profit for the period of £4,897,000 and on 140,000,000 Ordinary<br />
Shares, being the weighted average number of shares in issue during the period.<br />
8. Investment properties Company Group<br />
£’000 £’000<br />
Freehold and leasehold properties<br />
Purchases at cost - 275,950<br />
Development costs - 2,258<br />
Reclassification - (270)<br />
Surplus on revaluation to fair value - 5,072<br />
Closing valuation - 283,010<br />
Included within the above is one leasehold, or the local equivalent, property with a closing market valuation of<br />
£14,384,000.<br />
Savills SA, who have appropriate professional qualifications and recent experience in the location and category of the<br />
property being valued, completed a valuation of Group investment properties at 31 December <strong>2006</strong> on an open market<br />
basis in accordance with the requirements of the Appraisal and Valuation Manual published by the Royal Institution of<br />
Chartered Surveyors, which is deemed to equate to fair value. Fair value is determined by reference to market based<br />
evidence, which is the amounts for which the assets could be exchanged between a knowledgeable, willing buyer<br />
and a knowledgeable, willing seller in an arm’s length transaction as at the valuation date. The market value of these<br />
investment properties amounted to £287,855,000.<br />
On the acquisition of certain properties, the Group negotiated a purchase price adjustment for contingent deferred tax.<br />
The aggregate amount of such adjustments obtained to 31 December <strong>2006</strong> was £4,845,000. It is assumed that in the<br />
case of a future sale, any prospective buyer would seek a similar adjustment and so the closing valuation has been<br />
reduced to reflect this.<br />
The Group has adopted IAS 40, allowing leasehold properties to be carried at fair value rather than amortised over the<br />
term of the lease. The same valuation criteria are therefore applied to leasehold as freehold properties. The property<br />
valuer is independent and external to the Group. The property valuer takes account of deleterious materials included<br />
in the construction of the investment properties in arriving at its estimate of open market valuation, when the Managers<br />
advise the presence of such materials.<br />
26<br />
Notes to the Accounts<br />
8. Investment properties (continued)<br />
The Group has entered into leases on its property portfolio as lessor (see note 19 for further information). No one<br />
property accounts for more than 15 per cent of the gross assets of the Group. The 10 largest properties per open<br />
market value are shown on page 10. The only leasehold property which the Group holds as lessee has more than 30<br />
years remaining on the lease term.<br />
There are no restrictions on the realisability of the Group’s investment properties or on the remittance of income or<br />
proceeds of disposal. However, the Group’s investments comprise <strong>European</strong> commercial property, which may be<br />
difficult to realise as described in Liquidity risk, note 17. The majority of leases are on a full repairing basis and as such<br />
the Group is not liable for costs in respect of repairs, maintenance or enhancements to its investment properties.<br />
9. Investment in subsidiary undertakings<br />
The Company owns 100 per cent of the issued ordinary share capital of KEIF Luxembourg Sarl and KEIF Luxembourg<br />
Scandi Sarl, both companies incorporated in Luxembourg whose principal business is that of intermediary holding<br />
companies.<br />
Significant subsidiaries of KEIF Luxembourg Sarl and KEIF Luxembourg Scandi Sarl include:<br />
Country of Incorporation Ownership<br />
KEIF Norge AS Norway 100<br />
KEIF Sweden AB Sweden 100<br />
Feldrien Investments BV The Netherlands 100<br />
10. Deferred tax assets and liabilities<br />
(a) Recognised deferred tax assets and liabilities<br />
Deferred tax assets and liabilities are attributable to the following items:<br />
Group Group<br />
Assets Liabilities<br />
£’000 £’000<br />
Investment property – on revaluation surplus - (2,583)<br />
Tax loss carry-forwards 159 -<br />
159 (2,583)<br />
(b) Unrecognised deferred tax assets and liabilities<br />
At 31 December <strong>2006</strong>, deferred tax liabilities of £29,948,000 on temporary differences at the time of initial recognition<br />
arising from transactions treated as asset acquisitions have not been recognised in accordance with IAS 12. Included<br />
within this is an amount of £2,135,000 which is potentially payable under the initial acquisition agreement in the event of<br />
certain subsidiaries being sold in the future.<br />
27
Notes to the Accounts<br />
11. Trade and other receivables<br />
(a) Non-current<br />
Company Group<br />
£’000 £’000<br />
Due from subsidiary undertakings 143,554 -<br />
Interest rate swap assets (see note 17) - 2,135<br />
(b) Current<br />
143,554 2,135<br />
Accrued income - 325<br />
Rents receivable (net of provision for bad debts) - 4,786<br />
VAT recoverable - 1,490<br />
Other debtors and prepayments 18 10,122<br />
18 16,723<br />
Rents receivable, which are generally due for settlement at the relevant quarter end, are recognised and carried at the<br />
original invoice amount less an allowance for any uncollectable amounts. An estimate for doubtful debts is made when<br />
collection of the full amount is no longer probable. Bad debts are written off when identified.<br />
Included within amounts due from subsidiary undertakings are £65,864,000 of convertible bonds subscribed for by<br />
the Company. Each bond has a par value of €25, carries a fixed interest rate of 3.67 per cent per annum and has a<br />
maturity date of the 49th anniversary of the date of issuance.<br />
12. Cash and cash equivalents<br />
All cash balances were held in current accounts or with banks on short term deposits with an original maturity of three<br />
months or less at the period end.<br />
13. Trade and other payables Company Group<br />
£’000 £’000<br />
Rental income received in advance - 3,033<br />
Trade payables - 2,008<br />
Investment manager’s fee payable - 504<br />
Tax (including VAT) payable - 1,471<br />
Due to subsidiary undertakings 32,613 -<br />
Other payables 311 13,601<br />
32,924 20,617<br />
The Company’s payment policy is to ensure settlement of supplier invoices in accordance with stated terms.<br />
28<br />
Notes to the Accounts<br />
14. Loans and borrowings<br />
Company Group<br />
£’000 £’000<br />
Secured bank loans - 172,002<br />
Terms and conditions of the Group’s outstanding loans and borrowings, all of which are secured over the property<br />
assets to which they relate, were as follows:<br />
Nominal<br />
Interest Year of<br />
Currency rate maturity £’000<br />
Secured bank loans Euro 3.63% 2010-2011 133,307<br />
Secured bank loans NOK 4.39% 2009-2011 38,695<br />
The principal covenant relating to the loans included above requires a ratio of outstanding loan to<br />
property market value of less than 85% is maintained.<br />
15. Share capital and share premium account and reserves<br />
172,002<br />
Company and<br />
Group<br />
£’000<br />
Authorised share capital<br />
Ordinary Shares of nil par value each Unlimited<br />
Issued share capital<br />
140,000,000 Ordinary Shares of nil par value each, fully paid -<br />
Share premium account<br />
Received on the placing of Ordinary Shares 140,000<br />
Less: issue costs (4,515)<br />
135,485<br />
Conversion to special distributable reserve (132,500)<br />
Closing balance 2,985<br />
Issued share capital and share premium account 2,985<br />
The Royal Court of Guernsey confirmed the reduction of capital by way of a cancellation of the Company’s Share<br />
Premium Account. The amount cancelled, being £132,500,000, has been credited as a distributable reserve<br />
established in the Company’s books of account and shall be available to be used for all purposes permitted under<br />
Guernsey law, including the buy back of shares and the payment of dividends.<br />
Special distributable reserve<br />
As noted above, the special distributable reserve was created by the cancellation of the Company’s Share Premium<br />
Account. It is a distributable reserve to be used for all purposes permitted under Guernsey law, including the buy back<br />
of shares and the payment of dividends.<br />
Translation reserve<br />
The translation reserve comprises all foreign exchange differences arising from the translation of the financial<br />
statements of foreign operations.<br />
29
Notes to the Accounts<br />
15. Share capital and share premium account and reserves (continued)<br />
Revenue reserve<br />
Any surplus arising from the net profit on ordinary activities after taxation after payment of dividends is taken to this<br />
reserve, with any deficit up to the level of the special distributable reserve being charged to that reserve.<br />
16. Related party transactions<br />
Kenmore Financial Services Limited received fees for its services as Investment Manager. Further details are provided<br />
in note 2. The total charge to the Income Statement during the period was £504,000 of which £504,000 remained<br />
payable at the period end.<br />
The Directors of the Company received fees for their services. Further details are provided in the <strong>Report</strong> of the Directors<br />
on page 12 and in note 3. Total fees for the period were £42,000. No fees remained payable at the period end.<br />
At the end of the period, the Company was due £143,554,000 from its immediate subsidiaries (including £65,864,000<br />
of convertible bonds). The Company’s Income Statement for the period recognised £1,503,000 of interest income in<br />
respect of this amount (£964,000 relating to the convertible bonds).<br />
At the end of the period, the Company owed £32,613,000 to its immediate subsidiaries. The Company’s Income<br />
Statement for the period recognised £456,000 of interest charge in respect of these amounts.<br />
All of the above transactions were undertaken on an arm’s length basis.<br />
17. Financial instruments<br />
The Group’s investment objective is to provide ordinary shareholders with an attractive level of income together with<br />
the potential for capital and income growth from investing in a diversified <strong>European</strong> commercial property portfolio.<br />
Consistent with that objective, the Group holds <strong>European</strong> commercial property investments.<br />
The main risks arising from the Group’s financial instruments are credit risk, liquidity risk and interest rate risk. The<br />
Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and have<br />
remained unchanged for the period under review.<br />
Credit risk<br />
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered<br />
into with the Group. In the event of default by an occupational tenant, the Group will suffer a rental shortfall and incur<br />
additional costs, including legal expenses, in maintaining, insuring and re-letting the property until it is re-let. The Board<br />
receives regular reports on concentrations of risk and any tenants in arrears. The Managers monitor such reports in<br />
order to anticipate, and minimise the impact of, defaults by occupational tenants.<br />
The rent receivables of the Group at 31 December <strong>2006</strong> are disclosed in note 11.<br />
With respect to credit risk arising from other financial assets of the Group, which comprise cash and cash equivalents<br />
and certain other derivative instruments, the Group’s exposure to credit risk arises from default of the counterparty with<br />
a maximum exposure equal to the carrying value of these instruments. There are no significant concentrations of credit<br />
risk within the Group.<br />
Liquidity risk<br />
Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial<br />
commitments.<br />
The Group maintains sufficient short-term liquidity to meet its immediate payment requirements.<br />
The Group’s investments comprise <strong>European</strong> commercial property. Property and property related assets are inherently<br />
difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial<br />
uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales<br />
price even where such sales occur shortly after the valuation date.<br />
30<br />
Notes to the Accounts<br />
17. Financial instruments (continued)<br />
Interest rate risk<br />
The Group’s exposure to interest rate risk relates primarily to the Group’s long-term debt obligations. These consist of<br />
secured bank loans, further details of which are provided in note 14.<br />
Interest rate exposure has been limited by the purchase of interest rate swap contracts. The Group has entered into<br />
interest rate swaps with a notional amount of £139,839,000 used to hedge the exposure to changes in interest rates.<br />
The swaps fix the interest rate payable to a weighted average rate of 3.80%, and a total rate inclusive of margin of<br />
4.74%. The fair value of the interest rate swaps is disclosed in note 11(a) and is estimated as the present value of the<br />
expected future net interest cash flows, based on current and expected future interest rates at the period end.<br />
The interest rate profile of the Group and Company as at 31 December <strong>2006</strong> was as follows:<br />
Assets where Weighted Weighted average<br />
no interest average period for which<br />
Fair value total Fixed rate Variable rate is received interest rate rate is fixed<br />
Financial assets £’000 £’000 £’000 £’000 % (years)<br />
Group<br />
Cash and cash equivalents 33,581 - 33,581 - 3.58 -<br />
Trade and other receivables 16,723 - - 16,723 - -<br />
Company<br />
50,304 - 33,581 16,723 3.58 -<br />
Cash and cash equivalents 25,294 - 25,294 - 4.34 -<br />
Trade and other receivables 143,572 142,051 - 1,521 4.62 49<br />
168,866 142,051 25,294 1,521 4.54 -<br />
Liabilities where Weighted Weighted average<br />
no interest average period for which<br />
Fair value total Fixed rate Variable rate is received interest rate rate is fixed<br />
Financial liabilities £’000 £’000 £’000 £’000 % (years)<br />
Group<br />
Secured bank loans 169,867 137,696 32,171 - 3.80 4<br />
Apart from the secured bank loans as disclosed in note 14, the fair value of financial assets and liabilities is not<br />
materially different from their carrying value in the financial statements.<br />
31
Notes to the Accounts<br />
17. Financial instruments (continued)<br />
Foreign currency risk<br />
The Group’s underlying functional operating currencies are Sterling, the Euro, the Norwegian Kroner and the Swedish<br />
Kroner. The Group’s income and expenditure will, however, be presented in Sterling. The Group is, therefore, likely to<br />
be exposed to variations in currency exchange rates which might affect the results of operations. The Directors intend<br />
to operate prudent policies with respect to currency hedging. Where feasible, and as appropriate, the Group will seek<br />
to finance assets using local currency denominated financing.<br />
18. Capital commitments<br />
The Group has no capital commitments as at 31 December <strong>2006</strong>.<br />
19. Lease length<br />
The Group leases out its investment properties under operating leases.<br />
The total minimum future lease payments due, analysed by the year in which they fall due, was as follows:<br />
Group £’000<br />
Less than one year 22,806<br />
Between two and five years 73,155<br />
Over five years 42,960<br />
Total 138,921<br />
The largest single tenant at the year end accounted for 7.3% of the current annual rental income.<br />
The unoccupied property expressed as a percentage of estimated total rental value was 8.5% at the period end.<br />
The Group has entered into commercial property leases on its investment property portfolio. These properties,<br />
held under operating leases, are measured under the fair value model as the properties are held to earn rentals.<br />
The majority of these non-cancellable leases have remaining non-cancellable lease terms of between 5 and 15 years.<br />
Analyses of the nature of investment properties and leases are provided in ‘Portfolio Statistics’ on page 9.<br />
32<br />
Notice of <strong>Annual</strong> General Meeting<br />
Notice is hereby given that the First <strong>Annual</strong> General Meeting of Kenmore <strong>European</strong> <strong>Industrial</strong> <strong>Fund</strong> Limited will be held at<br />
Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3QL on 15 May 2007 at 5pm for the following purposes.<br />
To consider and, if thought fit, pass the following as Ordinary Resolutions:<br />
1 That the accounts and the reports of the Directors and of the Auditors for the period ended 31 December <strong>2006</strong> be<br />
received and approved.<br />
2 That KPMG Channel Islands Limited be re-appointed as Auditors and the Directors be authorised to determine<br />
the Auditors’ remuneration.<br />
3 That Mr C Spencer, who retires at the first <strong>Annual</strong> General Meeting following his appointment, be re-elected as a Director.<br />
4 That Ms H Green, who retires at the first <strong>Annual</strong> General Meeting following her appointment, be re-elected as a Director.<br />
5 That Mr J Kennedy, who retires at the first <strong>Annual</strong> General Meeting following his appointment, be re-elected as a Director.<br />
6 That Mr J Gamble, who retires at the first <strong>Annual</strong> General Meeting following his appointment, be re-elected as a Director.<br />
7 That Mr G Weaver, who retires at the first <strong>Annual</strong> General Meeting following his appointment, be re-elected as a Director.<br />
To consider and, if thought fit, pass the following as a Special Resolution:<br />
1 That the Company be authorised, in accordance with section 5 of The Companies (Purchase of Own Shares)<br />
Ordinance 1998 (the ‘‘Ordinance’’), to make market purchases (within the meaning of section 18 of the Ordinance) of<br />
ordinary shares of no par value each (‘‘Ordinary Shares’’), provided that:<br />
(a) the maximum number of Ordinary Shares hereby authorised to be purchased shall be 14.99 per cent of the issued<br />
Ordinary Shares on the date on which this resolution is passed;<br />
(b) the minimum price which may be paid for an Ordinary Share shall be 1p;<br />
(c) the maximum price (exclusive of expenses) which may be paid for an Ordinary Share shall be 105 per cent of the<br />
average of the middle market quotations (as derived from the Daily Official List) for the Ordinary Shares for the five<br />
business days immediately preceding the date of purchase;<br />
(d) unless previously varied, revoked or renewed, the authority hereby conferred shall expire at the conclusion of the<br />
<strong>Annual</strong> General Meeting of the Company to be held in 2008, or on 15 August 2008, whichever is the earlier, save that<br />
the Company may, prior to such expiry, enter into a contract to purchase Ordinary Shares under such authority and may<br />
make a purchase of Ordinary Shares pursuant to any such contract.<br />
By order of the Board<br />
Northern Trust International <strong>Fund</strong> Administration Services (Guernsey) Limited<br />
Secretary<br />
Trafalgar Court, Les Banques<br />
St Peter Port, Guernsey GY1 3QL<br />
27 February 2007<br />
Notes:<br />
1. A member who is entitled to attend and vote at the Meeting is entitled to appoint one or more proxies to attend and, on a<br />
poll, vote instead of him or her. A proxy need not be a member of the Company.<br />
2. A form of proxy is enclosed for use at the Meeting. The form of proxy should be completed and sent, together with<br />
the power of attorney or other authority (if any) under which it is signed, or a notarially certified copy of such power or<br />
authority, so as to reach Computershare Investor Services (CI) Limited, Ordnance House, 31 Pier Road, St Helier, Jersey<br />
JE4 8PW not later than 5pm on 13 May 2007.<br />
3. Completing and returning a form of proxy will not prevent a member from attending in person at the Meeting and voting<br />
should he or she so wish.<br />
4. The existing Articles of Association and the Directors’ letters of appointment will be available for inspection at the<br />
<strong>Annual</strong> General Meeting.<br />
33
Shareholder Information<br />
Dividends<br />
Dividends are paid in bi-annual instalments in April and September each year. Shareholders who wish to have<br />
dividends paid directly into a bank account rather than by cheque to their registered address can complete a mandate<br />
form for the purpose. Mandates may be obtained from Northern Trust International <strong>Fund</strong> Administration Services<br />
(Guernsey) Limited, Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3QL on request. Where dividends<br />
are paid directly to shareholders’ bank accounts, dividend tax vouchers are sent directly to shareholders’ registered<br />
addresses.<br />
Share Price<br />
The Company’s Ordinary Shares are listed on the London Stock Exchange. Prices are given daily in the Financial Times<br />
under ‘‘Investment Companies’’ and in other newspapers.<br />
Change of Address<br />
Communications with shareholders are sent to the address held on the share register. In the event of a change of<br />
address or other amendment this should be notified to Northern Trust International <strong>Fund</strong> Administration Services<br />
(Guernsey) Limited, Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3QL under the signature of the<br />
registered holder.<br />
Financial Calendar<br />
25 April 2007 Payment of first interim dividend<br />
15 May 2007 <strong>Annual</strong> General Meeting<br />
22 August 2007 Announcement of interim results<br />
September 2007 Payment of second interim dividend<br />
Shareholder Enquiries<br />
Contact Northern Trust International <strong>Fund</strong> Administration Services (Guernsey) Limited, Trafalgar Court, Les Banques,<br />
St Peter Port, Guernsey GY1 3QL. Additional information regarding the Company may also be found at its website<br />
address which is: www.kenmoreeifund.com<br />
34<br />
Corporate Information<br />
Directors (all non-executive)<br />
CGH Weaver (Chairman)<br />
JJ Gamble<br />
HF Green<br />
JAB Kennedy<br />
CP Spencer<br />
Registered Office<br />
Trafalgar Court<br />
Les Banques<br />
St Peter Port<br />
Guernsey<br />
Administrator, Secretary and Registrar<br />
Northern Trust International <strong>Fund</strong><br />
Administration Services (Guernsey) Limited<br />
Trafalgar Court<br />
Les Banques<br />
St Peter Port<br />
Guernsey GY1 3QL<br />
Investment Manager<br />
Kenmore Financial Services Limited<br />
33 Castle Street<br />
Edinburgh EH2 3DN<br />
Property Valuation Agents<br />
Savills SA<br />
14 rue Auber<br />
85009 Paris<br />
France<br />
Auditors<br />
KPMG Channel Islands Limited<br />
20 New Street<br />
St Peter Port<br />
Guernsey GY1 4AN<br />
Solicitors as to English Law<br />
Herbert Smith LLP<br />
Exchange House<br />
Primrose Street<br />
London EC2A 2HS<br />
Advisers as to Guernsey Law<br />
Ozannes<br />
1 Le Marchant Street<br />
St Peter Port<br />
Guernsey GY1 4HP<br />
Marketing Adviser<br />
Financial Dynamics Limited<br />
Holborn Gate<br />
26 Southampton Buildings<br />
London WC2A 1PB
www.kenmoreeifund.com<br />
KEIF ANNUAL REPORT AND ACCOUNTS FOR THE PERIOD ENDED 31 DECEMBER <strong>2006</strong>