Final Results

27th Mar 2009 07:00



27 March 2009

Public Service Properties Investments Limited

("PSPI", "the Group" or "the Company")

Final Results for the year to 31 December 2008

PSPI (AIM: PSPI), the specialist European care home real estate investment and financing company, announces final results for the year to 31 December 2008.

Highlights:

Financial

Operating profit¹ up 14% to £14.8 million (31 December 2007 - £13.0 million).

Gross assets increased to £302.5 million (31 December 2007 - £256.7 million), an increase of 18%, primarily as a result of acquisitions in Germany.

Investment properties reflect a small net decline of £1.3 million from fair value adjustments which reflects a £3.9 million gain on property assets acquired in 2008 in Germany offset by aggregate revaluation losses of £5.2 million on property assets in the UK, Switzerland and the USA.

Maintained final dividend of 4p per share (31 December 2007 - 4p), fully covered by cash earnings, making a total dividend for the year of 6p (2007- 6p). The dividend will be paid on 29 May 2009 to shareholders on the register at 15 May 2009.

Net asset value per share at 155.1p (31 December 2007 - 156.3p) and adjusted net asset value² per share at 196.9p at 31 December 2008 (31 December 2007 - 196.1p).

Conservative leverage3 strategy maintained - 56 % loan to value at 31 December 2008 (31 December 2007 - 53%) and compliant with all banking covenants.

Operational

Cash rental income increased by 35% to £14.6 million for the year (31 December 2007 - £10.8 million) reflecting additional rental income from the acquisition of assets in Germany and strong RPI indexed rent reviews in the UK.

Increased presence in Germany with the acquisition of a further 12 properties at a gross acquisition cost of approximately €47 million at an average net initial yield of 7.3%. German investment properties now represent 21.7% of the total property portfolio (31 December 2007 - 1.7%). 

Projects continue to increase bed capacity at three existing UK with £3.2 million advanced in 2008. The completion of these projects is expected in May and December 2009 at an aggregate cost of £6.7 million, with an increase in rent at completion.

Commenting on the results, Chairman Patrick Hall, said, "Despite the challenges of the credit crisis, the Group is well placed to withstand current market difficulties. The Group's focus on care home property assets has resulted in less valuation volatility than other sectors in the wider commercial property market and a stable net asset value per share. The Group benefits from indexed rental growth under long-term lease contracts with good covenants, conservative Loan to Value³ of 56% and a fully let property portfolio.

 

"There are some signs that the banks, particularly in mainland Europe, may slowly be able to lend funds against high quality assets during the course of 2009. The Group's strategy in the medium term will be defensive pending clarity on the timing and rate of developments in the banking sector and wider economies in which we operate." 

Notes:

¹ Operating profit excluding adjustment for fair value adjustments to investment properties.

² Adjusted net asset value per share is stated after deducting goodwill and adding back deferred taxation on business combinations and fair value gains to net assets. 

³ Leverage is defined as total borrowings as a percentage of total tangible non-current assets excluding goodwill and loans & receivables.

For further information, please visit www.pspiltd.com or contact:

Dr D Srinivas  Ralph Beney	Jeremy Ellis  Chris Sim	Simon Hudson Gemma Bradley
RP&C International	Evolution Securities Limited	Tavistock Communications
(Asset Managers)	(Nomad and Brokers)
Tel: 020 7766 7000	Tel: 020 7071 4300	Tel: 020 7920 3150

Chairman's Statement

I am pleased to report the Group's consolidated financial results for the year ended 31 December 2008. 

Despite the challenges of the credit crisis, the Group is well placed to withstand current market difficulties. The Group's focus on care home property assets has resulted in less valuation volatility than other sectors in the wider commercial property market and a stable net asset value per share. The Group benefits from indexed rental growth under long-term lease contracts with good covenants, conservative Loan to Value¹ of 56% and a fully let property portfolio.

The consistent level of cash flow from the investment portfolio fully supports the Group's operations and banking covenants, as well as providing cover for the dividend to shareholders. 

Financial Review

The Group's consolidated operating profit, excluding fair value adjustments to investment properties, for the year ended 31 December 2008 was £14.8 million, representing an increase of 14% over that generated in 2007. Cash rental income for 2008 was £14.6 million which represented an increase of 35% over 2007. Our results include rental income from the acquisitions made in Germany during the course of the year and strong rent reviews on the UK property portfolio.

The year under review witnessed a worsening credit market and a broadly based deterioration in property values. Against this back drop the Group has reported a net loss from fair value adjustments on investment properties of £1.3 million. While assets acquired in Germany increased in aggregate by £3.9 million, partly due to favourable currency movements, these gains were offset by revaluation losses on the UK, Swiss and US assets. We believe that the Group's strategy to target the German care home market is the correct course of action at present.

The significant volatility in the foreign exchange markets has resulted in the Group showing a loss after tax for the year of £0.3 million compared to a profit of £5.6 million for 2007. However, this loss is offset by an improvement of £5.5 million in the translation reserve in the equity statement between the year end dates. Earnings, adjusted to eliminate non cash and one off transactional items, were stated at £4.3 million or 7.11p per share for 2008 compared to £4.2 million for 2007. As a result, the Board of Directors is recommending the payment of a final dividend of 4p per share, which will be paid on 29 May 2009 to shareholders on the register at 15 May 2009, subject to shareholder approval at the annual general meeting. The interim and final dividends total 6p per share, which is at the same rate as paid for 2007 and is fully covered by cash earnings.

The net asset value per share at 31 December 2008 after the payment of interim and final dividends was 155.1p compared to 156.3p per share at 31 December 2007. The Adjusted Net Asset Value Per Share² at the end of the year was 196.9p compared to 196.1p at 31 December 2007, reflecting the stability in the Group's underlying assets.

Gross assets at 31 December 2008 were £302.5 million representing an increase of 18% over the value reported at the end of 2007. Total equity, after payment of dividends totalling £4.0 million, decreased to £103.6 million from £104.4 million at the end of 2007.

The Group completed several acquisitions in Germany during the first half of 2008 at a gross acquisition cost of approximately €47.2 million. In addition, the Group invested approximately £3.2 million to increase capacity at various homes in its UK portfolio.

There are some signs that the banks, particularly in mainland Europe, may slowly be able to lend funds again against high quality assets. The Group's strategy in the medium term will be defensive pending clarity on the timing and rate of developments in the banking sector and wider economies in which we operate. I refer you to the Asset Manager's Review below for further detail on the Group's performance and development plans.

Patrick Hall 

Chairman

24 March 2009

¹Loan to Value is represented by total short and long term borrowings expressed as a percentage of total non current assets, excluding goodwill and loans & receivables.

² Adjusted Net Asset Value Per Share is represented by the net assets less goodwill plus deferred tax provided on business combinations and fair value gains divided by the number of ordinary shares in issue at 31 December 2008. 

Asset Manager's Review 

Business Outlook

The increasing severity of the credit crisis and the extreme volatility in property and foreign exchange markets all contributed to a challenging environment for the Group in 2008. The Group continued its geographical diversification into Germany, completing several acquisitions and increasing the percentage of its assets there from 1.7% at the end of 2007 to 21.7% at the end of 2008. The German acquisitions were largely funded from working capital resources and acquisition facility financing. However, we are in advanced stages of negotiation to secure longer term finance which will free up funds for further capital expenditure on the UK portfolio whilst maintaining a conservative level of leverage on a consolidated basis.

Care home markets in both the UK and Germany have not been immune from valuation pressures evidenced in the wider commercial property market; however there has been less valuation volatility to date, particularly with the Group's chosen operators. As the Group has entered into long term leases with operators that have demonstrated strong EBITDAR to rent cover which is primarily derived directly or indirectly from local and national governments, its asset valuations have remained relatively stable.

The UK care home market

The Group has used Colliers CRE to value its healthcare assets in the UK and Germany. Colliers is generally regarded as a market leader for valuing UK healthcare properties and is the valuer of choice for many senior lending institutions. In its autumn care homes review, Colliers stated that "in the current economic downturn the long term elderly care sector is one of the few areas holding up comparatively well. Care homes for the elderly will, however, need to focus on residents with higher needs, particularly dementia care, as public funding becomes limited to those with the greatest care requirements."

We believe that the European Care group, tenant and operator of the Group's entire UK portfolio, is ideally situated to adapt to the challenges identified by Colliers. European Care continues to expand its operations and is the sixth largest operator in the UK based on number of beds. While transactional yields declined precipitously in the healthcare sector between the fourth quarter of 2005 and the fourth quarter of 2007 and then increased sharply, the Group's UK investment portfolio, by comparison, showed more modest gains during the first period but a less dramatic change during the most recent financial year. A large part of this stability can be attributed to the fact that European Care has expanded significantly whilst maintaining a stable senior management team. At the end of 2008, the Group's UK assets have been valued by Colliers at running yields of between 6.0% and 6.6%, which is up to 13% higher than those at the end of 2007. All of the Group's UK leases are subject to indexation based on changes in the retail price index ("RPI"), which was reported as nil for February 2009 and is expected to be negative for at least a few months in 2009. UK leases are subject to minimum annual increases of either 1.5% or 2.5%, however, which means that the Group's rental streams are always increasing. Valuation losses have been offset somewhat by the strong rental growth across the portfolio with average rent increases in 2008 of 4%.

Challenges to the care home sector include pressure on revenue caused by constraints on government spending and increasing costs. In the UK, wage cost inflation has made it increasingly difficult for operators to employ non European Union carers, who have provided a lower cost resource in recent years. Higher costs may have an adverse effect on operator margins which may, in turn, have an adverse effect on valuations.

The Group's strategy in the UK is to continue the development of additional bed capacity at existing locations by funding the construction and development of extensions and the redevelopment of existing facilities. The first redevelopment project, which is based in Yorkshire, is due for completion in May 2009 and will increase bed capacity by 50% through the construction of an extension between two adjacent homes. Following completion of the development, rental income will be increased by 8% p.a. on the gross capital expenditure, expected at £4.3 million. The properties have been valued at a running yield of 6.0% at 31 December 2008.

A second project at a property in Sunderland has a budgeted cost of approximately £2.3m. The project involves the demolition of an existing 23 bed converted nursing home, and the construction of a purpose built 40 bed care home to cater for patients with dementia. The project is due for completion in December 2009 following which the rent will be increased to provide an additional return of 7% p.a. on the gross capital expenditure.

There are a number of other projects that are being pursued and planning permission has already been obtained for several of these projects.

The German care home market

The German care home market has remained relatively stable during the course of 2008. Transactional yields have increased as private equity and other highly leveraged buyers have pulled back from the market. There are numerous opportunities to acquire well run care homes in Germany which enjoy high occupancy and EBITDAR to rent cover. The biggest challenge to the Group's further expansion has been the lack of senior debt financing. Several banks have withdrawn from the sector and others have been unable to fund client requirements. We believe that the market is now showing signs of a return to some normality, although loan to acquisition cost levels are likely to be 5%-15% lower than in the past.

IMMAC Holding 

During 2008 the Group's portfolio in Germany increased to 14 homes which were acquired in five transactions with two of the sites each containing three homes. The Group's German investment properties comprise 728 care home beds and 154 assisted living apartments with locations predominantly in northern and western Germany and two properties located in Berlin. The average lease term remaining is 20 years and the leases include inflation based indexation, adjusted every three or four years. The average net initial yield on the properties was 7.4%.

Six of the Group's German properties are leased to the Marseille Kliniken group ("Marseille"), Germany's second largest private care home operator listed on the Xetra, Frankfurt and Hamburg stock exchanges. Marseille operates more than 85 homes in Germany comprising just under 9,000 beds. The Marseille portfolio represents 63% of the annual lease income derived from Germany and has been valued at a running yield of 6.25% on net rental income. Four properties at two locations representing 22% of annual German lease income are leased to Meritus, a privately owned operator. In November 2008 Meritus also took over the lease of three properties located in Wiefelstede representing a further 9% of the Group's annual German lease income. The properties operated by Meritus have been valued using a running yield of 7.25% at 31 December 2008. The remaining property in Germany is leased to Pflegeheim Huttenstrasse, a private operator in Berlin, and has been valued at a running yield of 8.5% at the end of the year.

Financial Review

The Group's rental income increased from £12.6 million in 2007 to £16.8 million for the year ended 31 December 2008 representing an increase of 34%. This increase reflects rental income on assets acquired in Germany during the course of the year, indexation in respect of investment properties in the UK and Switzerland plus adjustment of straight line lease income on the UK investment portfolio arising from guaranteed minimum rent increases. The Group's underlying cash rental income increased 35% from £10.8 million in 2007 to £14.6 million in 2008. In addition, the Group received £1.0 million of finance lease income derived from a domiciliary care business in the UK, reflecting an increase of 4.1% over 2007.

Net losses from fair value adjustments on investment properties were £1.3 million in 2008 compared to net gains of £8.7 million in 2007. These losses comprise write downs on the UK properties of £3.7 million, on Swiss assets of £0.4 million, and the US assets of £1.1 million which have been offset by fair value gains of £3.9 million in respect of the Group's German assets purchased between the end of 2007 and 2008.

Finance income for the year has been stated at £2.5 million compared to £3.3 million for 2007. The reduction reflects reduced interest income from the investment of working capital as well as a general reduction in interest rates.

Administrative expenses increased from £3.2 million in 2007 to £4.0 million in 2008, partly due to an increase in management fees attributable to capital invested in Germany. Administration expenses also included £0.5 million (2007 - £0.6 million) of one off transaction related expenditure. 

Finance costs increased from £9.8 million in 2007 to £13.9 million in 2008. Interest on mortgage financings increased from £6.2 million to £7.9 million reflecting increased borrowings used to finance the Group's acquisitions in Germany. In addition, the total reflects £5.3 million (2007 - £2.8 million) of non cash items which include mark to market adjustments on interest rate swaps and net foreign exchange movements on certain foreign currency borrowings.

Income tax generated a small credit for 2008 compared to a charge of £6.3 million for 2007. Current tax was stated at £0.4 million (2007 - £0.2 million) and deferred tax generated a credit of £0.4 million (2007 charge - £6.1 million). The credit for deferred taxation for 2008 includes £1.7 million of savings resulting from UK corporation tax rates moving from 30% to 28%.

The Group's non current assets and total assets increased from £222.4 million and £255.7 million, respectively, at 31 December 2007 to £286.2 million and £302.5 million, respectively, at 31 December 2008, primarily as a result of the acquisitions in Germany mentioned above.

The Group had net current liabilities of £1.7 million at 31 December 2008 largely as a result of €14.0 million of acquisition facility financing. The Group is in advanced stages of negotiation to secure long term senior debt financing on acquisitions made in Germany during 2008, part of which will be used to repay the acquisition facility.

The Group's short and long term borrowings at 31 December 2008 were approximately £15.9 million and £141.4 million, respectively, reflecting a total debt to equity ratio of approximately 1.52:1, which we believe is conservative given the strength of the Group's underlying cash flow from its long term leases. The Group is compliant with all of its senior debt covenants both in terms of debt service and loan to value tests. We and the directors will continue to closely monitor the overall debt to equity ratio as the Group's business develops.

Deferred taxation, which consists of deferred taxation on fair value gains, business combinations and recognition of straight-line income, has increased from £32.6 million at 31 December 2007 to £34.0 million at the end of 2008. A net increase of £1.3 million arose on fair value adjustments to the portfolio and £1.8 million arose as a result of changes in foreign currency exchange rates. However, these were offset by a reduction of £1.7 million from the change in the rate of the UK Corporation tax from 30% to 28%.

The Group's total equity decreased from £104.4 million at 31 December 2007 to £103.6 million at 31 December 2008. The decrease reflects payment of £4.0 million in dividends during the year, an increase of £5.6 million in the mark to market provision for the Group's long term interest rate swaps and an increase of £5.3 million in foreign currency translation reserves. 

The Group's net asset value per share at 31 December 2008 after payment of 6p per share in dividends during the year is 155.1p which compares closely to the 156.3p per share reported at 31 December 2007. Adjusted net asset value per share, excluding goodwill and deferred tax on fair value gains and business combinations is 196.9p at 31 December 2008 compared to 196.1p at 31 December 2007.

The directors have proposed a final dividend of 4p per share which will be processed in accordance with the following timetable:

Ex-dividend date:	13 May 2009
Record date:	15 May 2009
Payment date:	29 May 2009

Together with the interim dividend paid in October of 2p per share (2007 - 2p), the total dividend for the year is 6p (2007 - 6p) which is fully covered by adjusted earnings as reflected in note 8 to the audited financial statements.

In our opinion, the year ahead will present challenges as well as opportunities. The Group remains well placed to maintain underlying cash earnings, to continue development of the UK portfolio and to actively manage its exposure to foreign currencies and leverage. 

RP&C International Inc.

March 2009

PUBLIC SERVICE PROPERTIES INVESTMENTS LIMITED

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2008

	Note	2008	2007
		£	£
Revenue	5	16,846,594	12,558,158
Net (loss)/gain from fair value adjustments on investment properties	10	(1,253,733)	8,650,606
Impairment of Goodwill	14	(531,000)	-
Negative Goodwill	27	-	310,011
Administrative expenses	6	(4,014,905)	(3,161,819)
Finance income	7 (a)	2,485,699	3,295,182
Operating profit		13,532,655	21,652,138
Finance costs	7 (b)	(13,905,819)	(9,791,129)
(Loss)/Profit before income tax		(373,164)	11,861,009
Income tax expense	21	(571)	(6,296,392)
(Loss)/Profit for the period		(373,735)	5,564,617
Attributable to:
Equity holders of the Company		(373,735)	5,564,617
Basic (loss)/earnings per share (£ per share)	8	(0.006)	0.09
Diluted (loss)/earnings per share (£ per share)	8	(0.006)	0.09

PUBLIC SERVICE PROPERTIES INVESTMENTS LIMITED

CONSOLIDATED BALANCE SHEET

FOR THE YEAR ENDED 31 DECEMBER 2008

	Note	2008	2007
		£	£
ASSETS
Non current assets
Investment property	10	258,450,196	197,057,229
Receivable from finance lease	12	8,413,212	8,143,701
Loans and receivables	13	4,351,500	4,351,500
Intangible Assets - Goodwill	14	2,538,832	3,090,249
Accrued income	15	12,495,127	9,721,855
		286,248,867	222,364,534
Current assets
Receivables and prepayments	17	9,463,647	6,305,382
Derivative financial instruments	16	-	325,129
Cash		6,752,736	26,686,185
		16,216,383	33,316,696
Total assets		302,465,250	255,681,230
EQUITY
Capital and reserves
Share Capital	18	344,853	344,853
Share Premium	18	64,038,167	64,038,167
Cashflow hedging reserve		(333,235)	1,519,227
Translation reserve		3,880,495	(1,569,764)
Retained Earnings		35,702,161	40,084,420
Total equity		103,632,441	104,416,903
LIABILITIES
Non current liabilites
Borrowings	19	141,384,776	112,308,006
Derivative financial instruments	16	5,556,580	238,671
Deferred income tax	20	33,966,478	32,606,715
		180,907,834	145,153,392
Current liabilities
Borrowings	19	15,917,389	2,233,098
Trade and other payables	22	142,785	2,706,119
Current income tax liabilities		518,085	283,313
Accruals	23	1,346,716	888,405
		17,924,975	6,110,935
Total liabilities		198,832,809	151,264,327
Total equity and liabilities		302,465,250	255,681,230

PUBLIC SERVICE PROPERTIES INVESTMENTS LIMITED

CONSOLIDATED CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2008

	Note	2008	2007
		£	£
Cash flow from operating activities
Cash generated from operations	24	10,544,975	7,972,690
Taxation paid		(189,018)	-
Interest paid		(7,729,918)	(6,129,554)
Net cash generated by operating activities		2,626,039	1,843,136
Cash flow from investing activities
Business Combination	25	-	(23,565,317)
Purchase of investment property	10	(40,145,135)	(4,848,963)
Capital expenditure	17	(2,880,560)	(304,303)
Cash received/(paid) for loans and receivables	13	-	2,952,750
Interest received		820,751	1,706,326
Net cash used in investing activities		(42,204,944)	(24,059,507)
Cash flow from financing activities
Proceeds from borrowings
-Initial Amount		26,867,090	23,750,000
-Associated Costs		-	(363,067)
Repayments of borrowings		(2,961,859)	(5,582,888)
Transaction Costs relating to Capital Raising	18, 7(b)	-	(3,010,128)
Dividends paid	9	(4,008,524)	(1,336,175)
Capital increases	18	-	34,212,692
Net cash generated / (used) by financing activities		19,896,707	47,670,434
Increase/(Decrease) in cash and cash equivalents		(19,682,198)	25,454,063
Movement in cash and cash equivalents
At start of year		26,686,185	1,213,463
Increase/(Decrease)		(19,682,198)	25,454,063
Foreign currency translation adjustments		(251,251)	18,659
At end of year		6,752,736	26,686,185

PUBLIC SERVICE PROPERTIES INVESTMENTS LIMITED 

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2008

Attributable to equity holders of the Company

	Notes	Share capital  £	Share premium  £	Cashflow hedging reserve £	Translation reserve £	Retained earnings  £	Total Equity  £
Balance as of 1 January 2007		16,633	31,728,823	512,763	(1,177,602)	35,855,978	66,936,595
Cash flow hedges - net	16	-	-	1,006,464	-	-	1,006,464
Proceeds from Shares Issued		328,220	33,884,472	-	-	-	34,212,692
Foreign currency translation		-	-	-	(392,162)	-	(392,162)
Net income/(expense) recognised directly in equity		328,220	33,884,472	1,006,464	(392,162)	-	34,826,994
Transaction costs relating to Capital Raising	18	-	(1,575,128)	-	-	-	(1,575,128)
Profit for the year		-	-	-	-	5,564,617	5,564,617
Dividends relating to 2007	9	-	-	-	-	(1,336,175)	(1,336,175)
Total recognised income for 2007		328,220	32,309,344	1,006,464	(392,162)	4,228,442	37,480,308
Balance as of 31 December 2007		344,853	64,038,167	1,519,227	(1,569,764)	40,084,420	104,416,903
Balance as of 1 January 2008
Cash flow hedges - net	16	-	-	(1,852,462)	-	-	(1,852,462)
Foreign currency translation		-	-	-	5,450,259	-	5,450,259
Net income/(expense) recognised directly in equity		-	-	(1,852,462)	5,450,259	-	3,597,797
Loss for the year		-	-	-	-	(373,735)	(373,735)
Dividends paid in 2008	9	-	-	-	-	(4,008,524)	(4,008,524)
Total recognised income for 2008		-	-	(1,852,462)	5,450,259	(4,382,259)	(784,462)
Balance as of 31 December 2008		344,853	64,038,167	(333,235)	3,880,495	35,702,161	103,632,441

PUBLIC SERVICE PROPERTIES INVESTMENTS LIMITED

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 DECEMBER 2008

 

1. BASIS OF PREPARATION

The consolidated financial statements of the Group have been prepared in accordance with and comply with International Financial Reporting Standards (IFRS), published by the International Accounting Standards Board (IASB). The consolidated financial statements are reported in Pounds Sterling unless otherwise stated and are based on the annual accounts of the individual subsidiaries at 31 December 2008 which have been drawn up according to uniform Group accounting principles.

The consolidated financial statements are prepared under the historical cost convention as modified by the revaluation of investment properties, other financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The preparation of financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results can differ from those estimates.

2. FINANCIAL AND OTHER RISK MANAGEMENT

 

2.1  Financial risk factors

The Group's activities expose it to a variety of financial risks: market risk (including currency and price risk), cash flow and fair value interest rate risk, credit risk and liquidity rate risk. The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group's financial performance. The Group uses derivative financial instruments to hedge certain risk exposures.

Risk management is carried out by the senior management of the asset manager under policies approved by the board of directors. Senior management identifies, evaluates and hedges financial risks. The board provides principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and investment of excess liquidity.

 

(a) Market risk

 

(i) Foreign exchange risk

The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US Dollar, Euros and the Swiss Franc. Limited foreign exchange risk arises from future commercial transactions, recognised assets and liabilities and net investments in foreign operations. However most operating entities have limited exposure to exchange risk outside their functional currencies. As a consequence, management considers foreign exchange risk to be immaterial to the Group.

The Group has investments in foreign operations, whose net assets are exposed to foreign currency translation risk. Currency exposure arising from the net assets of the Group's foreign operations in the US and Continental Europe are managed primarily through borrowings denominated in the relevant foreign currencies, although the directors monitor and permit currency exposure in this regard as an element of its financing strategy. 

Historically the Group has not entered into any hedging transactions in respect of the net assets of subsidiaries denominated in currencies other than Pounds Sterling. The Group will review this policy from time to time.

 

(ii) Cash flow and fair value interest rate risk

The Group's interest-rate risk mainly arises from long-term borrowings, derivative financial instruments and to a limited extent, from cash and cash equivalents. Borrowings issued at variable rates expose the Group to interest-rate risk. Borrowings issued at fixed rates and derivative financial instruments expose the Group to fair value interest-rate risk. Group policy is to maintain a significant percentage of its borrowings in fixed rate instruments. The Board regularly meet to review levels of fixed and variable borrowings and takes appropriate action as required.

The table below shows the sensitivity of profit and equity to movements in market interest rates:

	£	£	$	$	CHF	CHF	€	€
	2008	2007	2008	2007	2008	2007	2008	2007
Shift in basis points	0.5	0.5	0.5	0.5	0.5	0.5	0.5	0.5
Profit impact of increase	(194,856)	(125,298)	(61,989)	(57,448)	(90,737)	(75,586)	(31,702)	-
Profit impact of decrease	194,856	125,298	61,989	57,448	90,737	75,586	-	-
Equity impact of increase	118,750	71,176	-	-	-	-	-	-
Equity impact of decrease	(118,750)	(71,176)	-	-	-	-	-	-

(b) Credit Risk

Credit risk arises from cash, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to rental customers, including outstanding receivables. For banks and financial institutions, only independently rated parties with a minimum rating of 'A' (as per Standard & Poor's credit rating) are accepted.

 

The table below shows the credit limit and balance of the three major bank counterparties at the balance sheet date.

			31 December 2008		31 December 2007
	Counterparty	Rating	Credit limit	Balance	Credit limit	Balance
	Bank A	A	-	4,676,389	-	24,605,611
	Bank B	A+	-	998,461	-	1,626,689
	Bank C	A-	-	828,067	-	-

The Group's concentration of credit risk with non financial institutions is primarily with its rental customers. Management has assessed that the credit risk is low as the rental contracts are granted to customers with good credit history and due to the good record of recovery of receivables. As a result the Group has not incurred any significant losses. 

(c) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities. Due to the nature of the underlying businesses, the Group maintains flexibility in funding by maintaining availability under committed credit lines.

Management monitors rolling forecasts of the Group's liquidity reserve on the basis of expected cash flow. 

The table below analyses the Group's financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.

At 31 December 2008	Note	Less than 1 year	Between 1 and 2 years	Between 2 and 5 years	Over 5 Years
Borrowings		9,770,096	20,969,868	113,478,514	15,507,030
Trade and other payables	22	142,785	-	-	-
Total		9,912,881	20,969,868	113,478,514	15,507,030
At 31 December 2007	Note	Less than 1 year	Between 1 and 2 years	Between 2 and 5 years	Over 5 Years
Borrowings		8,689,684	8,897,044	112,076,551	16,920,058
Trade and other payables	22	2,706,119	-	-	-
Total		11,395,803	8,897,044	112,076,551	16,920,058

Borrowings in the table above include future interest payable.

Where an interest rate swap is in place, the fixed rate implicit in the agreement has been used to calculate future payments, consequently the position is shown after any cashflows arising from interest rate swaps.

(d) Capital risk management

The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

The Group monitors capital on the basis of the loan to value ratio. This ratio is calculated as total debt divided by total non current assets less goodwill and loans and receivables. Debt is calculated as total borrowings (including 'current and non-current borrowings' as shown in the consolidated balance sheet). 

The Group's intention is to maintain the loan to value ratio below 70%. The loan to value ratios at 31 December 2008 and 2007 were as follows:

	Note	£ 2008		£ 2007
Total borrowings	19	157,302,165		114,541,104
Total non current assets		286,248,867		222,364,534
Less: Goodwill	14	(2,538,832)		(3,090,249)
Less: Loans and receivables	13	(4,351,500)		(4,351,500)
Adjusted non current assets		279,358,535		214,922,785
Loan to value ratio		56.31%		53.29%

2.2 Other risk factors

Price risk and market rental risks

The Group is exposed to property price and market rental risks. Wherever possible the Group builds into the terms of its leases indexation linked to consumer price indices, in order to manage its market rental risk.

3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS

Estimates and judgments are continually evaluated and are based on historical experiences and other factors, including expectations of future events that are believed to be reasonable under the circumstance. The Group makes estimates and assumptions concerning the future. By definition, the resulting accounting estimates may not equal the related actual results. The estimates and assumptions that may have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are described below.

(a) Estimate of fair value of investment properties

The best evidence of fair value is current prices in an active market for similar lease and other contracts. In the absence of such information, the Group determines the amount within a range of reasonable fair value estimates. In making this judgement, the Group considers information from a variety of sources including:

current prices in an active market for properties of different nature, condition or location (or subject to different lease or other contracts), adjusted to reflect those differences;

recent prices of similar properties in less active markets, with adjustments to reflect any changes in economic conditions since the date of the transactions that occurred at those prices; and

discounted cash flow projections based on reliable estimates of future cash flows, derived from the terms of any existing lease and other contracts, and (where possible) from external evidence such as market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of cash flows.

(b) Principal assumptions for management's estimations of fair value

If information on current or recent prices or assumptions underlying the discounted cash flow approach investment properties are not available, the fair values of investment properties are determined using discounted cash flow valuation techniques. The Group uses assumptions that are mainly based on market conditions existing at each balance sheet date.

The principal assumptions underlying management's estimation of fair value are those related to: the receipt of contractual rentals; expected future market rentals; void periods; maintenance requirements; and appropriate discount rates. These valuations are regularly compared to actual market yield data and actual transactions by the Group and those reported by the market.

Management rely on valuations prepared by qualified independent valuation companies. Was the discounted rate used in preparing the independent valuation reports to differ by 5% to the rate used by the independent valuer, the net affect of the carrying amount of investment properties after deferred taxation would be an estimated £10.7 million lower (2007 - £7.1 million) or £9.7 million higher (2007 - £6.5 million).

The expected future market rentals are determined based on the specific terms of the rental contracts.

(c) Lease classification

The Group determines the classification of leases on each asset having regard to whether substantially all risks and rewards incidental to ownership of the asset are transferred to the lessee. The Group has determined that all of its leases are operating leases except for a business under licence agreement. The key factor in making the classification between finance leases and operating leases is the estimated life of the properties. The Group estimated the life of the buildings between 70 years and 75 years. The lease periods are between 7 years and 35 years. 

4. FOREIGN EXCHANGE RATES

	Balance Sheet		Income Statement and cash flow statement
			average	average
	31.12.2008	31.12.2007	2008	2007
	£	£	£	£
CHF 1.00	1.52860	2.24980	2.00056	2.40157
USD 1.00	1.44790	1.99730	1.85518	2.00181
EUR 1.00	1.02720	1.35710	1.25968	1.46206

5. REVENUE

	2008		2007
	£		£
Rental income	16,846,594		12,558,158

Rental income is stated after reallocation of £545,980 (2007 - £523,912) to interest income as referred to in Note 13.

Rental income includes accrued income provided to recognise guaranteed future income over the period of the leases, see Note 15.

The future aggregate minimum rentals receivable under non-cancellable operating leases are as follows:

	As at 31	As at 31
	December	December
	2008	2007
	£	£
Less than 1 year	17,233,800	12,052,272
More than 1 year and less than 5 years	51,749,559	48,878,009
More than 5 years	341,026,017	263,117,021
	410,009,376	324,047,302

A majority of the Investment Properties in the UK are leased for an initial period of 35 years. The leases terminate between 2036 and 2039, although the lessee has the right to renew the leases two years before their expiry, for a further period of 35 years subject to agreement on the revised rent. The remaining Investment Properties in the UK are leased for an initial period of 7 years, with the leases terminating in 2012. These leases have the same renewal rights as those described above. The rent on each lease increases on its anniversary at the rate of inflation in the UK, subject to minimum and maximum increases of 1.5% and 5% of the prior year's rent, respectively. In the event that a UK property is damaged or destroyed by any insured risk and is not reinstated by the Group within a period of 3 years, the lessee has the right to terminate the lease in respect of that UK property. The lessor may terminate each lease, subject to the senior lender's consent, for various reasons including the breach of material clauses of the lease.

The investment property in Switzerland is leased for a term of 20 years expiring on 30 June 2023. The lessor may terminate the lease prior to the end of the term in accordance with Swiss law and on 3 months written notice in the event of a change in control of the lessee. The lease rental payments are adjusted annually on 1 July of each year, in accordance with movements in the Swiss Index of Consumer Prices.

Investment properties in the United States of America are leased to the United States Postal Service under a master lease executed in March 1997 and amended on 29 January 1999. The lease expires on 28 February 2022. The rent under the lease is fixed for the entire period of the lease. The lessee has the right to unilaterally relinquish use of up to 25 of the post office properties provided that the resultant reduction in annual rent payable under the lease does not exceed a maximum of $300,000 per annum or 13% of the annual rental. Management have factored this into their analysis of minimum lease payments, and have no reason to believe that this right will be exercised in the foreseeable future.

The majority of Investment Properties in Germany are leased for an initial period of 25 years; however the lessee has the right to renew the leases for a further period of 5 years, subject to the agreement of the revised rent. The rent on the leases is changed at least every three years from the anniversary of inception, with reference to the German Consumer Price Index.

6. ADMINISTRATIVE EXPENSES

	2008 £		2007 £
Property rent, maintenance and office expenses	73,878		78,711
Administration of group companies	123,177		114,322
Management fees	2,019,594		1,456,575
Professional fees	1,358,359		1,086,659
Audit fees	198,210		152,016
Sundry expenses	241,687		273,536
	4,014,905		3,161,819

7. a) FINANCE INCOME

 

	Note	2008 £		2007 £
Interest Income - Finance Lease		1,040,494		1,007,255
Interest Income - Other Third Party		1,445,205		2,230,427
Other interest income		-		57,500
	24	2,485,699		3,295,182

b) FINANCE COSTS 

	Note	2008 £		2007 £
Interest on mortgages		6,457,921		4,408,697
Other interest and borrowing expenses		504,755		686,000
Interest on pre IPO notes		522		418
Interest on notes		905,243		1,079,016
	24	7,868,441		6,174,131
Fair value gains on financial instruments:  Interest rate swaps: ineffective element of cash flow hedges	16,24	3,790,576		1,432,769
Credit enhancement insurance premiums		758,290		749,229
Capital Raising Fees	24	-		1,435,000
Net Exchange losses		1,488,512		-
		13,905,819		9,791,129

8. EARNINGS PER SHARE

Basic earnings per share are calculated by dividing the net profit attributable to shareholders by the weighted average number of ordinary shares outstanding during the period. 

	As of 31 December 2008 £		As of 31 December 2007 £
Net (loss)/profit attributable to shareholders	(373,735)		5,564,617
Weighted average number of ordinary shares outstanding	66,808,737		61,530,199
Basic (loss)/earnings per share (pence per share)	(0.6)		9.0

In January 2004 the Company issued CHF 7 million of 4% Senior Unsecured Pre-IPO Notes due in 2011. CHF 6.47 million of these notes were redeemed in October 2006 and a further CHF 0.51 million were redeemed in February 2007. Each note holder received warrants attached to the notes which may be exercised up to two years after a public offering of the Company's shares. The warrants entitle the note holders to subscribe for the Company's shares at a discount to the public offering of shares between 5% - 20% depending on the timing of a public flotation of the Company's shares.

Management has estimated that the maximum number of additional ordinary shares that could be issued at 31 December 2008 as 610 (2007 - 610). Based on this, the diluted (loss)/earnings per share at 31 December 2008 was (0.6) pence (2007 - 9.0 pence).

Adjusted Earnings per Share

The Directors have chosen to disclose "adjusted earnings per share" in order to provide an indication of the Groups' underlying business performance. Accordingly it excludes the effect of items as detailed below. 

	Note		As at 31 December  2008 £		As at 31 December 2007 £
Net (loss)/profit attributable to shareholders			(373,735)		5,564,617
Fair Value Loss/(Gains) on Investment Properties	10		1,253,733		(8,650,606)
Negative Goodwill	27		-		(310,011)
Impairment of Goodwill	14		531,000		-
Deferred Taxation on Fair Value Gains	20		504,075		3,629,271
Loss of Tax Losses due to change in beneficial ownership of subsidiary	20		-		2,006,548
Capital Raising Fees	7b)		-		1,435,000
Amortisation of Debt Issue Costs	24		311,470		274,848
Interest Rate Swap charge to income statement	7b)		3,790,576		1,432,769
Accrued Income	15		(2,773,272)		(2,242,852)
Deferred Taxation on Accrued Income	20		766,018		672,856
Credit re: Deferred Tax change in taxation rate	20		(1,693,883)		-
Foreign Exchange Losses	7b)		1,488,512		-
One off acquisition costs			522,236		408,070
Current Taxation	21		423,790		158,608
Adjusted Earnings			4,750,520		4,379,118
Number of ordinary shares outstanding			66,808,738		66,808,738
Basic adjusted earnings per share (pence per share)			7.11		6.55
Dilutive Shares			610		610
Diluted adjusted earnings per share (pence per share)			7.11		6.55

9. DIVIDENDS 

A final dividend for 2007 in the amount of 4p per share was paid in May 2008; this resulted in a distribution of £2,672,350.

The Directors approved an interim dividend for 2008 in the amount of 2p per share which was paid in October 2008; this resulted in a distribution of £1,336,174.

10. INVESTMENT PROPERTY

	2008 £	2007 £
As at 1 January	197,057,229	155,650,387
Additions and extension of properties	-	1,323,222
Additions	40,145,135	27,478,261
Share of additions from Joint Ventures (Note 26)	-	3,525,741
Net (loss)/gains on fair value adjustment (Note 24)	(1,253,733)	8,650,606
Net changes in fair value adjustments due to exchange differences	22,501,565	429,012
As at 31 December	258,450,196	197,057,229

 

Bank borrowings are secured on investment property as outlined in Note 19.

Valuations of the investment properties were made as at 31 December 2008 by independent Property Consultants.

The valuation of the investment properties in the UK was conducted by Colliers CRE, UK. Based on the detailed review of relevant information, Colliers CRE concluded that capitalisation rates of between 6.0% - 6.60% (2007 - 5.75% - 6.00%) were appropriate under market conditions prevailing at 31 December 2008. PSPI has applied individual capitalisation rates as advised by Colliers CRE to each investment property (2007 - 6.00% for the entire UK portfolio, except the investment property within HCP Stonelea which used a rate of 5.75%) in preparation of the consolidated financial statements.

The valuation of the investment properties in the US was conducted by Real Estate Asset Counselling Inc, US, using the direct capitalisation of the NOI (Net Operating Income) approach in their valuation. Based on the most recent transactions in the sector reviewed by REAC, the overall direct capitalisation rates ranged between 6.00% and 8.01% (2007 - 6.00% and 7.19%). The Company applied the mean capitalisation rate of 6.92% (2007 - 6.86%).

The valuation of the investment properties in Switzerland was conducted by Botta Management AG, using a discounted cash flow analysis. A discount factor of 4.5%-4.8% (2007 - 4.6%-4.8%) was used for the valuation at 31 December 2008.

The valuation of the investment properties in Germany were conducted by Colliers CRE, UK (and in the previous period by IMMAC Holding AG, Hamburg). Based on the duration of the leases, the future cash flows and after due consideration of transaction activity in the market, Colliers CRE concluded that capitalisation rates of 6.25% to 8.50% were appropriate under the market conditions prevailing at 31 December 2008. PSPI has applied individual capitalisation rates as advised by Colliers CRE to each investment property (2007 - effective rate of 7.32% for the entire German portfolio) in preparation of the consolidated financial statements.

Included in property rent, maintenance and office expenses, as detailed in Note 6, are repairs of £73,878 (2007 - £78,711) in respect of investment properties generating rental income. These costs were incurred in respect of investment properties where the Group is responsible for structural and roof repairs. There were no repairs and maintenance costs incurred in respect of investment properties that did not generate rental income.

11. FINANCIAL INSTRUMENTS BY CATEGORY

The accounting policies for financial instruments have been applied to the line items below:
		Notes	Loans and receivables	Assets at fair value through the profit and loss designated	Derivatives used for hedging	Total
	31 December 2008		£	£	£	£
	Assets as per balance sheet
	Trade receivables	17	638,854	-	-	638,854
	Receivables from Finance Lease	12	8,413,211	-	-	8,413,211
	Loans and Receivables	13	4,351,500	-	-	4,351,500
	Receivables and Prepayments	17	8,824,793	-	-	8,824,793
	Cash and cash equivalents		6,752,736	-	-	6,752,736
	Total		28,981,094	-	-	28,981,094
				Derivatives used for hedging	Other financial liabilities	Total
				£	£	£
	Liabilities as per balance sheet
	Borrowings	19		-	157,302,165	157,302,165
	Derivative financial instruments	16		5,556,580	-	5,556,580
	Total			5,556,580	157,302,165	162,858,745

The accounting policies for financial instruments have been applied to the line items below:
		Notes	Loans and receivables	Assets at fair value through the profit and loss designated	Derivatives used for hedging	Total
	31 December 2007		£	£	£	£
	Assets as per balance sheet
	Derivative financial instruments	16	-	-	325,129	325,129
	Trade receivables	17	325,281	-	-	325,281
	Receivables from Finance Lease	12	8,143,701	-	-	8,143,701
	Loans and Receivables	13	4,351,500	-	-	4,351,500
	Receivables and Prepayments	17	5,980,101	-	-	5,980,101
	Cash and cash equivalents		26,686,185	-	-	26,686,185
	Total		45,486,768	-	325,129	45,811,897
				Derivatives used for hedging	Other financial liabilities	Total
				£	£	£
	Liabilities as per balance sheet
	Borrowings	19		-	114,541,104	114,541,104
	Derivative financial instruments	16		238,671	-	238,671
	Total			238,671	114,541,104	114,779,775

12. RECEIVABLE FROM FINANCE LEASES

	2008	2007
	£	£
Non-current
Finance leases - gross receivables	28,483,078	28,522,121
Unearned finance income	(20,011,013)	(20,316,332)
	8,472,065	8,205,789
Current
Finance leases - gross receivables	768,012	737,772
Unearned finance income	(826,865)	(799,860)
	(58,853)	(62,088)
Total receivable from finance leases	8,413,212	8,143,701
Gross receivables from finance leases:
- no later than 1 year	768,012	737,772
- later than 1 year and no later than 5 years	3,188,911	3,063,426
- later than 5 years	25,294,167	25,458,695
	29,251,090	29,259,893
Unearned future finance income on finance leases	(20,837,878)	(21,116,192)
Total receivable from finance leases	8,413,212	8,143,701

The Group has leased out a business under a licence agreement. The business is in respect of the provision of domiciliary care to clients in their own properties which has been licensed to an independent third party for 35 years with annual increases in line with the RPI index - minimum increase of 1.5%, maximum increase of 5%. The operator maintains the right to run the Business and receive any benefits/losses derived from running the business. The remaining life of this licence is 32 years.

The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable mentioned above. The Group does not hold any collateral as security. All receivables from finance leases are denominated in Pounds Sterling.

None of the receivable from finance leases were past due nor impaired.

13. LOANS AND RECEIVABLES

	2008 £	2007 £
As at 1 January	4,351,500	7,304,250
Repayment of mezzanine loan	-	(2,952,750)
As at 31 December	4,351,500	4,351,500

Loans consist of 100% of the issued redeemable preference shares in lessee companies. These companies lease the investment properties as referred to in Note 10. These preference shares are redeemable at any time.

The preference shares are non-voting, not entitled to a dividend, are cancelled on the termination of the leases written with the relevant lessee companies and are repayable at par. Interest income, implicit on the Loans is treated as interest income, as referred to in Note 5, on the same basis as specified in the lease agreements. During the year ended 31 December 2008, £545,980 (2007 - £523,912) has been deducted from rental income and included in interest income. The various rental contracts are referred to in Note 5.

In January 2006 a subsidiary of the Company invested £2.75 million into a mezzanine loan and this loan has been designated at fair value with any changes recognised through the income statement. The funds were used by the borrower as part of the acquisition of five nursing and residential care homes in the United Kingdom. The mezzanine loan matures the earlier of January 2010 or on the sale of the care homes acquired. Interest accrues at 15% per annum, although 6% per annum will be paid on maturity of the loan. In addition, the Group is entitled to 5% of the capital appreciation of the investment properties acquired over the gross acquisition cost, up to maturity of the loan. In the period to 31 December 2006 the Company recognised £202,750 as its proportionate share in respect of the properties. The Group has a second mortgage on the investment properties and a charge over the shares of the company owning the investment properties.

In December 2007 the mezzanine loan was repaid in full.

The fair values of loans and receivables are as follows:

	31 December 2008 £	31 December 2007 £
Preference shares	6,213,956	6,098,783
	6,213,956	6,098,783

The fair values are based on cash flows discounted using a rate based on the borrowing rate of 10.63% for the preference shares (2007 - 10.42% preference share).

The effective interest rates on non-current receivables were as follows:-

	31 December 2008	31 December 2007
Preference shares	12.88%	12.65%

The maximum exposure to credit risk at the reporting date is the fair value of each class of loans and receivables mentioned above. The Group does not hold any collateral as security. All loans and receivables are denominated in pounds sterling.

None of the loans and receivables were past due nor impaired.

14. INTANGIBLE ASSETS - GOODWILL

	2008 £	2007 £
As at 1 January	3,090,249	-
Additions (Note 25)	-	3,090,249
Adjustment due to final completion receipt	(20,417)	-
Impairment recognised in the year	(531,000)	-
As at 31 December	2,538,832	3,090,249

Goodwill arose on the acquisition of the issued share capital of Stonelea Healthcare Limited as detailed in Note 25 and represents the excess of the total purchase consideration over the fair value of the net assets acquired.

The goodwill has arisen due to the provision of deferred taxation on the business combination in respect of the fair value of the property over its' base cost. However, any future disposal may be performed in a manner such that any liability is unlikely to crystallise.

During the year, a final completion payment was received by HCP Stonelea Limited which has been adjusted against the carrying value of the Goodwill.

Goodwill acquired through business combinations has been allocated for impairment testing purposes to the individual cash generating unit (CGU) to which it relates. In this instance that is the investment property acquired (see Note 10). This represents the lowest level within the Group at which goodwill is monitored by management for internal reporting purposes.

In accordance with IAS 36 Impairment of Assets, the carrying amount of the CGU has been compared with its recoverable amount to test if impairment has occurred. This test indicated that the falling fair values of the Investment Property to which the goodwill relates had led to an impairment in the fair value of the goodwill of £531,000 (2007 £Nil).

15. ACCRUED INCOME

	2008 £	2007 £
As at 1 January	9,721,855	7,479,003
Recognition of straight-line income	2,773,272	2,242,852
As at 31 December	12,495,127	9,721,855

Accrued income is provided to recognise guaranteed future income over the period of the lease as referred to in Note 5.

16. DERIVATIVE FINANCIAL INSTRUMENTS

	2008		2007
	Assets	Liabilities	Assets	Liabilities
	£	£	£	£
Interest rate swaps - cash flow hedges	-	5,556,580	325,129	238,671

Interest rate swaps

The notional principal amounts of the outstanding interest rate swap contracts at 31 December 2008 were £59.881 million (2007 - £61.521 million). At 31 December 2008 the fixed interest rates vary from 6.115% to 6.800% (2007 - from 6.115% to 6.800%).

The interest rate swap in respect of the Bonds referred to in Notes 2 & 19 has fixed the interest rate from August 2003 to August 2006 to match the maturity of the bonds. The interest rate swap has therefore been classified as current. 

The interest rate swaps in respect of aggregate mortgage borrowings on the UK investment properties referred to in Note 19 match the interest payment and principal repayment profile of the various facilities. The interest rate swaps have been classified as non current as the relevant Group companies have no automatic right to cancel the instruments.

The movement between these dates, reflecting a move to market of the interest rate swaps of £5,643,038 (2007 - £426,305), of this movement £1,852,462 was adjusted directly against equity. This represents the movement of those swaps deemed effective. Those swaps ineffective and therefore ineligible for hedge accounting has been adjusted against the income statement and totals (£3,790,576) in Note 7.

Interest rate swaps are commitments to exchange one set of cash flows for another. Swaps result in an economic exchange of interest rates (for example, fixed rate for floating rate). No exchange of principal takes place. The Group's credit risk represents the potential cost to replace the swap contracts if counterparties fail to perform their obligation. This risk is monitored on an ongoing basis with reference to the current fair value, a portion of the notional amount of the contracts and the liquidity of the market. The Group assesses counterparties using the same techniques as for its lending activities to control the level of credit risk taken.

The maximum exposure to credit risk at the reporting date is the fair value of each class of derivative financial instruments mentioned above. The Group does not post any collateral as security.

17.RECEIVABLES AND PREPAYMENTS

	2008 £	2007 £
Trade receivables	1,387,090	710,249
Other receivables	1,808,279	2,439,114
Prepayments	6,268,278	3,156,019
	9,463,647	6,305,382

In December 2005 the Company deposited £500,000 as a prepayment of insurance premia with QBE as part of a CHF 23 million borrowing. In accordance with the terms of the agreement with QBE, the deposit was increased to £1,000,000 during 2006, which is included in prepayments. On full repayment of the borrowings the prepaid insurance premia will be returned to the Company. 

Included under prepayments is an amount of £3,184,862 (2007 - £304,303) in respect of capital expenditure on building works and extensions to properties. This will be transferred to Investment Property as it is brought into use.

Included under prepayments is an amount of £273,560 (2007 - £211,049) in respect of funds held by a trustee in respect of maintenance and amortisation reserves, which will be utilised on maturity of the bonds issued by United Post Office Investments Inc.

Included in other receivables is an amount of £Nil (2007 - £1,207,977) in respect of monies owed by the fellow joint venturer of PSPI in respect of the joint venture PSPI Elliot Celle Limited (see Note 26).

Included in other receivables is an amount of £1,167,810 (2007 - £938,640) including accrued interest, lent to European Care as short term working capital. 

As at 31 December 2008, trade receivables of £748,236 (2007 - £384,968) were past due however not considered to be impaired. It was assessed that this receivable is expected to be recovered. The ageing of this receivable is as follows

	£ 2008	£ 2007
3 to 6 months	-	-
Over 6 months	748,236	384,968

The maximum exposure to credit risk at the reporting date is the fair value of each class of receivable and prepayment mentioned above. The Group does not hold any collateral as security.

None of the receivables and prepayments are impaired.

18. SHARE CAPITAL

	31 December  2008 £	31 December 2007 £
Authorised:
Equity interests:
150,000,000 Ordinary shares of $0.01 each	786,081	786,081
Allotted, called up and fully paid:
Equity interests:
66,808,738 Ordinary shares of $0.01 each	344,853	344,853

	Number of shares	Ordinary shares £	Share premium £	Total £
At 31 December 2006	2,816,022	16,633	31,728,823	31,745,456
Issue of new shares	41,326,049	212,692	-	212,692
(20th March 2007) Transaction costs relating to	-	-	(1,575,128)	(1,575,128)
capital raising
Issue of new shares	22,666,667	115,528	33,884,472	34,000,000
(26th March 2007)
At 31 December 2007	66,808,738	344,853	64,038,167	64,383,020
At 31 December 2008	66,808,738	344,853	64,038,167	64,383,020

Pursuant to a written resolution passed on 22 November 2006, the amount of shares the company is authorised to issue was increased from 5,000,000 to 150,000,000 ordinary shares of US $0.01 each.

On 20 March 2007, 41,326,049 shares were issued to USIGH Limited at par value resulting in the amount of $413,260.49.

On 26 March 2007 22,666,667 shares were issued upon admission to the Alternative Investment Market of the London Stock Exchange ("AIM"). These shares were issued at a placing price of 150 pence per share.

The Directors approved an interim dividend for 2008 in the amount of 2p per share which was paid in October 2008; this resulted in a distribution of £1,336,175.

 

19. BORROWINGS

	2008 £	2007 £
Non-current
Mortgages	103,373,713	83,567,592
Bonds	15,610,117	11,240,289
Other	22,390,565	17,489,744
Senior Pre-IPO Notes	10,381	10,381
	141,384,776	112,308,006
Current
Mortgages	1,608,950	1,533,074
Other	14,308,439	700,024
	15,917,389	2,233,098
Total borrowings	157,302,165	114,541,104

Total borrowings include secured liabilities (Mortgages, bonds and other borrowings) of £128,070,458 (2007 - £103,807,918). These borrowings are secured by the assets of the Group. At 31 December 2008 the Group had subordinated borrowings of CHF 23 million (2007 - CHF 23 million) which are primarily secured by a pledge of shares of various subsidiary undertakings. 

The maturity of borrowings is as follows:

	2008 £	2007 £
Current borrowings	15,917,389	2,233,098
Between 1 and 2 years	1,608,950	1,533,074
Between 2 and 5 years	122,836,642	94,781,713
Over 5 years	16,939,184	15,993,219
Non-current borrowings	141,384,776	112,308,006

The carrying amounts and fair value of the non-current borrowings are as follows:

	Carrying amounts		Fair values
	2008	2007	2008	2007
	£	£	£	£
Mortgages	103,373,713	83,567,592	96,998,178	79,604,496
Bonds	15,610,117	11,240,289	16,100,626	11,931,724
Other	22,390,565	17,489,744	20,937,286	16,553,525
Senior Pre-IPO Notes	10,381	10,381	10,381	10,381
	141,384,776	112,308,006	134,046,471	108,100,126

The fair values are based on cash flows discounted using a rate based upon a range of borrowings rate between 3.56% and 8.50% (2007 - 3.56% and 8.50%). 

The carrying amounts of short-term borrowings approximate their fair-value.

The carrying amounts of the Group's total borrowings are denominated in the following currencies:

	2008 £	2007 £
Pound sterling	86,606,211	87,437,586
US dollar	15,610,117	11,240,289
Swiss franc	23,284,031	15,863,229
Euro	31,801,806	-
	157,302,165	114,541,104

20. DEFERRED INCOME TAX 

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority.

	2008 £	2007 £
Deferred tax liabilities to be recovered after more  than 12 months	33,966,478	32,606,715

The gross movement on the deferred income tax account is as follows:

	2008 £	2007 £
Beginning of the year	32,606,715	19,332,699
Income statement charge (Note 21)	(423,219)	6,137,784
Acquisition of subsidiary (Note 25)	-	7,058,452
Net changes due to exchange differences	1,782,982	77,780
End of the year	33,966,478	32,606,715

Deferred income tax liabilities of £1,179,812 (2007: £577,179) have not been recognised for the withholding tax and other taxes that would be payable on the un-remitted earnings of certain subsidiaries. Such amounts are permanently reinvested. Un-remitted earnings totalled £4,213,615 at 31 December 2008 (2007: £1,923,930). No deferred income tax liabilities have been recognised for the withholding tax and other taxes concerning un-remitted earnings of subsidiaries as these liabilities will not crystallise due to the tax structure of the Group.

The movement in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same jurisdiction, is as follows:

Deferred tax liabilities:	Business combinations £	Fair value gains £	Straight line recognition  of lease income £	Total £
At 31 December 2007	11,753,966	17,902,507	2,950,242	32,606,715
Charged to the income statement	93,112	411,534	766,018	1,270,664
Adjustment due to change in taxation rate	(789,805)	(684,273)	(219,805)	(1,693,883)
Net changes due to exchange differences	-	1,782,982	-	1,782,982
At 31 December 2008	11,057,273	19,412,750	3,496,455	33,966,478

21.INCOME TAXES

	2008 £	2007 £
Current tax	423,790	158,608
Deferred tax (Note 20)	(423,219)	6,137,784
	571	6,296,392

The tax on the Group's profit before tax differs from the theoretical amount that would arise using the weighted average tax rate applicable to profits of the consolidated companies as follows:

	Note	2008 £	2007 £
(Loss)/Profit before tax per consolidated income statement		(373,735)	11,861,009
Tax calculated at domestic tax rates applicable to profits in the respective countries		(93,215)	3,556,896
Expenses not deductible for tax purposes		339,277	1,143,805
Tax relating to prior years		48,353	28,320
Utilisation of previously unrecognised capital allowances and tax losses		(293,844)	(439,177)
Loss of tax losses due to change of beneficial ownership of subsidiary	8,20	-	2,006,548
Tax charge (Note 24)		571	6,296,392

The weighted average applicable tax rate was 24.94% (2007: 29.99%). The decrease in the effective tax rate is caused by a change in the profitability of certain of the Group's subsidiaries and a decrease in the UK tax rate in 2008 from 30% to 28%.

22. TRADE AND OTHER PAYABLES

	2008 £	2007 £
Social security and other taxes	87,337	86,597
Other payables	55,448	2,619,522
	142,785	2,706,119

23. ACCRUALS

	2008 £	2007 £
Interest and other finance costs	752,447	608,758
Amounts owed to Related Parties	172,111	34,748
Other accrued expenses	422,158	244,899
	1,346,716	888,405

24. CASH GENERATED FROM OPERATIONS

	Note	2008 £	2007 £
(Loss)/Profit for the year: Adjustments for: - Interest expense	7b)	(373,735) 7,868,441	5,564,617  6,174,131
- Capital Raising Fees	7b)	-	1,435,000
- Net Foreign Exchange Losses	7b)	1,488,512	-
- Interest income	7a)	(2,485,699)	(3,295,182)
- Tax	21	571	6,296,392
- Ineffective element of cash flow hedge	7b)	3,790,576	1,432,769
- Changes in fair value of Investment Property	10	1,253,733	(8,650,606)
- Impairment of Goodwill	14	531,000	-
- Amortisation of Debt Issue Costs	8	311,470	274,848
- Changes in receivables and prepayments		453,777	1,886,053
- Changes in accrued income	15	(2,773,272)	(2,242,852)
- Changes in trade and other payables		159,815	(649,954)
- Changes in accruals		319,786	(252,526)
Cash generated from operations		10,544,975	7,972,690

25. BUSINESS COMBINATIONS

There were no business combinations during 2008

On 4 September 2007, the Group acquired 100% of the issued share capital of Stonelea Healthcare Limited, an owner and operator of nursing and residential care home facilities in the United Kingdom. On the same day the assets and business were leased to a third party operator at an initial rent of £1.58 million per annum. The lease is for an initial period of 35 years, with the lessee having options to renew for a further period up to 35 years from the date of the initial lease. The lease contributed revenues of £817,454 and net loss of £133,455 to the Group for the period from 4 September 2007 to 31 December 2007. If the acquisition had occurred on 1 January 2007, the lease would have contributed revenues of £2,505,095 and net profit of £199,635. The Group borrowed £23.75 million from the Bank of Scotland to finance the acquisition. The loan requires payment of interest only during the whole five year period. The additional borrowings are secured by the land and buildings acquired and by cross guarantees with other group entities that already had existing facilities outstanding from the same lender.

Details of net assets acquired and goodwill are as follows:

	Note		£
Purchase consideration:
- Cash paid			22,815,167
- Direct costs relating to acquisition			915,558
Total purchase consideration			23,730,725
Fair value of net assets acquired			20,640,476
Goodwill on business combinations	14		3,090,249
The assets and liabilities arising from the acquisition are as follows:
Note	Fair value £ 2007		Acquiree's Carrying amount £ 2007
Cash and cash equivalents	165,408		165,408
Investment property 10	27,478,261		23,000,000
Receivables	539,831		539,831
Payables	(484,572)		(484,572)
Deferred tax 20	(7,058,452)		(93,111)
Net assets acquired	20,640,476		23,127,556

	£
Purchase consideration settled in cash	23,730,725
Cash and cash equivalents in subsidiary acquired	(165,408)
Cash outflow on acquisition	23,565,317

26.  JOINT VENTURES

During the year, the group was informed that the Joint Venturer would not be exercising its co-investment rights in the German properties acquired in December 2007. As the group met all of its obligations under the joint venture agreement, there is no requirement to restate comparative figures. The group has acquired 100% ownership of these properties after the acquisition of the 50% outstanding as at 31 December 2007 from the 

Joint Venturer and this forms part of Investment Property additions in 2008 (see Note 10).

	Note	2008	2007
		£	£
Assets
Investment Properties	11	-	3,525,74 1
Other Non Current Assets		-	-
Current Assets		-	119,030
		-	3,644,771
Liabilities
Non Current Liabilities		-	-
Current Liabilities		-	2,461,311
			2,461,311
Net Assets		-	1,183,460
Income		-	-
Expenses		-	(79,557)
Profit after income tax		-	(79,557)
Proportionate interest in joint venture's commitments			-

 

27.  NEGATIVE GOODWILL

In 2007 the Group received an amount of £310,011 in respect of the acquisition of 100% of the issued share capital of Hollygarth Care Homes Limited on 5 May 2005. This represented an adjustment to the purchase consideration and as such has been treated as additional negative goodwill.

28.  SEGMENT INFORMATION		For the year ended 31 December 2008
		SEGMENT
		UK	US	Germany	Switzerland	Total
	Note	£	£	£	£	£
Revenue	5	12,884,613	1,244,831	2,108,497	608,653	16,846,594
Net gain/(loss) on fair value adjustment of investment property	10	(3,719,078)	(1,079,005)	3,943,233	(398,883)	(1,253,733)
Impairment of Goodwill	14	(531,000)	-	-	-	(531,000)
Administrative expenses	6	(3,033,865)	(189,015)	(764,365)	(27,660)	(4,014,905)
Interest income	7a)	2,457,076	3,734	24,710	179	2,485,699
Segment result / operating profit		8,057,746	(19,455)	5,312,075	182,289	13,532,655
Finance costs - net	7b)	(12,762,094)	(643,557)	(262,979)	(237,189)	(13,905,819)
Profit / (loss) before income tax		(4,704,348)	(663,012)	5,049,096	(54,900)	(373,164)
Income Taxes	21	612,635	366,862	(1,021,042)	40,974	(571)
Profit/ (loss) for the year		(4,091,713)	(296,150)	4,028,054	(13,926)	(373,735)
Attributable to:
Equity holders of the Company						5,502,875
Minority interests						-
						5,502,875
ASSETS
Segment assets		197,559,376	20,229,260	59,697,047	18,858,724	296,344,407
Unallocated assets						6,120,843
Total assets						302,465,250
LIABILITIES
Segment liabilities		(141,270,230)	(18,746,297)	(13,466,506)	(10,393,639)	(183,876,672)
Unallocated liabilities						(14,956,137)
Total liabilities						(198,832,809)
Capital expenditure	10					40,693,413

At the 31 December 2008, the Group's business segment is organised on a worldwide basis into four main geographical areas. The nature of operations in the US is that of Postal Offices and in the UK, Germany and Switzerland that of Nursing Homes, although geographical segments are considered primary. Investment properties are leased on the bases described in Note 5.

Capital expenditure includes investment property related to the German Healthcare Property segment (Note 10).

28. SEGMENT INFORMATION		For the year ended 31 December 2007
		SEGMENT
		UK	US	Germany	Switzerland	Total
	Note	£	£	£	£	£
Revenue	5	10,904,532	1,152,857	-	500,769	12,558,158
Net gain/(loss) on fair value adjustment of investment property	10	9,312,961	(354,679)	-	(307,676)	8,650,606
Negative Goodwill	27	310,011	-	-	-	310,011
Administrative expenses	6	(2,013,930)	(666,178)	(79,557)	(402,154)	(3,161,819)
Interest income	7a)	3,271,363	23,805	-	14	3,295,182
Segment result / operating profit		21,784,937	155,805	(79,557)	(209,047)	21,652,138
Finance costs - net	7b)	(8,732,053)	(862,568)	-	(196,508)	(9,791,129)
Profit / (loss) before income tax		13,052,884	(706,763)	(79,557)	(405,555)	11,861,009
Income Taxes	21	(6,253,250)	-	-	(43,142)	(6,296,392)
Profit / (loss) for the year		6,799,634	(706,763)	(79,557)	(448,697)	5,564,617
Attributable to:
Equity holders of the Company						5,564,617
Minority interests						-
						5,564,617
ASSETS
Segment assets		195,045,794	15,779,486	3,644,771	13,033,518	227,503,569
Unallocated assets						28,177,661
Total assets						255,681,230
LIABILITIES
Segment liabilities		(118,599,151)	(11,320,662)	(3,724,327)	(7,260,393)	(140,904,533)
Unallocated liabilities						(10,359,794)
Total liabilities						(151,264,327)
Capital expenditure	10,14,25	30,568,510	-	-	-	30,568,510

At the 31 December 2008, the Group's business segment is organised on a worldwide basis into four main geographical areas. The nature of operations in the US is that of Postal Offices and in the UK, Germany and Switzerland that of Nursing Homes, although geographical segments are considered primary. Investment properties are leased on the bases described in Note 5.

Capital expenditure includes investment property and goodwill acquired through business combinations related to the UK Healthcare Property segment (Note 25).

ENDFR SEEEDMSUSELD

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