Half Yearly Report

28 September 2012

Public Service Properties Investments Limited

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

Unaudited Interim Results for the six months ended 30 June 2012

PSPI (AIM: PSPI), the specialist European care home real estate investment and financing company, announces unaudited results for the six months ended 30 June 2012.

Highlights:

Patrick Hall, Chairman of PSPI, commented:

"Due to the continuing challenges in the markets, particularly as it relates to sourcing bank funding on acceptable terms, and taking into account the Company's size and areas of investment, the Board has also concluded that it is appropriate for the Company to continue to test market appetite for all the Group's assets. In view of these matters, the Board of Directors does not declare an interim dividend."

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

Chairman's Statement

I am pleased to report the Group's unaudited consolidated financial interim results for the six month period ended 30 June 2012.

Strategic Review

On 30 September 2011 I announced the commencement of a strategic review of all of the Group's assets in each jurisdiction against a background of very restricted debt markets, Government austerity measures and local authority funding difficulties throughout the UK. The Board and its advisers had been conscious that the debt refinancing of £82 million secured against a majority of the Group's UK assets and approximately £5 million adverse value of interest rate swap contracts, both due in September 2012, could be a challenge to achieve on attractive terms against the backdrop of these factors. During the intervening twelve months the Board and its advisers have extensively reviewed options in each of the jurisdictions in which the Group had invested, including investigating whether any of its assets could be sold in an orderly manner. The broad findings from that review were that the credit markets remained extremely challenging which, in turn, has had a negative impact on secondary market transactions, thus limiting the opportunities to sell assets on satisfactory terms. As part of the strategic review, the Company announced on 2 April 2012 that it had commenced discussions with the Esquire Group ("Esquire"), the parent company of the European Care Group, the tenant of all the Group's UK properties, with the prospect of a joint refinancing of debt in conjunction with some form of combination of the majority of the Group's UK properties with Esquire. After taking detailed market soundings, the Board concluded that a standalone refinancing without a material deleveraging would not be possible on attractive terms and, therefore, the Board recommended that shareholders vote in favour of a combination of the majority of the Company's UK portfolio with the assets and businesses of Esquire (the "Transaction"), with whom the Company had maintained parallel negotiations.

Combination transaction

On 4 July 2012, the Group announced the details of the Transaction which was completed on 25 July 2012 following approval by the Company's shareholders at a general meeting held on 24 July 2012. The Group sold four subsidiaries which owned 27 care homes leased to the European Care Group in exchange for a 20% equity stake in Esquire and a subordinated loan note of £2.8 million issued by a subsidiary of Esquire, which will accrue interest at 5% per annum with the principal and accrued interest becoming payable in July 2017.

The subsidiaries transferred to Esquire were joint borrowers of £82 million of senior debt and approximately £5 million of interest rate swap obligations; however, this debt and all the other senior debt owed by the Esquire Group was also refinanced in July 2012 for a five year term, to allow the new management team of European Care time to improve operational efficiency within the Esquire Group. I have joined the board of European Care and Richard Barnes, a fellow Director of the Company, has joined the board of various Esquire entities to represent the Company's interests in what is, and is likely to remain, a privately held group.

The Board concluded that due to the significant amount of consolidated debt now held by the Esquire Group, further declines in the independent valuation of the European Care Group's assets and the subordinated nature of the loan note issued by the Esquire Group, the prudent approach for the Company was to value these investments at £1,000. Despite the resultant reduction in the Company's net assets, the Board believes that the Transaction will protect the Company's current equity value of £29 million in the remaining UK assets and businesses which are still leased to Esquire and which have, as a portfolio, historically traded better than the portfolio of assets sold to Esquire.

These interim results only reflect a partial reduction in the Group's unaudited consolidated net assets, primarily in respect of a decline in the valuation of investment properties at 30 June 2012. The additional impact of the reduction in net assets is shown in Note 15, Subsequent Events, to the interim accounts.

More details on the Transaction were contained in a circular to shareholders dated 6 July 2012 which is available on the Company's website at www.pspiltd.com

Financial Review

Revenue rose by 3.2% to £8.8 million for the period ended 30 June 2012 over the comparable period in 2011, although it should be noted that £2.5 million of rent receivable from European Care was converted into the loan note (referred to above) received by the Company as part of the Transaction. Rents on the UK assets that remain leased to European Care and business licence fees increased by 3.9% to £4.7 million per annum in February 2012.

Fair value adjustments on investment properties showed a decline of £40.2 million at 30 June 2012, a reduction of 15.6% of the values reported at 31 December 2011. The majority of the deterioration related to those UK assets included as part of the Transaction where the Group has recognised fair value losses of £31.5 million. The remaining UK assets declined by £3.5 million (6.8%), whilst the German, US and Swiss assets reduced by £3.5 million (7.1%), £0.6 million (3.5%) and £1.1 million (10.3%), respectively. In addition, the Group reflected a fall of £2.3 million in asset values as a result of changes in foreign currency exchange rates. The Group's property valuations were conducted by Colliers International, independent property specialists, for assets held in the UK, Germany and Switzerland and REAC, an independent property consultant specialising in post office valuations, in respect of the US assets. The decline in property values reflected generally weak markets across all of the jurisdictions in which the Group invests and operational challenges faced by the Group's tenants.

Total equity was £77.3 million at 30 June 2012, a decline of 32.3% compared to £114.1 million at 31 December 2011 reflecting the impact of the decline in property values, a provision for a portion of the costs of the Transaction of £1.4 million and pre-tax earnings of £4.3 million during the first six months of 2012. The Group recognised additional net losses of £13.7 million on completion of the Transaction which are not adjusted in the results at 30 June 2012. Net Asset Value per share at 30 June 2012 stood at 73.4p per share compared to 108.3p per share at 31 December 2011 and 118.4p per share at 30 June 2011. The unaudited pro forma Net Asset Value per share at 31 July 2012, after completion of the Transaction, was 60.3p per share and the unaudited pro forma Adjusted Net Asset Value¹ per share was 65.1p.

Future Strategy

Due to the continuing challenges in the markets, particularly as it relates to sourcing bank funding on acceptable terms, and taking into account the Group's size and areas of investment, the Board has also concluded that it is appropriate for the Company to continue to test market appetite for all the Group's assets. Further announcements will be made as appropriate.

The Group will also focus on a reduction of costs as a result of the reduction in gross and net revenues following completion of the Transaction. The number of directors will be reduced from seven to five with Susan McCabe and Alan Henderson having agreed to resign as directors effective as at 31 December 2012. I would like to thank both Susan and Alan for their excellent contribution to the Group since their appointments in 2007. On 2 April 2012, the Company also announced, in view of the potentially significant change in the Group's business, the Company had given notice to terminate the Asset Management Agreement with RP&C International which has a two year notice period. As a result, the Asset Manager will continue in its current role during the notice period. The fees payable to the Asset Manager will decrease in line with the reduction of reported net asset value, and the Company expects to announce additional cost savings in due course.

After maintenance of sufficient working capital, the Company intends that any surplus funds from asset disposals will be paid back to shareholders; however, at present there can be no guarantee on timing and quantum of amounts to be distributed. As a result of this policy, the Board is not declaring an interim dividend and the Company has no plans to return to regular dividend payments in the immediate future.

The Asset Manager's report also includes additional information on the Group's activities during the first half of the year.

Patrick Hall

Chairman

28 September 2012

1. The pro forma adjusted net asset value per share excludes goodwill, loans receivable and deferred taxation.

Asset Manager's Review

Business Outlook

The Group's focus on owning properties leased to third party operators, primarily in the healthcare sector, has become ever more challenging as the impact of the credit crisis continues to adversely affect the property sector and the wider economic outlook in many jurisdictions, particularly the UK, offers little encouragement for an improving market environment. Taking all of the different factors together, the ability for an owner of property in the care home sector to expand and grow is increasingly more difficult.

UK

Following completion of the Transaction and the refinancing of all debt into new five year facilities, the management of the European Care business will focus on improving operational performance across its many services, including operation of the Group's remaining leased assets and licenced businesses in the UK. Rental incomes for the UK portfolio increase annually in line with the Retail Price Index ("RPI"), subject to a cap of 5% per annum. The Group's remaining leased assets and the domiciliary care business which are licenced to European Care have historically performed, in aggregate, better than the assets subject to the Transaction, and continue to do so. Colliers International, who conducted an independent valuation of the Group's assets in the UK as at 6 July 2012 stated that the tenant's operational results provided rental cover of 1.77 times based on historical results for 2011.

Germany

The care home property market in Germany remains comparatively more stable than in the UK, although access to debt financing is also challenging in current market conditions. The Group uses three different operators in Germany with one tenant providing approximately 60% of the German rental income. The rents for the German portfolio increase every three or four years by a proportion of the increase in the German Consumer Price Index.

Switzerland and the US

Rental income from the Swiss investment property increases annually in line with the Swiss Consumer Price Index, although the tenant has been unable to meet rental obligations in full due to operational constraints at the property. The Group has made provisions against unpaid rents since December 2010. The US investment portfolio provides a fixed income throughout the term of the lease which expires in February 2022. The tenant in the US is the United States Postal Service ("USPS"), an agency of the US Government. The USPS is seeking to reorganise aspects of its operational activities to address significant losses incurred in recent years.

The Company continues to seek purchasers for these assets on acceptable terms. There can be no guarantee as to the success or timing of any disposals in the immediate future.

Financial Review

The Group's revenues were £8.8 million for the six months ended 30 June 2012 compared to £8.5 million for the same period in 2011. Of the total, £2.5 million related to rent not paid in cash during the first six months of the year and which was exchanged for a loan note as part of the Transaction.

Rental income from the Group's leased assets in the UK, that were not part of the Transaction, increased in line with increases in RPI at the rate of 3.9% per annum from mid-February 2012. There are two debt providers secured by these UK assets and businesses with maturities in December 2013 and February 2014 with an aggregate loan to value ratio of 39%.

The Group completed the refurbishment of a property in Berlin during February 2012. At that time, the tenant entered into a new 25 year lease and is focused on building up occupancy since re-opening the care home. Rental income for this property re-started in March 2012. Rents for six of the ten locations where the Company owns assets in Germany will produce rental increases at the rate of 3.45% per annum from July 2012. The Group has borrowed from two German banks with one facility maturing at the end of March 2013, and the Group has started negotiations to refinance this facility.

The Group incurred capital expenditure of £2.2 million and repaid debt of £1.6 million during the first half of 2012. Capital expenditure obligations have largely finished, although as part of the Transaction the Group agreed to make a contribution to European Care's capital expenditure costs at the rate of £100,000 per month until the end of January 2013. The Group has also indemnified Esquire in respect of liabilities to corporation tax up to 24 July 2012 relating to the companies transferred as part of the Transaction. The Group estimates that this liability is likely to amount to approximately £0.5 million.

Certain unaudited operational information by jurisdiction for the six months ended 30 June 2012 is provided below, splitting the data relating to the UK between those assets subject to the Transaction and those that remain leased assets/businesses after 25 July 2012, being the date of completion of the Transaction. The data is stated before the allocation of management costs and other general charges.

The Group incurred negative cash flow in respect of the assets sold under the Transaction, primarily because a significant portion of rent was deferred during the first half of 2012 and funding of capital expenditure. The portion of deferred rent relating to the UK portfolio was exchanged, as part of the Transaction, into the subordinated loan note issued by Esquire which is repayable in July 2017 together with interest accruing at 5% per annum. The Group also incurred negative cash flow from the care home located in Switzerland due to deferred rent and an additional amount of amortisation funded in the first quarter.

The table below reflects the key movements in investment properties since 31 December 2011 and 30 June 2012 by jurisdiction and is unaudited.

* includes capital expenditure and capitalised interest of £9.2 million which together with capital expenditure incurred in the first half of 2012 was written off against fair value movements at 30 June 2012.

The Group's short and long term borrowings at 30 June 2012 were £105.6 million and £33.7 million, respectively, compared to £92.8 million and £49.4 million at 31 December 2011. The overall decrease was as a result of £1.7 million of amortisation and £1.2 million movement arising from changes in foreign exchange rates. Total borrowings at 30 June 2012 represented 61.6% of non-current assets excluding goodwill, deferred tax assets, loans and receivables. However, total borrowings at 31 July 2012, post completion of the Transaction, represented 49.5% of non-current assets excluding goodwill, deferred tax assets, loans and receivables. The Group will continue to focus on debt management and retain a prudent consolidated loan to value ratio.

The table below summarises the debt by jurisdiction at 30 June 2012 and is unaudited.

All debt is non-recourse to the Company with the exception of Switzerland where the Company has provided an indemnity for approximately half the current debt.

Deferred taxation on fair value gains and business combinations decreased from £19.1 million at 31 December 2011 to £16.4 million at 30 June 2012, primarily as a result of the net fair value reduction in asset values during the period and changes to the rate of corporation tax in the UK.

Liabilities on derivative financial instruments were stated at £4.8 million at 30 June 2012, the majority of which was eliminated in July 2012 on completion of the Transaction. Accruals at 30 June 2012 reflect estimated costs in respect of the Transaction of £1.4 million. The total expenses payable in respect of the Transaction were £2.5 million.

Total equity decreased from £114.1 million at 31 December 2011 to £77.3 million at 30 June 2012 reflecting the fair value losses noted above. The unaudited net assets decreased by a further £13.7 million on elimination of balances between the Group and Esquire transferred under the Transaction, additional transaction costs incurred in July and other operating results to 31 July 2012. The unaudited pro-forma consolidated net assets of the Group as at 31 July 2012, after completion of the Transaction, based on management accounts and which is provided for illustrative purposes, are summarised below:

The unaudited pro forma balance sheet included in the Company's circular dated 6 July 2012 stated net assets assuming the Transaction had taken place at 31 December 2011 of £71.3 million. The pro-forma net asset position above is stated after the additional reductions £8.7 million in property values at 30 June 2012 for assets retained by the Group.

RP&C International

28 September 2012

INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT

The notes on pages 12 to 22 are an integral part of these interim condensed consolidated financial statements.

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

The notes on pages 12 to 22 are an integral part of these interim condensed consolidated financial statements. 

INTERIM CONDENSED CONSOLIDATED BALANCE SHEET

The notes on pages 12 to 22 are an integral part of these interim condensed consolidated financial statements.

INTERIM CONDENSED CONSOLIDATED CASH FLOW STATEMENT

The notes on pages 12 to 22 are an integral part of these interim condensed consolidated financial statements.

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

Attributable to equity holders of the Company

The notes on pages 12 to 22 are an integral part of these interim condensed consolidated financial statements

INTERIM CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Public Service Properties Investments Limited, domiciled in the British Virgin Islands (registered office at Nerine Chambers, Road Town, Tortola, British Virgin Islands), is the parent company of the PSPI Group. Public Service Properties Investments Limited and its international subsidiaries (together "the Group" or "the Company"), is an investment property Group with a portfolio in the USA, the UK and Continental Europe. It is principally involved in leasing out real estate where the rental income is primarily generated directly or indirectly from governmental sources. Public Service Properties Investments Limited was formed in February 2001.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these interim condensed consolidated financial statements have been consistently applied to all the periods presented, unless otherwise stated.

2.1 Basis of preparation

The interim condensed consolidated financial statements of the Group have been prepared in accordance with IAS 34 "Interim Financial Reporting", published by the International Accounting Standards Board (IASB). The condensed consolidated financial statements are reported in Pound Sterling unless otherwise stated.

These condensed interim financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's most recent Annual Financial Statements, pages 22 to 32, in respect of the year ended 31 December 2011, which have been prepared in accordance with International Financial Reporting Standards ('IFRS'). These condensed interim financial statements for the six months ended 30 June 2012 and the comparative figures for the six months ended 30 June 2011 are unaudited. The extracts from the Group's Annual Financial Statements for the year ended 31 December 2011 represent an abbreviated version of the Group's full accounts for that year, on which the Auditors issued an unqualified audit report.

The interim condensed 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.

In 2011, the Group elected for early adoption of the amendments to IAS 12 'Deferred Tax: Recovery of Underlying Assets'. The amendment affects investment properties measured at fair value. The recognition of deferred taxes in relation to those investment properties is based on an expected recovery through a sales transaction. The Group takes the view that this policy provides reliable and more relevant information because it deals more accurately with the future tax liabilities related to such properties. The adoption included retrospective application in the financial statements in accordance with the amendments and IAS 8 "Accounting policies, changes in estimates and errors. The effect on the financial statements was included in the Group's Annual Financial Statements for the year ended 31 December 2011.

2.2 Principles of consolidation

The results of subsidiary undertakings, which are those entities in which the Group has an interest of more than one half of the voting rights or otherwise has power to exercise control over the operations, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and they cease to be consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. All intercompany transactions, balances and unrealised gains and losses on transactions between Group companies are eliminated. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group.

2.3 Amendments to accounting and valuation principles 

There have been no amendments to accounting or valuation principles during the period to 30 June 2012.

3. FINANCIAL RISK MANAGEMENT

3.1 Financial risk factors

The group's activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk.

The interim condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at 31 December 2011. There have been no changes in the risk management department since year end or in any risk management policies.

3.2 Liquidity Risk

The Group's annual financial statements for the year ended 31 December 2011 disclosed a material uncertainty and significant doubt about the Group's ability to continue as a going concern with respect to liquidity. As per the debt agreements in place at the time and as at 30 June 2012, £81.3 million (approximately 50%) of the total borrowings are scheduled to be repaid in September 2012 to a sole lender.

As detailed in Note 15, on the 25th July 2012 the Company completed a transaction which combined the majority of its UK property owning subsidiaries with the assets and business of the European Care Group, the Group's sole UK tenant in a non-cash transaction. These property owning subsidiaries included the £81.3 million debt due in September 2012 thereby remediating the going concern issue.

Additional repayments totalling £24.6 million of the total borrowings are also classified as current as at 30 June 2012 and payable within one year. A refinancing of these debt facilities is expected to be completed before the repayment date and various opportunities have been considered. The Group will monitor the situation.

3.3 Fair value estimation

In 2012, there were no significant changes in the business or economic circumstances that affect the fair value of the Group's financial assets and financial liabilities. In 2012 there were no reclassifications of financial assets or liabilities

Valuations of the investment properties were made at the end of each period/year by independent property consultants. The valuations are based on both the duration of the leases and the future cash flows and after due consideration of transaction activity in the market.

FOREIGN EXCHANGE RATES

4. REVENUE

Rental income is stated after reallocation of £313,915 (30 June 2011 - £298,632 and 31 December 2011 - £603,793) to interest income.

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. However, these leases formed part of the transaction referred to in Note 15 and as such were no longer part of the Group as of 25th July 2012.

These leases have the same renewal rights as those described above. Effective 31 December 2010 each of the leases relating to UK properties was amended to reflect that the rent on each lease increases on its anniversary by the annual increase in the UK Retail Price Index, subject to a maximum of 5% of the prior year's rent. In addition, each lease is subject to an upward only market rent review every five years from the start of the lease. Prior to the 31 December 2010, each lease was subject to a minimum increase of 1.5% and maximum of 5.0% per annum with no market reviews. 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 ("USPS") 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 140 post office properties provided that the resultant reduction in annual rent payable under the lease does not exceed a maximum of $300,000 (£192,098) per annum or 13% of the annual rental. The Company is aware that 16 of its post office properties have been included on a list of 3,700 post offices that may be closed at some point in the future. This would represent approximately 5% of the annual rental income from the US portfolio. The USPS plans to reduce the overall number of post offices in the US have been factored into management's analysis of minimum lease payments. However, as no formal notice of a move to cancel has been received regarding those post office properties include on the list of potential future closures, formal closures have not been factored into the analysis of minimum lease payments at this time.

The majority of investment properties in Germany are leased for an initial period of 25 years and terminate between 2013 and 2033; 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.

5. ADMINISTRATIVE EXPENSES

6. a) NET FINANCE INCOME

b) NET FINANCE COSTS

7. EARNINGS PER SHARE

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

In January 2004, the Company issued CHF 7 million (£3.15 million) of 4% Senior Unsecured Pre-IPO Notes due in 2011. CHF 6.47 million (£2.74 million) of these notes were redeemed in October 2006 and a further CHF 0.505 million (£0.21 million) were redeemed in February 2007. The remaining notes were redeemed in 2011.

ADJUSTED EARNINGS PER SHARE - NON GAAP

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

8. DIVIDENDS

No Dividends have been paid during the period to 30 June 2012.

9. INVESTMENT PROPERTY

Valuations of the investment properties were made at the end of each period/year 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 6.25% and 21.75% were appropriate under market conditions prevailing at 30 June 2012 (30 June 2011 - between 5.75% and 10.0% and 31 December 2011 - between 6.0% and 13.5% ), resulting in an average of 9.24% (30 June 2011 - 7.03 % and 31 December - 7.80%). PSPI has applied individual capitalisation rates as advised by Colliers CRE to each investment property in preparation of the interim condensed consolidated financial statements.

Additions in the period relate to the capitalisation of capital expenditure relating to the extension and improvement of certain UK investment properties. During the period certain amounts capitalised under IFRS were deemed to have no value and, as such, adjusted to a nil fair value. These amounts totalled £11,569,765 being made up of £8,472,847 of capital expenditure and £3,094,918 of accrued interest and capitalised rent and are included in the total fair value adjustment of £40,247,991.

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 8.50% and 9.0%. The Company applied a capitalisation rate of 8.75% (30 June 2011 - 7.88% and 31 December 2011 - 8.14%).

The valuation of the investment properties in Switzerland was conducted by Colliers Switzerland (2010: Botta Management AG) using a discounted cash flow analysis. The change of valuer was made to align the Swiss properties with other European assets in the Group. A discount factor of 6.5% was used for the valuation at 30 June 2012 (30 June 2011- 4.5% and 31 December 2011 - 6.5%).

The valuation of the investment properties in Germany was conducted by Colliers CRE, UK. Based on both the duration of the leases and the future cash flows and after due consideration of transaction activity in the market, Colliers CRE concluded that capitalisation rates of 7.15% to 9.50% were appropriate under the market conditions prevailing at 30 June 2012 (30 June 2011 - 6.35% to 7.59% and 31 December 2011 - 6.86% to 7.82%), resulting in an average capitalisation rate of 7.81% (30 June 2011 - 6.70% and 31 December 2011 - 7.22%). PSPI has applied individual capitalisation rates as advised by Colliers CRE to each investment property in preparation of the interim condensed consolidated financial statements.

10. GOODWILL

Goodwill arose on the acquisition of the issued share capital of Stonelea Healthcare Limited on 4 September 2007 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.

Impairment tests for goodwill

Goodwill acquired through business combinations has been allocated for impairment testing purposes to the group of cash generating units (CGU) to which it relates. In this instance that is the 3 investment properties acquired within HCP Stonelea Limited. This represents the lowest level within the Group 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. The recoverable amount is defined as the higher of value in use and fair value less costs to sell.

The recoverable amount of the CGU has been based upon fair value less costs to sell calculations. These calculations, use the independent property valuation performed by Colliers CRE, UK as at 30 June 2012 as their basis. It is assumed that it is normal practice for such properties to be sold within its "corporate wrapper" and consequently that any deferred taxation liability in relation to the property should be included in the calculation of the value of the CGU. As such it is assumed that any future buyer of the investment properties would assume a share of the deferred taxation liability.

This test indicated that an impairment of goodwill of £959,058 had occurred as at 30 June 2012 (30 June 2011 - £Nil and 31 December 2011 - £108,635).

11. SHARE CAPITAL

On 9th November 2011 the board approved a dividend of 2.5p per share with the option for a scrip dividend alternative. Of the 102,440,064 shares in issue at 24th November 2011 (the payment date), 28,245,186 opted for a cash dividend which resulted in a payment of £706,130. The remaining 74,194,878 shareholders opted for the scrip alternative. These scrip shares had an issue price of 63.4p and resulted in the issue of 2,925,653 new shares on 29th November 2011.

12. DEFERRED INCOME TAX

Deferred tax assets:

During the period to 30 June 2012, the deferred tax asset related to unused loss carry-forwards recognised has reduced from £1,383,174 at 31 December 2011 (£1,590,294 at 30 June 2011) to £584,241 at 30 June 2012 due to the utilisation of such losses against taxable profits.

13. CASH GENERATED FROM OPERATIONS

14. SEGMENT INFORMATION