Half Yearly Report

30 September 2011

Public Service Properties Investments Limited

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

Half Year Unaudited Results for the six months 30 June 2011

PSPI (AIM: PSPI), the specialist European care home real estate investment and financing company, announces unaudited results for the six months ended 30 June 2011.

Highlights:

§ Adjusted earnings before tax of £5.0 million or 4.9p per share (30 June 2010 - £3.5 million or 4.2p per share).

§ Cash rental income increase by 2.2% to £8.5 million (30 June 2010 - £8.4 million).

§ An interim dividend of 2.5p per share to be paid on 29 November 2011 (record date 14 October 2011) (2010 - 2.5p per share). The Board of Directors has resolved to introduce a scrip dividend alternative starting with this interim dividend, subject to shareholder approval.

§ Investment properties valued at £276.9 million (31 December 2010 - £272.2 million).

§ Net asset value per share at 118.4p and adjusted net asset value per share¹ at 148.3p at 30 June 2011 (31 December 2010 - 119.9p and 150.5p).

§ The Company repaid £8.6 million in debt during the six months ended 30 June 2011 (2010 - £2.1 million) and invested £3.6 million in capital expenditure (2010 - £1.5 million).

§ Conservative leverage - 50% Loan to Value² at 30 June 2011 (31 December 2010 - 53%) and compliant with all banking covenants.

§ Post period end, refinanced $23 million secured against the US assets in August 2011.

§ Resolved to commence a review of strategic options to maximise shareholder value.

Commenting on the results, Chairman Patrick Hall, said, 

"The Group continues to benefit from a fully let portfolio, long term leases, indexed rents, and conservative leverage, all of which support an encouraging outlook for the Group's portfolio. We believe that your Company, as a specialist real estate investment company, is well placed in current market conditions as demonstrated by these results. The Company is continuing with the capital expenditure programme on a number of care home assets in the UK and the refurbishment of a property in Berlin commenced in the first half of 2011, all of which will create additional value over the medium term.

Despite the Group's progress, the Company's shares have persistently been trading at a significant discount to Net Asset Value. In order to attempt to address the discount, the Board of Directors has resolved to commence a review of the Group's assets and the Company as a whole, and the strategic options available to maximise shareholder value. The Board is being advised on this review, which is being conducted jointly with the Asset Manager, by Smith Square Partners, an independent corporate finance advisory firm. There can be no assurances that the outcome will result in any specific action or actions, and no timetable has been set for its completion."

Notes:

¹ Adjusted net asset value per share is represented by net assets less goodwill plus deferred tax provided on business combinations and fair value gains divided by the number of ordinary shares in issue.

² Loan to Value is represented by total short and long term borrowings expressed as a percentage of total non-current assets, excluding goodwill, loans and receivables.

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 2011.

The Group continues to benefit from a fully let portfolio, long term leases, indexed rents, and conservative leverage, all of which support an encouraging outlook for the Group's portfolio. We believe that your Company, as a specialist real estate investment company, is well placed in current market conditions as demonstrated by these results. The Company is continuing with the capital expenditure programme on a number of care home assets in the UK and the refurbishment of a property in Berlin commenced in the first half of 2011, all of which will create additional value over the medium term.

Despite the Group's progress, the Company's shares have persistently been trading at a significant discount to Net Asset Value. In order to attempt to address the discount, the Board of Directors has resolved to commence a review of the Group's assets and the Company as a whole, and the strategic options available to maximise shareholder value. The Board is being advised on this review, which is being conducted jointly with the Asset Manager, by Smith Square Partners, an independent corporate finance advisory firm. There can be no assurances that the outcome will result in any specific action or actions, and no timetable has been set for its completion.

Financial Review

Cash rental income rose by 2.2% to £8.5 million for the period ended 30 June 2011 over the comparable period in 2010. Approximately two-thirds of the UK properties were subject to annual indexed rent reviews in the six months up to the end of 30 June 2011 and reflected average increases of 5.0%.

Fair value adjustments on investment properties showed a reduction of £3.6 million at 30 June 2011, representing a decline of 1.3% for the investment property portfolio since 31 December 2010. The majority of the decline was in respect of the Company's Swiss asset where the operator had experienced a significant drop in occupancy towards the end of 2010. We are pleased to note that occupancy has largely recovered but the independent valuer has marked down the asset at 30 June 2011.

Adjusted earnings for the six months ended 30 June 2011 were £5.0 million compared to £3.5 million for the same period in 2010 and adjusted earnings per share¹ were 4.9p compared to 4.2p for the comparable period in 2010.

Total equity after £4.6 million of dividends were paid in May 2011, was £121.3 million at 30 June 2011 compared to £122.9 million at 31 December 2010. Net Asset Value per share at 30 June 2011 stood at 118.4p per share or 148.3p per share if adjusted for goodwill and deferred taxation.

Operational matters

The Company continued to invest in the capital expenditure projects announced in 2011, increasing capital expenditure by a further £3.6 million in both the UK and Germany. The investment programme will continue for the rest of 2011 and into the first half of 2012, after which the Company will have enlarged and upgraded a significant portion of the UK properties to provide a portfolio generating a higher income return and well positioned for the future. The Company will also complete a refurbishment programme for one of its German care homes where the current lease expires in 2013. Terms have already been agreed for the tenant to enter into a new 25 year lease on completion of the project in the first quarter of 2012.

Debt of £8.6 million was repaid and a further £5.5 million of debt was refinanced during the first six months of 2011. The Company also completed a $24.3 million refinancing of its US portfolio in August 2011. The Company's Loan to Value² ratio at 30 June 2011 was 50% (31 December 2010: 52%).

The economic climate in the Company's various markets remains challenging, and in the last six months we have followed a strategy of investing for the longer term benefit of the Company's existing assets, whilst taking a cautious approach to acquisitions at this time.

Dividends

The Board of Directors has approved an interim dividend of 2.5p per share, payable on 29 November 2011 to shareholders on the register on 14 October 2011. The Group's progressive dividend policy and overall shareholder distribution policy will be evaluated as part of the strategic review discussed above, but the Board of Directors has resolved to introduce a scrip dividend alternative starting with this interim dividend, subject to shareholder approval.

The Asset Manager's Review includes further detail on the Group's performance and development plans as well as comments from the tenant of our UK portfolio.

Patrick Hall

Chairman

30 September2011

¹ Earnings per share adjusted to exclude the impact of non cash and one-off items as disclosed in the notes to the Interim Report.

² Loan to Value is represented by total short and long term borrowings expressed as a percentage of total non-current assets, excluding goodwill, deferred tax, loans and receivables.

Asset Manager's Review

Business Outlook

The impact of the credit crisis continues to adversely affect the property sector, with senior debt providers lending on a more cautious and selective basis. The Group continues to enjoy good relationships with its debt providers and remains fully compliant with all debt service and loan to value covenants. However, the continued availability of senior debt for operations and acquisitions remains a critical factor going forward. In addition, the well publicised operational problems for the largest operator in the UK care home sector have created an even more challenging market and backdrop in which to operate.

Whilst the longer term fundamentals of the care home sector remain strong, there are short term pressures on operators, most notably in the UK where Government spending cuts have impacted cash flows. Although we do not expect significant changes in Government support for the care home sector, there are a number of factors, such as later-stage referrals of residents, which have affected occupancy.

The Dilnot Commission reported to the Government in July 2011 making various recommendations on the potential structure of funding for the long term care sector in the UK to address the demographic trends and attendant funding requirements. The Government asked the Commission to recommend:

- how best to meet the costs of care and support as a partnership between individuals and the state;

- how people could choose to protect their assets, especially their homes, against the cost of care;

- how, both now and in future, public funding for the care and support system can be best used to meet care and support needs.

The central recommendation was to establish a cap on the level of contribution that individuals would be expected to make towards the cost of their long term care requirements. By establishing a cap, the report concluded that individuals could better plan for these costs and that this would "create a new space for the financial services sector to help people in meeting their contribution". It remains to be seen which recommendations the Government will adopt in the months ahead.

Notwithstanding the market pressures referred to above, the Group remains well positioned as a pure property owner with a fully let portfolio, on long leases located in several jurisdictions. The weighted average unexpired lease term is approximately 20 years, which will increase on completion of several expansion and refurbishment projects in the UK and Germany. The Group maintains a conservative level of gearing with a majority of its debt subject to fixed interest rates.

The Company is investing in a number of projects that will add capacity through expansion, re-configuration and refurbishment for a number of properties in the UK portfolio. One enlarged home in the North-East re-opened in May 2011 and a second extended home, close to Scarborough, is expected to be completed by early October. Two other projects in Bury and Derby are scheduled to be completed towards the end of 2011, and two further projects in the North East are scheduled to be completed in the first quarter of 2012. There are several other projects that will be considered by the Company in due course.

On completion of each project, rent payable under the relevant leases will increase by 8% of the gross capital expenditure. In the meantime, the Company has agreed to capitalise rent on properties where there is a material disruption to occupancy, and hence, operational cash flow for the Company's tenant, prior to commencement of the new construction and refurbishment phase, through to the post completion build up in occupancy.

The Company believes that its tenant in the UK is taking appropriate action to address these factors by targeting residents with higher care needs and controlling its wage costs. The Company believes that these measures, coupled with the capital investment mentioned herein, will result in improved performance over the medium term.

We have asked the tenant of the Company's UK care homes, European Care, to comment on its operations which are set out below.

The care home property market in Germany remains stable. Currently, we do not foresee material changes to government support for residents who cannot afford to pay for care in the types of care homes which are owned by the Group.

The rents for the German portfolio increase on average every three or four years by a proportion of the increase in the German Consumer Price Index. The Swiss investment property increases annually in line with the Swiss consumer price index whilst the US investment portfolio provides a fixed income stream throughout the term of the lease until renewal in 2022.

Financial Review

The Group's revenues were £8.5 million for the six months ended 30 June 2011 compared to£9.6m for the same period in 2010, although the 2010 revenue included £1.2 million of non-cash accrued income linked to the guaranteed minimum annual rental increases for all of the Group's UK properties. This guaranteed minimum increase was removed from each lease relating to UK properties effective 31 December 2010. The Group's underlying cash revenues therefore increased by 2.2% to £8.5 million for the six months ended 30 June 2011. This increase primarily reflects increases in rental income for investment properties in the UK and foreign currency movements for non-sterling denominated rental revenues.

Rent reviews for approximately two-thirds of the Company's UK investment properties occur during the first half of the year. This has resulted in increases of 5.0% per annum, based on the rise in the UK RPI. The removal of the guaranteed annual rental increase on UK leases was replaced by an upward only market review every five years and rents will continue to increase annually based on the increase in the RPI, subject to a maximum of 5.0% per annum.

The independent valuation of the UK portfolio, which represented 69.0% of the Company's portfolio at 30 June 2011, was consistent with the market value as at 31 December 2010. The average capitalisation rate for the UK investment properties was assessed at 7.0% at 30 June 2011 compared to 6.8% at 31 December 2010. The increase in rental income has been offset by a widening of the capitalisation rate, primarily resulting in a squeeze on the level of operator rent cover since operator fee levels have increased at a considerably slower pace than the increase in rents. Subject to market conditions and the tenant's ability to re-build occupancy, it is expected that those properties in the capital expenditure programme will benefit from a valuation re-rating post completion, in addition to increased rental income.

The independent valuation of the German portfolio, which represented approximately 20.0% of the Company's portfolio value at 30 June 2011, remained at the same value in constant currency as at 31 December 2010. The average capitalisation rate for the German portfolio was unchanged at 7.1% at 30 June 2011 and 31 December 2010. The Company entered into an agreement to refurbish one of its properties in Berlin where the lease had been set to expire in 2013. As part of the refurbishment programme, the tenant has agreed to enter into a new 25 year lease at an increased rent. The refurbishment work commenced in the first half of 2011 and is due for completion in May 2012.

The independent valuation of the US portfolio, representing approximately 6.0% of the Company's portfolio at 30 June 2011, declined in value by 3.3% in constant currency during the first six months of 2011. The US Postal Service ("USPS") announced in August that it was considering the closure of up to 3,700 post offices across the United States. 16 of the Company's 140 post offices were included in the list of potential closures. The rental income on these 16 properties represents approximately 5.0% of the annual US rental income or 0.4% of the annual rental income for the Company. No final decision has been taken in respect of the closure programme and further news could take several months to crystallise. Rental income received from the USPS is generally at or below market rents, hence should the USPS exit the leases for these properties, the Company would look to re-let or sell the property following a review of options, as appropriate. It should also be noted that the Company was able successfully to complete the debt refinancing in respect of the US portfolio in mid-August against this backdrop.

The independent valuation of the Swiss investment property, representing approximately 5.0% of the Company's portfolio at 30 June 2011, declined by 16.5% in constant currency as a result of a poor trading performance over several months starting in the last quarter of 2010. Occupancy has improved since the early part of 2011; however, the valuation assumed a 30% drop in lease income on renewal in 2023, thus reducing the residual value for the property.

As mentioned above, the Company is conducting a review of the Group's assets over the short to medium term, which may or may not include consideration of disposal of assets. Cash finance costs were £3.4 million for the first six months of 2011 compared to £4.2 million in 2010. The reduction is primarily as a result of debt repayments made at the end of 2010 and in the first half of 2011 coupled with debt refinancing and new debt at lower rates of interest.

Adjusted earnings² for the six month period amounted to 4.9p per share (2010: 4.2p). The Board of Directors has approved an interim dividend of 2.5p per share (2010: 2.5p), totalling £2.6 million which will be paid on 29 November 2011 to shareholders on the register on 14 October 2011. The Board of Directors has resolved to introduce a scrip dividend alternative starting with this interim dividend, subject to shareholder approval.

The Group's non-current assets increased from £290.0 million at 31 December 2010 to £294.0 million at 30 June 2011 primarily as a result of additional capital expenditure on the UK portfolio offset by the fair value adjustments noted above and changes in foreign currency exchange rates. Total assets decreased from £308.9 million to £302.1 million during the same period, primarily due to the decrease in cash from investment in the capital expenditure programme and the repayment of £7.5m of fixed rate notes that matured in February 2011.

The Group's short and long term borrowings at 30 June 2011 were £25.8 million and £115.9 million, respectively, compared to £33.3 million and £112.4 million at 31 December 2010. The overall decrease was as a result of £8.6 million of debt repayments offset by £2.5 million of additional senior debt secured against some of the UK properties. Total borrowings at 30 June 2011 represented 49.6% of non-current assets excluding goodwill, deferred tax assets, loans and receivables.

The Company obtained a debt refinancing secured against the US portfolio in August, achieving a net 75% loan to value financing on a ten-year maturity, with the principal amortising over 30 years. The new facility is non-recourse to the Group. An affiliate of Elliott Associates, L.P., which represents the Company's largest shareholder provided a bridge loan of £2.8 million in connection with the refinancing which is due to be repaid by the end of 2011.

While the Board continues to monitor the Group's debt levels, it considers the Group's overall gearing to be conservative given the strength of the Group's underlying cash flow from its long term leases; however, the Company is actively preparing a strategy in preparation for the significant debt refinancing due in September 2012.

Deferred taxation on fair value gains and business combinations decreased from £33.9 million at 31 December 2010 to £33.1million at 30 June 2011, primarily as a result of the net fair value reduction in asset values during the period.

Total equity decreased from £122.9 million at 31 December 2010, to £121.3 million at 30 June 2011. The decrease primarily reflects the profit for the year less the £4.6 million final dividend for 2010 which was paid in May and a net increase of £1.6 million due to movements in the fair value hedging and translation reserves.

The Group's net asset value per share at 30 June 2010 was 118.4p and the net asset value per share, adjusted for goodwill and deferred taxation on fair value gains and business combinations, was 148.3p per share.

RP&C International

30 September 2011

¹ Capitalisation rate is represented by the net rental income receivable divided by the market value of the properties from which the rental income is derived

²Adjusted earnings represent reported net profit/(loss) after tax and adjusted for non-cash adjustments to the income statement and excluding one-off costs of a non-recurring nature.

PUBLIC SERVICE PROPERTIES INVESTMENTS LIMITED

INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT

The notes on pages 13 to 23 are an integral part of these interim condensed consolidated financial statements.

PUBLIC SERVICE PROPERTIES INVESTMENTS LIMITED

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

The notes on pages 13 to 23 are an integral part of these interim condensed consolidated financial statements. PUBLIC SERVICE PROPERTIES INVESTMENTS LIMITED

INTERIM CONDENSED CONSOLIDATED BALANCE SHEET

The notes on pages 13 to 23 are an integral part of these interim condensed consolidated financial statements.

PUBLIC SERVICE PROPERTIES INVESTMENTS LIMITED

INTERIM CONDENSED CONSOLIDATED CASH FLOW STATEMENT

The notes on pages 13 to 23 are an integral part of these interim condensed consolidated financial statements.

PUBLIC SERVICE PROPERTIES INVESTMENTS LIMITED

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

The notes on pages 13 to 23 are an integral part of these interim condensed consolidated financial statements

PUBLIC SERVICE PROPERTIES INVESTMENTS LIMITED

INTERIM CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

Public Service Properties Investments Limited (PSPI) (the "Company"), 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. The Company and its international subsidiaries (together the "Group"), 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. ACCOUNTING POLICIES

The principal accounting policies applied in the preparation of these interim 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 and comply with International Financial Reporting Standards (IFRS), published by the International Accounting Standards Board (IASB). The consolidated financial statements are reported in British Pounds unless otherwise stated and are based on the accounting policies set out in pages 22 to 32 of the audited accounts for the year ended 31 December 2010. This report was prepared in accordance with IAS 34 "Interim Financial Reporting".

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.

The following standards, amendments and interpretations to existing standards effective in 2011 but not relevant to the Group:

IFRIC 14 'IAS 19 - Limits on a Defined benefit Asset, Minimum Funding Requirements and their Interaction' (effective 1 January 2011, early application permitted) The amendment clarifies that a voluntary prepayment

into a pension plan in surplus shall be recognised as an economic benefit. In Switzerland this typically may happen when there is an employer contribution reserve.

Amendments to IFRS 7 'Disclosures - Transfers of financial assets' (effective on 1 July 2011, early application permitted). The amendment requires additional disclosures in respect of risk exposures arising from transferred financial assets (e.g. factoring, securitisation), any associated liabilities and it includes additional disclosure requirements in respect to those transfers.

IFRIC 13 'Customer loyalty programs' (applicable for annual periods beginning on or after 1 January 2011, prospective application). The change clarifies the meaning of the term 'fair value' is clarified in the context of measuring award credits under customer loyalty programmes.

The following new standards, new interpretations and amendments to standards and interpretations have been issued but are not effective for the financial year beginning 1 January 2011 and have not been early adopted:

IFRS 9 'Financial Instruments' (effective 1 January 2013, retrospective application, early application permitted). IFRS 9 comprises two measurement categories for financial assets: amortised cost and fair value. All equity instruments are measured at fair value. Management has an option to present in other comprehensive income unrealised and realised fair value gains and losses on equity investments that are not held for trading. A debt instrument is at amortised cost only if it is the entity's business model to hold the financial asset to collect contractual cash flows and the cash flows represent principal and interest. It will otherwise need to be considered at fair value through profit or loss. The Group has elected not to adopt the amendment before the effective date. The amendment is not expected to have a material impact on the financial statements.

Amendments to IFRS 9 'Financial instruments' (effective 1 January 2013, retrospective application, early application permitted). The amendment includes guidance on financial liabilities and derecognition of financial instruments. The accounting and presentation for financial liabilities and for derecognising financial instruments has been relocated from IAS 39 without change, except for financial liabilities that are designated at fair value through profit or loss. Entities with financial liabilities designated at FVTPL recognise changes in the fair value due to changes in the liability's credit risk directly in OCI. There is no subsequent recycling of the amounts in OCI to profit or loss, but accumulated gains or losses may be transferred within equity. The Group has elected not to adopt the amendment before the effective date. The amendment is not expected to have a material impact on the financial statements.

IFRS 10, 'Consolidated financial statements', (effective for annual periods beginning on or after 1 January 2013, early application permitted). IFRS 10 replaces all of the guidance on control and consolidation in IAS 27 and SIC-12. IAS 27 is renamed and continues to be a standard dealing solely with separate financial statements. The Group has elected not to adopt the amendment before the effective date. The amendment is not expected to have a material impact on the financial statements.

IFRS 11, 'Joint arrangements', (effective for annual periods beginning on or after 1 January 2013, early application permitted). The definition of joint control is unchanged, but the new standard introduces new terminology. The Group has elected not to adopt the amendment before the effective date. The amendment is not expected to have a material impact on the financial statements.

Amendments to IAS 12 'Deferred Tax: Recovery of Underlying Assets' (effective 1 January 2012, early application permitted). 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 SIC-21 guidance has been included in the standard. The amendment is expected to have a material impact on the financial statements, however the impact of the change cannot be reasonably estimated as of the reporting date.

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 2011.

4. REVENUE

Rental income is stated after reallocation of £298,632 (30 June 2010 - £295,160 and 31 December 2010 - £583,974) to interest income.

Rental income includes accrued income provided to recognise guaranteed future income over the period of the leases, see Note 11 up to 31 December 2010. As at this date the UK leases were amended to remove the guaranteed minimum 1.5% annual increase (see Note 11).

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. 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 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 (£193,911) 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. Since no formal notice of a move to cancel has been received, this has not been factored into the analysis of minimum lease payments at this time.

4. REVENUE (Continued)

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.

5. ADMINISTRATIVE EXPENSES

6. 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.

7. EARNINGS PER SHARE (Continued)

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. Each noteholder 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 noteholders 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. The remaining notes were redeemed in 2011.

Management has estimated that the maximum number of additional ordinary shares that could be issued at 30 June 2011 is Nil (30 June 2010 - 610 and 31 December 2010 - 610).

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

The Directors have approved an interim dividend in the amount of 2.5p per share, such dividend to be paid on 29 November 2011 to shareholders on the register on 14 October 2011; this will result in a distribution of £2,561,002. The Board of Directors has resolved to introduce a scrip dividend alternative, subject to shareholder approval, in respect of this interim dividend.

Dividends totalling £7,170,804 were distributed in respect of 2010, of which £4,609,803 was paid in 2011.

9. INVESTMENT PROPERTY

Valuations of the investment properties were made as at 30 June 2011 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 5.75% and 10.00% were appropriate under market conditions prevailing at 30 June 2011 (30 June 2010 - between 6.0% and 10.0% and 31 December 2010 - between 5.75% and 10.0% ), resulting in an average of 7.03% (30 June 2010 - 6.60 % and 31 December - 6.81%). PSPI has applied individual capitalisation rates as advised by Colliers CRE to each investment property in preparation of the interim condensed 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 7.78% and 7.98%. The Company applied a capitalisation rate of 7.88% (30 June 2010 - 7.45% and 31 December 2010 - 7.58%).

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% was used for the valuation at 30 June 2011 (30 June 2010 - 4.5% and 31 December 2010 - 4.5%). For the valuation at 30 June 2011, the residual cash flow analysis reflected a 30% reduction of rent on termination of the lease (31 December 2010 - 10%).

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 6.35% to 7.59% were appropriate under the market conditions prevailing at 30 June 2011 (30 June 2010 - 6.45% to 8.50% and 31 December 2010 - 6.35% to 8.50%), resulting in an average capitalisation rate of 6.70% (30 June 2010 - 6.80% and 31 December 2010 - 6.70%). 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.

10. GOODWILL

Impairment tests for goodwill

In accordance with IAS 36 Impairment of Assets, the carrying amount of the cash generating unit ("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 2011, adjusted for the known rental increase due in the second half of 2011, 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 no impairment of goodwill had occurred as at 30 June 2011 (30 June 2010 - £Nil and 31 December 2010 - Nil).

11. ACCRUED INCOME

Accrued income is provided to recognise guaranteed future income over the period of the lease. On 31 December 2010 the UK leases were amended to remove the guaranteed minimum annual rental increase of 1.5%. As such, from this date accrued income is no longer to be accrued and any accumulated accrued income has been released.

12. SHARE CAPITAL

12. SHARE CAPITAL (Continued)

On 26 March 2010, the Company announced an 8 for 15 Open Share Offer with the issue of 35,631,326 Open Offer Shares at a price of 70 pence per share. This offer closed on 13 April 2010 at which point valid applications for 18,487,890 shares by qualifying shareholders had been received. As a consequence, the remaining 17,143,436 shares were issued to qualifying shareholders under the excess application facility. The total of 35,631,326 shares was admitted for trading on AIM on 14 April 2010.

13. DEFERRED INCOME TAX