The M&G Secured Property Income Fund Annual Investment Report and audited Consolidated Financial Statements for the year ended 30 June 2019 Contents

The M&G Secured Property Income Fund Manager’s report Page 1 Financial highlights Page 8 Consolidated Financial Statements and notes Page 9 Trustee’s responsibilities and report Page 25 Independent Auditor’s report Page 26 Other regulatory disclosures Page 30 The M&G Secured Property Income Fund Manager’s report

The Manager of The M&G Secured Property Income Fund (the Independent Auditor ‘Fund’) presents the Annual Investment Report and Consolidated Financial Statements (audited) for the Fund for the year ended Ernst & Young LLP 30 June 2019. Royal Chambers, St. Julian’s Avenue, St Peter Port, Guernsey GY1 4AF

Administration Real Estate Asset Manager M&G Real Estate Limited Manager 10 Fenchurch Avenue, London EC3M 5AG

M&G (Guernsey) Limited Legal Adviser to the Fund Ground Floor, Dorey Court, Admiral Park, St Peter Port, Guernsey GY1 2HT as to Guernsey law Carey Olsen (Guernsey) LLP Licensed by the Guernsey Financial Services Commission under Carey House, Les Banques, St Peter Port, The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as Guernsey GY1 4BZ amended).

Board of Directors of the Manager Neither the Manager nor the Trustee are authorised under the United Kingdom Financial Services and Markets Act 2000. The investor James J Gilligan (Chairman) protection provided by the United Kingdom regulatory system does Peter J Baxter not apply to the Fund. John E Cable Timothy I Cumming Both the Manager and the Trustee are licensed by the Guernsey Karen Donald Financial Services Commission under The Protection of Investors Steffan Francis (Bailiwick of Guernsey) Law, 1987 (as amended). Peter Mills (appointed 11 January 2019) Statements made in this report are, where appropriate, based on Administrator, Registrar and Listing Sponsor advice received by the Manager regarding present law and administrative practice. Every care has been taken in preparing the JTC Fund Solutions (Guernsey) Limited statements contained herein which are believed to be correct at the Ground Floor, Dorey Court, Admiral Park, St Peter Port, time of going to press, but the Manager does not take any Guernsey GY1 2HT responsibility for the accuracy of such statements or for the effect on them of any future changes in the law or in administrative practice. Investment Advisor Investors who are in doubt of what action to take are recommended to consult their professional advisers. M&G Investment Management Limited 10 Fenchurch Avenue, London EC3M 5AG The Fund

Trustee - until 15 August 2019 The Fund (with its subsidiaries, together the ‘Group’) is an open ended unit trust constituted in Guernsey with unlimited duration by a Kleinwort Benson (Guernsey) Limited Trust Instrument dated 2 May 2007 and amended and restated on Hambro House, St. Julian’s Avenue, St Peter Port, 24 February 2016 (as further amended, restated, novated or Guernsey GY1 3AE supplemented from time to time), made between the Trustee and the Licensed by the Guernsey Financial Services Commission under Manager and governed by Guernsey law. The Fund is listed on The The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as International Stock Exchange (‘TISE’). The Fund has been authorised amended). by the Guernsey Financial Services Commission (‘GFSC’) as an authorised Class B open-ended collective investment scheme under Trustee - from 15 August 2019 the Authorised Collective Investment Schemes (Class B) Rules 2013 (the ‘Rules’). Northern Trust (Guernsey) Limited The GFSC has exercised the discretion permitted under the Rules to PO Box 71, Trafalgar Court, Les Banques, St Peter Port, modify the requirement of the Rules for the disclosure of the value of Guernsey GY1 3DA individual properties held in the portfolio. The requirement is modified Licensed by the Guernsey Financial Services Commission under to show a portfolio statement specifying properties held in value The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as bands at the end of the accounting period. This modification is amended). consistent with industry practice.

Independent Valuer

CBRE Limited Henrietta House, Henrietta Place, London W1G 0NB

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 1 The M&G Secured Property Income Fund Manager’s report

Manager’s responsibilities Investment objective

The Fund invests primarily in UK real estate, with the objective to Statement of the Manager’s responsibilities in respect deliver a secure long-term income stream with inflation-linked or of the Consolidated Financial Statements of the Fund fixed uplifts. Investment returns are optimised by combining The Manager is responsible for preparing Consolidated Financial systematic analysis of both tenant credit quality and real estate Statements for each financial year which give a true and fair view of fundamentals. the state of affairs of the Group and of the total return and cash flows As a consequence, this provides investors access to long-term of the Group for that period and are in accordance with the provisions liability matching cash flows through exposure to a diversified pool of its Principal Documents and The Rules made under The Protection of inflation mitigated corporate revenue streams, backed by UK of Investors (Bailiwick of Guernsey) Law, 1987 (as amended). In real estate assets. preparing those Consolidated Financial Statements the Manager is required to: • select suitable accounting policies and then apply them Investment policy consistently; • make judgements and estimates that are reasonable and prudent; The Fund aims to provide growing and secure income by investing • state whether applicable United Kingdom accounting standards in a diversified portfolio of UK real estate assets. The Fund seeks to have been followed subject to any material departures disclosed add value through: and explained in the Consolidated Financial Statements; and • strategic asset selection across the main sectors of the UK real • prepare the Consolidated Financial Statements on the going estate market; concern basis unless it is inappropriate to presume that the Fund • analysis of each property’s fundamentals and potential; and and the Group will continue in operation. • analysis of the credit quality of each tenant. The Manager confirms that it has complied with the above Security of investment returns will be achieved through maintaining requirements in preparing the Consolidated Financial Statements. an appropriate balance between tenant credit quality and the The Manager is responsible for keeping proper accounting records underlying real estate fundamentals (including vacant possession which disclose with reasonable accuracy at any time the financial value), whilst income growth will be achieved by investing in assets position of the Fund and the Group and to enable it to ensure that the with leases that incorporate regular rent reviews providing inflation Consolidated Financial Statements comply with the provisions of The linked or fixed uplifts. Rules made under The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended) and the Principal Documents.

The Manager is also responsible for taking reasonable steps for the prevention and detection of fraud and other irregularities.

So far as the Manager is aware, there is no relevant audit information of which the Fund’s auditor is unaware, and the Manager has taken all the steps to ensure it is aware of any relevant audit information and to establish that the Fund’s auditor is aware of that information.

Statement of the Directors of the Manager

This report is signed in accordance with the requirements of The Authorised Collective Investment Schemes (Class B) Rules, 2013.

J J Gilligan Directors of the Manager T I Cumming } 23 October 2019

2 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Manager’s report

The Fund’s reported NAV per Unit increased by 2.60% over the year Investment Advisor’s report to 30 June 2019. This has been driven by inflation-linked rental growth across the portfolio flowing through to capital value growth on a As at October 2019 for the year ended 30 June 2019 constant yield basis, in combination with yield compression across a number of assets. In particular, the Fund’s ground rent portfolios, Investment highlights budget hotels and student and social housing assets have been the • The Fund delivered a total return of 6.72% for the 12-month biggest contributors to capital value growth over the year. Long lease period up to 30 June 2019 net of all costs and charges; assets have continued to be in high demand from investors – primarily due to their long term contracted rental growth, defensive nature and • The average annualised net distribution yield of the Fund (net strong relative value proposition – as demonstrated by the weight of income as a percentage of the average reported NAV per Unit) capital in the UK long lease market. Simultaneously, transaction was 3.95%; volumes have dropped considerably across the real estate market (particularly in the first half of 2019). This is largely attributable to • New investor capital commitments of £235 million were received Brexit uncertainty, which is making it more difficult for vendors and over the 12-month period up to 30 June 2019, comprising owner-occupiers to take significant long term financing decisions, subscriptions from both new investors and top ups by existing such as entering into a sale and leaseback or the development of investors; new premises. Accordingly, the market remains highly competed and • The reported Net Asset Value (NAV) of the Fund was £4.293 therefore the Fund has remained selective with regard to new billion (+£459 million over the year); acquisitions. Best relative value for investors continues to be found in off-market transactions, alternative sectors/structures and larger lot • All of the Fund’s leases are fully repairing and insuring, resulting sizes. in a gross income stream; The average annualised net distribution yield of the Fund (total net • The weighted average lease expiry (WALE) of the portfolio by distributions divided by the average reported NAV per Unit) for the income remains healthy at 30.4 years (versus 31.6 years as at 30 year ended 30 June 2019 was 3.95%, 0.09% lower than the previous June 2018). With ground leases capped at 50 years, the portfolio year. This slight decrease has been in part due to the forward funding WALE stands at 23.7 years (versus 24.7 years as at 30 June of the Anglo American HQ in Farringdon, as it is not yet income 2018); producing, and in part due to further yield compression (non-income • The Fund completed on four acquisitions during the 12-month driven capital growth) across several of the Fund’s holdings. The period up to 30 June 2019, for a total maximum commitment of average monthly distribution per Unit for the year was £0.382, versus £618 million, bringing the total number of holdings in the Fund to £0.378 in the previous financial year. 201 individual property interests, across 47 holdings; Negative capital growth in the broader market has been driven • In the year, the Fund sold two BUPA care homes and completed primarily by the well-documented structural change in the retail on the sale of five Buzz Bingo clubs (formerly Gala Bingo) for a market (resulting in notable defaults, company voluntary combined sale price of £40 million. These sale initiatives form arrangements ‘CVA’ activity and increased vacancy). The Fund has part of the ongoing Asset Management strategy of the Fund to no retail exposure, with the exception of supermarket retail which monitor operational assets, seek best relative value for investors behaves very differently given the predominantly investment grade and maintain the portfolio quality through disposals; nature of tenants and limited impact of online sales. In addition, the Fund benefits from contractual rental growth which in turn flows • Post-year end, the Fund completed on the acquisition of David through to capital value growth (in a constant yield environment), Lloyd Colchester for a purchase price of £17 million, the disposal whereas the broader property market is subject to rental growth of two additional Buzz bingo assets in Wolverhampton and uncertainty, thus capital growth has slowed accordingly. Bridlington for a combined sale price of £3 million and the disposal of the final BUPA care home in the Avalon Unit Trust for Valuations remain well supported due to the weight of investor capital a sale price of £14 million; chasing long term inflation-linked cash flows from high quality real estate. Investor appetite remains especially strong due to the • The Fund’s undrawn capital queue stood at £591 million as at 30 ‘illiquidity premium’ offered above similarly rated corporate credit. As June 2019, comprising undrawn commitments from the Q2, Q3 at 30 June 2019 the Fund offered a 3.09% p.a. return premium above and Q4 2017 vintages, the Q3 and Q4 2018 and the Q1 and Q2 ‘BBB’ corporate credit (this is calculated by taking the market 2019 vintages. No capital commitments were received in Q1 or breakeven inflation rate and assumes no tenant defaults, no further Q2 2018. sales or purchases and no capital value growth). This illiquidity premium offers a degree of valuation protection should gilt rates and Fund performance credit spreads widen meaningfully. Over the year to 30 June 2019, the Fund provided a total return of 6.72% (net of all costs and charges), driven by continued strong rental income generation and rental growth as well as capital value uplifts across certain sectors and assets within the portfolio. UK inflation (RPI) was 2.88% over the year to 30 June 2019, resulting in a real return of 3.84% for the Fund (net of all costs and charges) which remains ahead of the Fund’s medium to long term anticipated return of RPI + 3% (unchanged over the last 12 months).

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 3 The M&G Secured Property Income Fund Manager’s report

Although not to the same magnitude as the industrial sector, the office Investment Advisor’s report sector is also benefiting from rising rents. Central London occupational demand has remained relatively healthy despite the Fund performance (continued) uncertainty created by Brexit and, indeed, rents are now rising in both the West End and City. As progress is made on Brexit, we expect We believe that over the medium to long term the Fund should demand for space in central London to strengthen further. Rents are continue to deliver attractive risk-adjusted performance, due to its also rising in the regional markets, as continued demand meets disciplined investment strategy focusing on high quality assets with limited supply, particularly of Grade A space. With development in the long term, growing and secure income streams. Since inception, the regions likely to remain restrained, this rental growth should continue Fund has delivered significantly stronger returns than the wider in the short to medium term. property market with a total annualised return of 5.73% (net of all costs and charges) versus 3.06% (net) as measured by the MSCI UK The living sectors remain underpinned by demand/supply All Balanced Property Fund Index, a total return pick up of 2.67% per imbalances. In particular, while the Private Rented Sector in London annum for a lower risk proposition (higher average tenant credit has been held back by supply and Brexit uncertainty, the market has rating, longer leases, contractual rental growth and higher quality real turned a corner and rents are starting to rise again. With real wages estate). continuing to rise and rental supply being absorbed, we expect growth to strengthen in the short to medium term. Regional cities with Economic overview significant demand and supply imbalances should also see healthy Economic activity was flat over the three months to July 2019, as rental growth in the medium term. stockpiling ahead of the original end-March Brexit date was unwound Given rental growth uncertainty and the backdrop of Brexit, a broader in the second quarter. Despite the installation of a new Prime Minister, spectrum of investors have demand for assets with long, secure significant political uncertainty remains with regard to Brexit and this is income streams, in particular in the sub-£50 million region and across expected to continue to restrain activity in the short-term. all sectors. As a result, we expect yields on long lease assets to hold While sentiment may be holding back growth, underlying up well or compress further, with those with RPI-linkage particularly in fundamentals remain relatively strong. The unemployment rate demand. remains close to its near 45 year lows, while the number of people Proposed changes to make the UK’s Retail Price Inflation (RPI) more employed has reached the highest level since records began. Despite representative, aligning it with a Consumer Price Inflation (CPI-H) the continued rise in employment, job vacancies remain elevated. alternative, have been delayed until at least 2025 by the Chancellor of This tightness of the labour market is placing significant pressure on the Exchequer. Whilst there has been some UK inflation linked wage levels and, indeed, at 3.7% p.a. (June 2019), earnings growth is government bond volatility as a result of these recent discussions, the now at its highest level since before the global financial crisis. This wider view is that it is very unlikely that RPI will cease to exist – it may should help to underpin consumer spending. be amended or downgraded (from an ‘official statistic’) but it strikes us At the same time, inflation has remained under control, with CPI as extremely difficult to actually retire it completely. This is because increasing by 2.1% p.a. in July 2019, only just above the 2% target there are too many instruments and other contracts that are rate. The combination of muted growth and political uncertainty referenced to it (including leases, annuities, student loans and suggest that interest rates are unlikely to be increased in the short pension scheme benefits). So whilst it is something that we are term (the Bank of England base rate has remained flat at 75bps since tracking, we do not consider it to be a high probability event in the August 2018) and, indeed, potentially it may be reduced should near term. economic conditions weaken. Portfolio structure Market overview The Fund continues to invest in UK property with long term The UK property market has slowed considerably over the year but contracted income streams. As at 30 June 2019, the Fund’s reported pockets remain attractive, including long lease property. However, NAV was £4,293 billion (+£459 million over the year) and comprised there remain significant differentials in performance at sector level. 201 individual assets across 47 holdings and 23 tenants. The Fund The industrial sector, benefiting from the on-going shift to online retail, has a high security of income with all investments backed by long continues to see the strongest performance of the mainstream term leases with inflation-linked or fixed rental increases, as well as sectors. This is largely a result of the continued strength of the ownership of the underlying real estate. Further, the Fund has an occupier market, boosting rental levels, as retailers continue to investment grade weighted average credit rating of ‘BBB-’. As at 30 enhance their multi-channel strategies in the face of limited good- June 2019, the weighted average lease term by income of the quality supply. We see this trend of above-average rental growth portfolio was 30.4 years (23.7 years assuming ground leases are continuing for multi-let industrials in particular, although a growing capped at 50 years), with the nearest lease expiry being 12.3 years supply pipeline in the big-box sector may act to restrict growth within (the original British Car Auctions portfolio). The Fund has 90.1% of the distribution warehouse sub-market. rental income linked to inflation with the remaining 9.9% of income Meanwhile, the retail sector continues to suffer as occupiers providing fixed percentage rental increases (average of 2.7% per implement rationalisation strategies and Company Voluntary annum). Arrangements and, as a result, the sector is seeing a combination of As at 30 June 2019, the Fund’s sector exposure (by income) stood falling rents and rising yields. Polarisation also exists within the retail as follows: 31.1% in Supermarket Retail, 17.5% in Leisure, 16.1% in sector itself, with the more defensive sectors like bulky goods and Office, 10.7% in Hotels, 8.1% in Healthcare, 6.5% in Quasi- supermarkets holding up relatively better. Their defensiveness is, in Industrial, 5.3% in Student Accommodation and 4.6% in Residential. part, a reflection of their greater resilience to the threat of online retail and, as a result, we expect them to continue to perform well relative to retail as a whole.

4 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Manager’s report

The Fund sold seven assets over the year to 30 June 2019, totalling Investment Advisor’s report £40 million, comprising: • Two BUPA Care Homes in Bristol and Stratford-upon-Avon. The Portfolio structure (continued) assets sold in two separate transactions for a total of £29 million, In terms of geographical allocation, the Fund’s exposure (by income) in line with book value. stands at: 35.4% located in London, 11.4% in the South East and • Five Buzz bingo clubs (formerly Gala Bingo) in three transactions 53.2% in the rest of the UK. for a total of £11 million and each individual asset was sold ahead Tenant industry sources of net rental income of the Fund are of book value. detailed below, with a decrease in income over the last year from the Post balance sheet date the Fund completed on the purchase of the Supermarket Retail sector (-0.9% to 31.1%) and Healthcare sector (- £17 million David Lloyd Health and Racquets club located in 1.2% to 8.1%) following the sale of the BUPA care home assets and Colchester, the disposal of two additional Buzz Bingo clubs in an increase in exposure to the Media sector (+2.7% to 6.7%), with Wolverhampton and Bridlington, as well as the disposal of the completion of WPP Southbank in Q4 2018. The remaining sources remaining BUPA Care Home in Solihull. Overall, the Fund continued of income were: Leisure 17.5%, Vehicle Remarketing 6.5%, Finance to grow over the financial year (reported NAV increased by circa £459 5.9%, Student Accommodation 5.3%, Residential 4.6% and Energy million, 12.0%). 3.5%. Trends in the long lease property market have remained largely The Fund will continue to grow and become more diversified with the unchanged in the last twelve months. Investor demand for secure, completion of its development assets: the Anglo American HQ long term income streams remains high, thus there has been redevelopment in Farringdon, London is expected to complete in Q3 continued yield compression across many sectors, in particular 2020 (although rent will commence in June 2020, regardless of the across ground rents and public sector let assets. In addition, status of the development) and the North Wharf Gardens, competition continues to be strong for openly marketed long lease Paddington hotel and aparthotel development is due to complete in assets, especially where there is an investment grade tenant or Q3 2021 (upon completion it will be let to Premier Inn and Staycity). guarantor on the lease, but not exclusively given the scarcity of long lease assets and the increase in long lease investors with higher risk Liquidity appetites. As a result, the Fund has seen limited value in assets The Fund has continued to attract investor interest over the year, where there has been a competitive bidding process in place. We despite having an already significant capital queue, with total capital continue to find relative value in off-market transactions, large lot sizes commitments of £235 million in the 12 months to 30 June 2019 and in circumstances where M&G’s strong credit expertise enables (versus £216 million in the prior year). Over the same period, investor us to structure transactions and understand complex or non-publicly drawdowns totalled £307 million. rated entities.

Whilst aiming to deploy investor capital as quickly as possible – The Fund continues to pursue further accretive opportunities. Given provided assets that are accretive to the portfolio can be sourced at M&G’s long track record and significant market presence and good relative value – running a capital queue provides investors with reputation for innovation in this sector, the Fund should continue to liquidity and enables meaningful conversations with vendors and have access to a good pipeline of investment opportunities. We are potential counterparties. We are currently guiding drawdown timings currently monitoring an active pipeline of investment opportunities of 24 months for new investor commitments to be drawn, given the and aim to deploy capital on an effective basis to provide further value size of the current capital queue. Assuming completion of the Anglo and diversification to investors. For new commitments we are American and Paddington developments the Fund’s net capital queue currently guiding 24 months to be drawn, given the current capital stands at £361 million as at 30 June 2019. queue size and market conditions. The Fund’s strategy remains highly scalable due to owning fewer Transaction activity holdings than a balanced property fund of a similar reported NAV, reduced physical asset management as all properties have full The Fund completed on four acquisitions over the year to 30 June repairing and insuring leases subject to contracted rent reviews. 2019, totalling £618 million, comprising: • £265 million forward funding of the Anglo American office redevelopment asset in Farringdon, Central London. Upon practical completion, the asset will be let to Anglo American for a term of 25 years subject to 5-yearly rent reviews (2.5% fixed uplifts). • £119 million prime central London office located on London’s South Bank, let to WPP Plc for a term of 25.5 years subject to annual RPI-linked rent reviews with a collar of 1.5% to 3%. • £25 million David Lloyd Royal Berkshire health club, located near Bracknell. • £208 million forward funding of a 642-room Premier Inn hotel and Staycity aparthotel in Paddington, London.

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 5 The M&G Secured Property Income Fund Manager’s report

The Fund continues to be fully invested in UK property and aims to Investment Advisor’s report minimise its cash balance via the use of its capital queue system and short term debt facility. This limits any cash drag on performance and Fund governance provides a liquidity mechanism for investors. Whilst the Fund does not have a specific target cash balance, over the year to 30 June 2019 the The Fund continues to operate within all its investment guidelines; cash balance in the Fund and all its sub-trusts has not exceeded 5% none of which have been breached since the Fund’s inception. This is of reported NAV. Whilst the Fund has the ability to invest in property reinforced by the strong governance framework within which the Fund derivatives it does not currently hold any and has not since the Fund’s operates, namely the level and range of experience on the Investment inception. Advisor’s Investment Committee (comprising senior staff members across M&G’s Fixed Income and Real Estate businesses) and the Outlook for the Fund independent board of the Manager. Please see the below table for a Long lease assets remain in high demand, particularly to cash flow summary of the Fund’s position versus each of its investment driven investors. Traditional forms of inflation-matching remain restrictions as at 30 June 2019: expensive, thus underpinning the relative value of long lease real estate assets. Investors are cognisant of this and have continued to Investment restriction Fund’s position as at 30 June 2019 Borrowing Max 30% (or if greater than 30% allocate significant capital to the sector. Demand therefore continues it must not last more than 3 months) 0.00% of GAV to support valuations and we expect this to remain the case. Any single counterparty (OTC Derivative), Furthermore, the weight of money chasing the sector has resulted in Max 20% of GAV -0.54% of GAV reduced risk premiums for certain assets, with investors competing to Any single body (Transferable Secs, Money Market), secure assets. The low yield environment has also increased the Max 20% of GAV 0.00% of GAV importance of investment fundamentals when assessing Any single body (Deposits), Max 20% of GAV 2.99% of GAV opportunities. Leisure sector assets (excluding hotels), Max 30% of GAV 15.56% of GAV The Fund’s strategy provides flexibility and patience to seek-out Under development or held relative value across all sectors and via a range of structures. We vacant pending development, Max 20% of GAV 1.99% of GAV* remain confident that we will be able to continue sourcing Any single group of tenants (excl. UK Govt), opportunities that offer an attractive risk return profile for investors. Max 35% of Gross Income 13.60% of Gross Income Any single Real Estate Asset, Max 30% of GAV 5.78% of GAV Min Credit Rating (Deposits, excl. Trustee), Ben Jones and Lee McDowell Min A-/A3 (Split Low) Confirmed M&G Investment Management Limited Speculative Abortive Costs, Max £100,000, w/out approval (Board) Not exceeded in year to 30 June 2019 23 October 2019 Ben Jones and Lee McDowell are employees of M&G FA Limited (formerly M&G * Whilst not included as at 30 June 2019, it should be noted that the Fund’s forward Limited) which is an associate of M&G (Guernsey) Limited. funding of the Anglo American HQ falls outside of the definition of a development given it is subject to a fixed lease start date guaranteed by an investment grade counterparty.

Each and every transaction (sale or purchase), as well as other asset management initiatives, are reviewed by the Investment Committee of the Investment Advisor, and by the Manager, which retains ultimate control of the Fund.

We also consider Environmental, Social and Governance (ESG) issues to be a relevant and important component of our investment philosophy and process. Our approach is to incorporate ESG issues into our investment analysis wherever material to risk or return. The most relevant ESG issues will differ from sector to sector, and from company to company. For example, governance factors are normally very material for financial institutions while environmental factors may be less relevant for such companies. M&G is a long term investor and since ESG issues often develop over the longer term, it is essential that we incorporate ESG issues into our investment analysis. We should also note that the Fund’s lease structures (which are full repairing and insuring leases) mean that much of the responsibility and influence over the usual property related ESG considerations remain with the tenant rather than the landlord (in this case the Fund). In the 2019 Global Real Estate Sustainability Benchmark survey, the Fund achieved a score of 68 and two green stars.

6 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Manager’s report

Portfolio statement (continued) Investments Property by Market Sector and Value Band as at 30 June 2019 2018 Portfolio of investments [a] Location % % Properties with value over £20 million up to £50 million 6.55 7.20 Portfolio statement Priory Group, Stump Lane Chelmsford Property by Market Sector and Value Band as at 30 June Priory Group, The Bourne North London 2019 2018 Lyme Regis House Bournemouth [a] Portfolio of investments Location % % Dunaskin Street Glasgow RETAIL 23.68 26.05 Bridewell Street Bristol Properties with value over £90 million up to £150 million 2.37 2.56 Unite House, Frogmore Street Bristol Sainsbury’s, 45 & 33 Garratt Lane London Priory Group, Heath House Lane Bristol Properties with value over £50 million up to £90 million 16.09 17.82 Priory Group, Rappax Road Altrincham Morrisons Supermarket, Coventry Road Sheldon Sainsbury’s, Treyew Road Truro Properties with value up to £20 million 1.22 2.11 Okeford House Bournemouth Tesco Supermarket, Hythe Road Ashford Chesil House Bournemouth Sainsbury’s, Southgate Huddersfield Priory Nursing & Residential Home, Shirley Solihull Sainsbury’s, Otford Road Sevenoaks Priory Group, Chobham Road Woking Tesco Supermarket, Culverhouse Cross Cardiff Tesco Supermarket, Riverview Drive Bedford OTHER INVESTMENTS 9.15 9.85 Tesco Supermarket, Parc Trostre Llanelli 99.95% holding in The Swansea Unit Trust (unconsolidated) Tesco Supermarket, Old Road Royston 40% holding in The Tesco Jade Unit Trust (unconsolidated) Sainsbury’s, Dog Kennel Hill Dulwich 40% holding in The Jade (GP) Limited (unconsolidated) Sainsbury’s, William Hunter Way Brentwood 50% holding in The Car Auctions Unit Trust (unconsolidated) Properties with value over £20 million up to £50 million 5.22 5.67 Total portfolio valuation 98.43 98.94 Tesco Supermarket, Springlands Way Sudbury Derivatives (0.53) (0.51) Sainsbury’s, Worthington Way Wigan Net other assets 2.10 1.57 Morrisons Supermarket, Edgeley Road Stockport Net assets attributable to Unitholders Morrisons Supermarket, Plumpton Park Harrogate and non-controlling interests (“NCI”) 100.00 100.00 Morrisons Supermarket, West Bailey Killingworth Morrisons Supermarket, Limebrook Way Maldon [a] Portfolio statement bands have been revised and comparative values of the bands restated based on the 30 June 2019 valuations. OFFICE 19.40 15.04 Properties with value over £150 million up to £260 million 5.99 6.67 [b] 45 (2018: 45) properties located in the United Kingdom ranging in value from 250 Bishopsgate London £3,690,000 to £30,140,000, of which one was acquired during the year. Properties with value over £90 million up to £150 million 11.51 6.33 [c] 42 (2018: 47) properties located in the United Kingdom ranging in value from St Vincent Street Glasgow £790,000 to £8,940,000. Rose Court London [d] 39 (2018: 39) properties located in the United Kingdom ranging in value from Southwark Bridge Road London £1,090,000 to £7,980,000. 17 Charterhouse Street, Farringdon London [e] Stratford, Halo moved bands. Properties with value over £50 million up to £90 million 1.90 2.04 Dorland House, Westbourne Terrace London LEISURE (INCLUDING HOTELS) 31.24 31.11 Portfolio transactions Properties with value over £90 million up to £150 million 5.16 5.60 Premier Inn, Arrivals Road Gatwick Acquisitions, development and refurbishment costs Premier Inn, Tothill Street London Property Name Location £’000 Properties with value over £50 million up to £90 million 1.86 - North Wharf Gardens, Paddington London Acquisitions Properties with value over £20 million up to £50 million 6.76 5.62 Southwark Bridge Road London Tennis Clubs Portfolio [b] Various David Lloyd Royal Berkshire Bracknell Travelodge Hotel, Povey Cross Road Gatwick Total cost of acquisitions for the year 155,431 Premier Inn, 29-37 Red Lion Street London Travelodge Hotel, 3 Harewood Row London Total cost of acquisitions for the year as a percentage of NAV 3.58% Hilton Hotel, Terminal 5 Heathrow Clayton Hotel, St. Mary’s Street Cardiff Development and refurbishment David Lloyd Royal Berkshire Bracknell 17 Charterhouse Street, Farringdon London North Wharf Gardens, Paddington London Properties with value up to £20 million 17.46 19.89 Tennis Clubs Portfolio [b] Various Total development and refurbishment costs for the year 222,991 Bingo Halls Portfolio [c] Various Total development and refurbishment Health Clubs Portfolio [d] Various costs for the year as a percentage of NAV 5.14% 14-18 Noel Street London Travelodge Hotel, 3 Waterloo Place Edinburgh Disposals 104-108 Bolsover Street London Property Name Location £’000 OTHER 14.96 16.89 Gala Bingo Hall, Belle Vue Manchester Properties with value over £150 million up to £260 million 3.76 - Gala Bingo Hall, Christchurch Road Bournemouth Stratford, Halo London Gala Bingo Hall Bradford [e] Properties with value over £90 million up to £150 million - 3.80 Gala Bingo Hall, Brade Drive Coventry Properties with value over £50 million up to £90 million 3.43 3.78 Gala Bingo Hall Derby Aberfeldy New Village London Alveston Leys Nursing Home Stratford-upon-Avon Priory Group, Priory Lane Roehampton Druid Stoke Nursing Home Bristol Total for the year 39,697

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 7 The M&G Secured Property Income Fund Financial highlights

The preceeding table includes transaction costs incurred by Fund performance subsidiaries and associates, as a percentage of the total purchase cost.

The impact of transaction costs related to the selling of property- Long-term performance related assets will be reduced by the dilution levy charged to Year ended 30.06.19 3 years (p.a.) Since inception (p.a.) redeeming investors where applicable. Total Total Total Capital Return Capital Return Capital [a] Return [a] % % % % % % Institutional Specific Unit class performance ‘A’ Units 2.60 6.72 3.10 7.34 1.36 5.73

[a] Since launch on 1 August 2007. The following table shows the performance of the Institutional ‘A’ Operating charges and Unit class based on the reported NAV. transaction costs Institutional ‘A’ Unit performance The Unit class was launched on 1 August 2007. We explain below the payments made to meet the ongoing costs of investing and managing the Fund, comprised of operating charges Year ended 30 June 2019 2018 2017 Change in NAV per Unit £ £ £ and portfolio transaction costs. Opening NAV per Unit 114.44 109.69 107.12 Operating charges Return before operating charges and after direct transaction costs 3.70 5.49 3.32 Operating charges include payments made to the Manager, its Operating charges (0.73) (0.74) (0.75) associates and independent service providers as follows: Return after all charges and costs 2.97 4.75 2.57 • Manager’s fee: Fee paid to M&G (Guernsey) Limited in its Closing NAV per Unit 117.41 114.44 109.69 capacity as Manager of the Fund. Direct transaction costs £ £ £ • Investment Advisory fee: Fee paid to M&G Investment Direct transaction costs per Unit 0.58 0.04 0.32 Management Limited for investment advisory services. Performance and charges % % % • Administration fee: Fee paid to JTC Fund Solutions (Guernsey) Direct transaction costs 0.50 0.04 0.30 Limited in its capacity as Administrator of the Fund. Operating charges 0.63 0.66 0.69 • Trustee fee: Fee paid to Kleinwort Benson (Guernsey) Limited Return after all charges and costs 2.60 4.33 2.40 in its capacity as Trustee of the Fund. Distribution yield [a] 3.78 3.88 3.95 • Real Estate Asset Management fee : Fee paid to M&G Real Estate [a] In relation to dealing NAV (NAV after taking into account any dilution Limited in its capacity as Real Estate Asset Manager of the Fund. adjustments). • Other property expenses : Other costs associated with the Other information management and operation of the property portfolio itself. Closing reported NAV of the Fund (£’000) 4,293,270 3,834,238 3,603,439 Number of Units in issue 36,567,175 33,505,584 32,850,852 Transaction costs Highest dealing price per Unit (£) 122.398 119.116 114.188 Lowest dealing price per Unit (£) 119.256 114.477 111.137 Portfolio transaction costs include the costs of acquiring or disposing, as the case may be, of all of the assets forming the Scheme Property, being agents’ commissions, legal, fiscal and financial advisory fees Dealing Price and additionally in the case of acquisitions, surveyors’ fees and taxes, On 1 July 2019 and 2018, the Dealing Day immediately following the accounting including Stamp Duty Land Tax (‘SDLT’). reference date, the Dealing Pric e was as follows: Dealing Price Dealing Price To protect existing investors, portfolio transaction costs incurred as a £ £ 2019 2018 result of investors buying and selling Units in the Fund are recovered Institutional ‘A’ Units 122.398 119.116 from those investors through a ‘dilution adjustment’ to the price they pay or receive. The following table shows direct portfolio transaction costs paid by the Fund before and after that part of the dilution Dealing Price history adjustment relating to direct portfolio transaction costs. High Low Calendar year £ £ Direct transaction costs Institutional ‘A’ Units 2017 116.928 111.602 2018 121.141 117.466 2019 2018 2017 % % % 2019 [a] 122.398 121.263 SDLT 4.57 3.29 3.04 [a] To 30 June 2019. Legal & survey fees 0.51 0.28 0.17 Agent fees 0.49 - 0.16 Investment Advisor acquisition fee 0.45 - 0.09 Other 0.10 0.15 0.28 Direct transaction costs before dilution adjustment 6.12 3.72 3.74 Dilution adjustment in respect of direct transaction costs (4.25) (4.09) (4.10) Direct transaction costs 1.87 (0.37) (0.36)

8 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

Consolidated Financial Statements Consolidated balance sheet as at 30 June 2019 2018 Note £’000 £’000 Assets Fixed assets Consolidated statement of total return Investment property under for the year ended 30 June 2019 2018 construction 12 212,078 - Note £’000 £’000 £’000 £’000 Investment property 12 3,655,482 3,462,945 Income Other investments 13 397,169 383,712 Net capital gains on investments 5 76,851 170,013 Net investment in finance leases 14 8,314 8,517 Revenue 6 191,707 179,960 Lease inducement asset 6,176 - Expenses 7 (23,675) (22,902) Finance costs: Interest 9 (1,474) (1,781) 4,279,219 3,855,174 ______Current assets Net revenue 166,558 155,277 Lease inducement asset 268 2,659 Total return before distributions 243,409 325,290 Debtors 16 11,924 7,060 Finance costs: Distributions 9 (166,780) (155,389) Cash and cash equivalents 166,428 138,465 Change in net assets attributable to Unitholders and 178,620 148,184 non-controlling interests from Total assets 4,457,839 4,003,358 investment activities 76,629 169,901 Non-controlling interests (9,191) (5,876) Liabilities Change in net assets Derivative liability 18 23,175 19,874 attributable to Unitholders Creditors 19 50,625 47,005 from investment activities 67,438 164,025 Distributions payable 9 42,188 39,994 All items in the Consolidated statement of total return derive from Total liabilities 115,988 106,873 continuing operations. Net assets attributable to Unitholders 4,176,116 3,739,959 Non-controlling interests 165,735 156,526 Net assets attributable to Unitholders Consolidated statement of change in net assets and non-controlling interests 4,341,851 3,896,485 attributable to Unitholders for the year ended 30 June 2019 2018 Reconciliation to Fund Balance Sheet £’000 £’000 £’000 £’000 Net assets attributable to Unitholders Opening net assets attributable excluding non-controlling interests to Unitholders 3,739,959 3,499,552 as per Fund Balance Sheet 4,293,270 3,834,238 Amounts received on issue of Units 354,150 92,798 Adjustment for estimated Amounts paid on cancellation SDLT savings 1(d), 1(e) (117,154) (94,279) o f U n it s _ _ _(_4_5_6) _(_19_,_4_7_6) Net assets attributable to Unitholders 353,694 73,322 excluding non-controlling interests in accordance with FRS 102 4,176,116 3,739,959 Dilution adjustment 15,025 3,060 Change in net assets attributable The Financial Statements on pages 9 to 24 were signed on behalf of to Unitholders from investment the Board of Directors of M&G (Guernsey) Limited on 23 October activities (see above ) 67,438 164,025 2019 by: Closing net assets attributable to Unitholders 4,176,116 3,739,959 J J Gilligan Directors of the Manager T I Cumming }

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 9 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

Consolidated Financial Statements Consolidated cash flow statement for the year ended 30 June 2019 2018 Note £’000 £’000 Net cash inflow from operating activities 10 145,730 139,190 Fund balance sheet Investing activities as at 30 June 2019 2018 Distributions received 19,171 18,807 Note £’000 £’000 Interest received 1,787 28 Assets Finance lease receipts 454 454 Fixed assets Lease inducement paid (3,968) - Investments in subsidiaries 20 3,712,176 3,314,242 Purchase of investment property and Other investments 13 397,169 383,712 investment property under construction (378,422) (32,462) Investment property 117,470 86,721 Investments in associates (9) (11,226) 4,226,815 3,784,675 Disposal of investment property 39,697 1,125 Disposal of unconsolidated subsidiaries 820 872 Current assets Debtors 16 44,675 42,070 Net cash outflow from investing activities (320,470) (22,402) Cash and cash equivalents 70,056 52,608 Financing activities 114,731 94,678 Amounts received on issue of Units 369,175 95,858 Total assets 4,341,546 3,879,353 Amounts received on Units issued to NCI 70 4,780 Amounts paid on cancellation of Units (456) (19,476) Liabilities Amounts paid on cancellation of Units to NCI (26) - Creditors 19 7,427 6,365 Amounts received from banking facility 210,000 - Distributions payable 40,849 38,750 Amounts repaid on banking facility (210,000) - Total liabilities 48,276 45,115 Distributions paid (159,264) (147,535) Net assets attributable to Unitholders 4,293,270 3,834,238 Distributions paid to NCI (5,322) (4,931) Finance costs: Interest (1,474) (1,781) Reconciliation to reported NAV Net cashflow from financing activities 202,703 (73,085) Net assets attributable to Unitholders based Net increase in cash 27,963 43,703 on reported NAV 4,293,270 3,834,238 Opening cash 138,465 94,762 Net assets attributable to Unitholders 4,293,270 3,834,238 Closing cash at bank and on deposit 166,428 138,465

The Financial Statements on pages 9 to 24 were signed on behalf of the Board of Directors of M&G (Guernsey) Limited on 23 October 2019 by:

J J Gilligan Directors of the Manager T I Cumming }

10 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

All intra-group transactions, balances, income and expenses are Notes to the Financial Statements eliminated on consolidation.

d) Investments in unconsolidated subsidiaries 1 Accounting policies Investments in unconsolidated subsidiaries are initially recognised at cost and include all costs related to the acquisition a) Basis of accounting of the subsidiary. These Consolidated Financial Statements have been prepared in Investments in unconsolidated subsidiaries are held as part of an accordance with FRS 102, the Financial Reporting Standard investment portfolio and are subsequently measured at fair value, applicable in the United Kingdom and the Republic of Ireland, which is based on the net asset value of the relevant including all subsequent amendments and in accordance with the unconsolidated subsidiary as at the period end date. As Statement of Recommended Practice ‘Financial Statements of unconsolidated subsidiaries are SDLT exempt entities, the Authorised Funds’, issued by the Investment Association, in May, valuation of the investment may include an uplift element which 2014 (the ‘IA SORP’). reflects the SDLT saving that would be achieved by disposing of These Consolidated Financial Statements have been prepared the subsidiary rather than the property. These are included within under the historical cost convention, as modified for the ‘other investments’. revaluation of investment property, investment property under e) Investments in associates construction, other investments and derivatives. Investments in associates are held as part of an investment The Consolidated Financial Statements have been prepared on portfolio and are measured at fair value through the profit or loss. the going concern basis. The Manager considers that it is This is on the basis that their value to the Fund is through their appropriate to apply the going concern basis of accounting and marketable value, rather than as a medium through which the that there are no material uncertainties related to going concern Fund carries out its business. The investments are carried at their because the Fund’s existing liquid assets, borrowing facility and net asset value and distributions are recognised on an accruals commitments from investors are sufficient to meet its liabilities, basis in the period to which they relate. Where the associate is a contingencies and commitments as they fall due. In the event of SDLT exempt entity, the valuation of the investment may include significant redemption requests, the Fund has a substantial an uplift element which reflects a SDLT saving that would be capital queue as explained in note 23; furthermore it has the achieved by disposing of the Fund’s interest in the associate ability to defer redemption requests to allow an orderly disposal of rather than the property. These are included within ‘other assets if necessary, as disclosed in note 3(a). investments’. b) Functional and presentational currency f) Investment properties and investment properties under The Consolidated Financial Statements are presented in Pounds construction Sterling (£), which is the Fund’s functional and presentational currency. Property assets consist of investment property and, in the case of sites in the course of development, investment property under c) Basis of consolidation construction. Initially property assets are recognised at cost, The Consolidated Financial Statements of the Group incorporate including SDLT and other transaction costs, and reduced for the financial statements of the Fund and its consolidated amounts received from the vendor, associated with the purchase subsidiaries drawn up to 30 June 2019. Under FRS 102, Section of the property asset. Acquisitions and disposals are accounted 9 Consolidated and Separate Financial Statements, control is for on exchange of contracts or thereafter when all conditions presumed when a parent owns more than half of the voting have been met. power of an entity. Property assets are subsequently measured at fair value and are Where subsidiaries hold investment property the IA SORP states valued by an independent valuer at fair value as defined in the that the Fund is required to consolidate such entities. Where a Appraisal and Valuation Standards manual issued by the Royal subsidiary holds investments that do not meet the definition of Institution of Chartered Surveyors of the United Kingdom. investment property, the entity is not consolidated and is held at g) Development loans and interest income fair value as it is held as a part of an investment portfolio. The Fund has entered into development loan agreements with The results of investment property holding subsidiaries acquired third party developers in respect of certain properties under are consolidated from the date on which control passes. development. The development loans receivable are shown in Acquisitions are accounted for under the acquisition method. the Consolidated balance sheet at amortised cost within ‘other The results of investment property holding subsidiaries sold investments’. These loans are repayable at the option of the during the year are deconsolidated from the date on which control developer at any time. The loans are repayable by the developers passes. in the event that the building work is not completed in accordance with the purchase contract. Interest is charged under the terms Non-controlling interests in the net assets of the consolidated detailed in the respective development loan agreements and subsidiaries are distinguished from the Group’s net assets taken to the Consolidated statement of total return in the period in attributable to Unitholders therein and are classified as liabilities. which it accrues. Non-controlling interests consist of the amounts of those interests at the date of the original acquisition and the non- controlling interest’s share of changes in net assets since the date of acquisition.

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 11 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

m) Unitholders’ funds Notes to the Financial Statements In accordance with Section 22 of FRS 102 and the IA SORP 2014 paragraph 2.80, Fund Units are classified as equity instruments only when they meet all three of the following 1 Accounting policies (continued) conditions: 1) The Fund is a stand-alone fund or is the sub-fund of h) Investment in finance leases an umbrella; 2) the Fund has only a single class of Units; and 3) the Fund is not obliged to distribute by way of cash (where, for Where leases transfer the significant risks and rewards of owning example, only accumulation Units are in issue) any part of the the asset to the tenant, the lease is accounted for as a finance total return to Unitholders. Since the third condition is not met, the lease in accordance with Section 20 of FRS 102. At lease Fund Units are classified as financial liabilities. Distributions on inception the fair value of the asset is de-recognised from asset these Units are recognised in the Consolidated statement of total under construction and a finance lease receivable recognised, at return as ‘Finance costs: Distributions’. the fair value of the asset. n) Net capital gains and losses Finance lease income is recognised over the period of the lease at a constant rate of return, using known amounts to be received Realised and unrealised gains or losses on disposal and at lease inception. The difference between the gross receivable revaluations of property assets and other investments are treated and the present value of the receivable is recognised as finance as movements on capital and classified as ‘net capital gains or income within Income over the lease term. Additional amounts losses on investments’ in the Consolidated statement of total received in future years which are not known at lease inception, return. such as those arising from inflation-linked rent reviews, are o) Recognition of income treated as additional income in the period which it relates to. All income is accounted for on an accruals basis net of VAT. The finance leases are reviewed for impairment at the end of each reporting period. Rental income and contingent rents, being those that are not fixed at the inception of the lease, are recorded as income in the period i) Lease incentives in which earned. Changes arising from rent reviews are reflected The Fund may agree to pay incentive fees to the lessee in as income, based on estimates, when it is reasonable to assume connection with the lease contracts for the properties held by the they will be received. Fund. These fees are capitalised within the carrying amount of Interest receivable is accounted for on an effective interest rate basis. the related investment property and amortised over the lease term. Lease incentives are recognised as a reduction of rental Interest receivable on development loans is described in note 1g. income on a straight-line basis over the lease term. Distributions receivable from investments are recognised on an j) Derivatives accruals basis and accounted for in the Statement of total return.

Where derivative contracts are used to manage risk exposure, If it is expected that revenue receivable at the balance sheet date the derivative financial instruments are initially measured at fair will not be received, a provision is recognised for the amount that value on the date on which a derivative contract is entered into. is considered irrecoverable.

Subsequently derivative contracts are measured at fair value p) Expenses through the Consolidated statement of total return and carried as assets when the fair value is positive or as liabilities when the fair For accounting purposes, all expenses (other than those relating value is negative. to the purchase and sale of investments and SDLT) are charged against income for the period on an accruals basis. k) Cash and cash equivalents Transaction costs associated with failed investment property Cash and cash equivalents comprise cash at bank and on hand acquisitions and disposals are charged as expenses to the and demand deposits with an original maturity of three months or Consolidated statement of total return in the period the less and other short term, highly liquid investments that are transaction is aborted. readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. q) Loan facility fees

l) Bank loans and interest The direct issue costs of raising finance are amortised over the life of the loan facility. Bank loans are recognised initially at fair value, net of transaction costs incurred and subsequently stated at amortised cost. Any r) Finance costs: Distributions difference between the proceeds (net of transaction costs) and Distributions treated as finance costs are calculated in the redemption value is recognised in the Consolidated accordance with note 2 and recognised gross of any applicable statement of total return over the period of the loan using the withholding tax within the period to which they relate. effective interest method. Interest expense is recognised within ‘Finance costs: Interest’ in the Consolidated statement of total return using the effective interest rate method.

12 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

3. Risk Mitigation: a risk mitigation strategy for a new risk or a new Notes to the Financial Statements mitigation for an existing risk is approved by the Board of Directors of the Manager following a recommendation from the Manager’s Risk Director. Such mitigation strategy could be the 2 Distribution policy addition of a new control, the amendment of an existing control, the avoidance of the risk by the cessation of the activity or the Net income (which is defined as the income and other receipts and transfer of the risk by insuring or outsourcing the activity. accruals of the Fund less expenses, fees, costs and other deductions payable, but gross of any income tax withheld or treated as withheld 4. Risk Monitoring: all risks are reviewed by the Manager’s Risk from Unitholders) attributable to Unitholders belongs beneficially to Director on a quarterly or more frequent basis, as required. the Unitholders and does not form part of the Scheme Property, in 5. Risk Reporting: all risks are formally reviewed by the Board of accordance with the Fund’s status as a Baker Trust. It is the Fund’s Directors of the Manager on a quarterly basis. policy therefore to distribute all net income. a) Liquidity risk and capital management Net income is not included in the calculation of the creation or subscription prices of Units. Liquidity risk is the risk that the Group may encounter in attempting to realise assets or otherwise raise funds to meet financial Net income attributable to holders of Institutional ‘A’ Units, becomes commitments as and when they fall due. available for distribution on the accounting reference date being the last day of each calendar quarter, and is allocated to those Investors The Group’s liquidity can be affected by unexpected or high levels who held units at any time during that calendar quarter. This of Unit redemptions. In addition to investor commitments, the entitlement to a share of the net income of the Fund is calculated by Manager reserves the right to defer accepted redemption requests reference to the Investor’s holding of Units and their tenure in the for a period of up to six successive Dealing Days as defined in the Fund for the period, and is paid within 30 business days following the Information Memorandum. At the end of this period, a minimum of end of the relevant calendar quarter. 10% of the Units comprising each accepted redemption request will be redeemed on each successive Dealing Day until settlement It is the policy of the Fund to pay distributions from net income. The has been made in full. amount available for distribution is calculated in accordance with the policy as set out above. The Manager may borrow for the account of the Group including for the purpose of meeting redemption requests and to meet The Manager is not obliged to make distributions if it would render the timing differences in connection with the acquisition and disposal Fund insolvent, or if the distribution may leave the Fund unable to of investments. Cash is held to meet the Group’s short term meet any future obligations and liabilities. liabilities. The Fund has a revolving credit facility with Royal Bank of Scotland International Ltd, as described in note 17. 3 Risk management policies The Group has long-term commitments to the developers under The Fund’s overall investment objective is to deliver a secure long- agreements and in relation to the Fund’s investment in term income stream with inflation-linked or fixed uplifts through subsidiaries. Meeting these requirements are managed in investment primarily in UK real estate. The Group's activities expose accordance with the capital structure. it to various types of risk, particularly those associated with the property market. In addition, the Group holds cash and liquid The Manager considers that the Fund’s capital consists of its net resources as well as having debtors and creditors that arise directly assets attributable to Unitholders together with the Fund’s from its operations. borrowing facilities and its capital queue. The Manager manages the Fund’s capital to enable the Fund to continue as a going The main risks arising from the Group’s portfolio of investments and concern and meet its liabilities as they fall due and to minimise the investment property are liquidity risk, market price risk, credit risk, cost of borrowing within the constraint of meeting liabilities as they interest rate risk and development risk. fall due. When funding new developments or acquiring new assets The Manager and Investment Advisor monitor and seek to manage the Manager assesses whether it is in the best interests of these risks by using appropriate reporting mechanisms which identify Unitholders as a whole to utilise existing borrowing facilities, risk activities and allow the Group to control or avoid risks identified. negotiate new facilities or draw down from the capital queue. The Manager also considers whether it is in the best interests of The Manager operates a risk management framework containing five Unitholders to use existing liquid assets or the different sources of key steps: capital to meet redemption requests or to defer such redemptions. 1. Risk Identification: new risks are identified and escalated to the Risk Director and included in the quarterly reporting cycle to the The Fund is not subject to any regulatory capital requirements. Board of Directors of the Manager. Significant new risks may be escalated immediately by the Manager’s Risk Director to the Board in exceptional circumstances.

2. Risk Assessment: risks are assessed against a Group-wide risk assessment scale and ratings are reviewed on a quarterly basis. Themed stress testing is carried out and the results are reported by the Manager’s Risk Director to the Board of Directors of the Manager.

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 13 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

Credit risk arises from cash and cash equivalents held at banks. Notes to the Financial Statements The Group structures the levels of credit risk it accepts by placing limits on its exposure to a single counterparty, or groups of counterparties, and to geographical and industry segments. Such 3 Risk management policies (continued) risks are subject to frequent reviews. Cash is placed on deposit with reputable financial institutions. The Fund has policies that b) Market price risk limit the amount of credit exposure to any financial institution. The Market price risk is primarily the risk that the Fund is exposed to Group holds cash and cash equivalents for operational use with adverse real estate valuation movements. Real estate values of HSBC UK Bank plc and The Royal Bank of Scotland plc, each the Fund can be affected by a number of factors that are beyond with Moody’s ratings of Aa3 and Baa2 respectively (2018: Aa3 the control of the Manager. These include, but are not limited to, and Baa2 respectively). changes to global or local economic conditions, local market Limits on the level of credit risk by category and territory are conditions, the financial conditions of tenants, changes in interest approved by the Manager. The utilisation of credit limits is rates, real estate tax rates and other operational expenses, regularly monitored. environmental laws and regulations, planning laws and other governmental legislation, energy prices and the relative d) Interest rate risk attractiveness of real estate types or locations. In addition, real The Fund is subject to interest rate risk in respect of cash estate is subject to long-term cyclical trends that give rise to deposits, as well as interest paid on overdrafts and bank loans significant volatility in values. held. Interest is earned and accrued based on bank base rates. The value of investment properties and investment properties Since the objective of the Fund is to deliver returns over the long under construction is determined by the Independent Valuer, term, transactions with the sole objective of realising short term CBRE, and is therefore subjective. The Independent Valuer has returns are generally not undertaken. Finance leases, earning a acquired significant experience in the real estate sectors targeted fixed rate of interest, expose the Fund to market risk from adverse by the Fund. movements in rates.

No assurance can be given that any given real estate asset could e) Development risks be sold at a price equal to the fair value ascribed to it. Valuation The development or redevelopment of properties carries a methodol ogies applied are outlined in note 4. number of risks. During the development phase the risk partly lies c) Credit risk with the developer not being able to deliver the property as agreed. Other risks associated with development or Credit risk is the risk that an issuer or counterparty in respect of redevelopment include the risk that delays in the construction rental income receivable, finance lease receivables, distributions timetable result in real estate not reaching a stage where it is receivable, development loans receivable and cash balances, will reasonably fit for occupancy and the risk of bad craftsmanship by be unable or unwilling to meet a commitment that it has entered contractors. Furthermore, should the project costs exceed into with the Group. During the development phase, the credit risk budgeted costs, the Group would incur additional monitoring and exposure comes from the developer but on completion will shift to progress costs. Similarly, there may be planning risks arising from the tenant. In respect of the property portfolio, in the event of difficulties in obtaining planning consents and licences which default by an occupational tenant, the Group will suffer an income delay the construction timetable. Development risks are shortfall and incur additional cost including legal expenses, substantially mitigated by provisions including lease pre- maintaining, insuring and re-letting the property. This risk is commitments, fixed price development contracts, guarantees reduced by investing in a diversified portfolio of properties. from appropriate capitalised parties and contracted sunset dates. Additionally, the income from any one tenant or tenants within the same group must not exceed 35% of the aggregate income in These risk management policies have been consistently applied relation to the property investments in any accounting period since the beginning of the financial year. unless that tenant is the UK Government or guaranteed by the UK Government.

The Fund has policies in place to ensure that contracts are entered into only with lessees and developers with an appropriate credit history and that an appropriate balance exists between tenant credit quality and the underlying real estate fundamentals where appropriate, whilst achieving income growth by investing in assets with leases or other contracts that incorporate regular rent reviews providing inflation-linked or fixed uplifts.

14 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

a) Sales / Direct Comparison Approach Notes to the Financial Statements The comparative approach considers the sales of similar or substitute properties and related market data, and establishes a value estimate by processes involving comparison. In general, a 4 Critical accounting estimates and judgements property being valued (a subject property) is compared with sales The preparation of Consolidated Financial Statements in conformity of similar properties that have been transacted in the market. with FRS 102 requires management to make judgements, estimates Listings and offerings may also be considered. and assumptions that affect the application of policies and the This approach establishes limits on the fair value for real property reported amounts of assets and liabilities, revenues and expenses. by examining the prices commonly paid for properties that However, uncertainty about these assumptions and estimates could compete with the subject property for buyers. Sales are result in outcomes that require a material adjustment to the carrying investigated to ensure that the parties to the transaction were amount of the assets or the liabilities reflected in future periods. typically motivated.

In the process of applying the Group’s accounting policies, b) Income Capitalisation Approach management has made various judgements. These judgements are considered to be in line with standard market practice and where The income capitalisation approach considers income and relevant have been disclosed in the associated accounting policies expense data relating to the property being valued and estimates (refer to notes 1(a), 1(d), 1(e) and 1(f)) and the appropriate value through a capitalisation process. Capitalisation relates disclosures have been made. The key estimates concerning the income (usually a net income figure) and a defined value type by future and other key sources of estimation uncertainty at the end of converting an income amount into a value estimate. This process the reporting period that have a significant risk of causing a material may consider direct relationships (known as capitalisation rates), adjustment to the carrying amounts of assets and liabilities within the yield or discount rates (reflecting measures of return on next financial year are discussed below. investment), or both.

Fair value of investment properties, investment properties under The income capitalisation approach is particularly important for construction and finance leases properties that are purchased and sold on the basis of their earnings capabilities and characteristics and in situations where Investment properties and investment properties under construction there is market evidence to support the various elements are stated at fair value. Finance leases held in unconsolidated incorporated into the analysis. The income capitalisation subsidiaries are stated at fair value. For directly held finance leases, approach is based on the same principles that apply to other at lease inception a finance lease receivable is recognised at the fair valuation approaches. In particular, it perceives value as created value of the asset. by the expectation of future benefits (income streams). Income All fair values have been determined based on valuations performed capitalisation employs processes that consider the present value by CBRE in their capacity as accredited independent valuers, as at 30 of anticipated future income benefits. June 2019. CBRE have acquired significant expertise in valuing these c) Discounted Cash Flow (DCF) Analysis types of investment properties, investment properties under construction and finance leases. The Valuers derive the fair value by DCF is a financial modelling technique based on explicit applying the methodology and valuation guidelines as set out in the assumptions regarding the prospective cash flow to a property or practice statements of the current Royal Institution of Chartered business. As an accepted methodology within the income Surveyors’ ‘Appraisal and Valuation Manual’ and the requirements of approach to valuation, DCF analysis involves the projection of a ‘FRS 102’. The assets were valued in their entirety by the series of periodic cash flows either to an operating property, a Independent Valuers as at 30 June 2019. development property, or a business. To this projected cash flow series, an appropriate, market-derived discount rate is applied to Fair value is estimated through application of valuation methods and establish an indication of the present value of the income stream procedures that reflect the nature of the property and the associated with the property or business. In the case of operating circumstances under which the given property would most likely trade real properties, periodic cash flow is typically estimated as gross in the market. The most common method used to estimate fair value income less vacancy and collection losses and less operating of investment properties and finance leases is the sales comparison expenses / outgoings. approach. The income capitalisation approach, including discounted cash flow (DCF) analysis, is then used to support and confirm the The series of periodic net operating incomes, along with an conclusions drawn from the sales comparison approach. For finance estimate of the reversion / terminal value, anticipated at the end leases, as there is no residual value a greater reliance is placed on of the projection period, is then discounted. The most widely used the cash flows. The Valuers have regard for not only the vacant applications of DCF analysis are the Internal Rate of Return possession value of the sites but also the trading performance of the (IRR) and Net Present Value (NPV). operational assets. The most common method used to estimate the As with all other components of DCF analysis, the discount rate fair value of investment properties under construction is the residual should also reflect market data, i.e., other market derived discount value method. rates. Discount rates should be selected from comparable The determined fair value of the investment properties and properties or businesses in the market. In order for these investment properties under construction is most sensitive to the properties to be comparable, the revenue, expenses, risk, estimated yield as well as the long term vacancy rate. inflation, real rates of return, and income projections for the properties must be similar to those of the subject property. Present value calculations of cash flows are most often

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 15 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

5 Net capital gains on investments Notes to the Financial Statements 2019 2018 £’000 £’000 Realised gains on sale of investment property 3,129 364 4 Critical accounting estimates and judgements Unrealised gains on investment properties 73,673 138,866 Unrealised (loss) / gain on investment property under construction (10,913) 1,359 (continued) Unrealised gains on investments in associates 5,837 27,795 c) Discounted Cash Flow (DCF) Analysis (continued) Unrealised gains on unconsolidated subsidiaries 8,426 82 Unrealised (loss) / gain on derivatives (3,301) 1,547 calculated using appropriate discount rates for each class of Net capital gain s 76,851 170,013 cash flows. A reversion / terminal value is capitalised at a terminal capitalisation rate, or reversion yield, and discounted to present value at an appropriate discount rate. In many instances, a single 6 Revenue discount rate is used for all cash flows. 2019 2018 £’000 £’000 d) Residual value method Distributions from associates and unconsolidated subsidiaries 19,291 18,942 Interest on finance lease 253 259 For the investment properties under construction, fair value has Interest income 1,787 28 been determined using the residual value method. As part of this Other income 455 594 process the valuation specialist initially assesses the gross Rental income 170,104 160,249 development value of the respective property based on the Amortisation of Lease inducement asset (183) (112) Estimated Rental Value (‘ERV’) that they assume for each asset Total revenue 191,707 179,960 upon completion and an equivalent yield that would be appropriate for the subject property. Various costs such as the 7 Expenses estimates of capital outlay, construction costs and developer’s 2019 2018 profit then have to be deducted in order to arrive at the value of £’000 £’000 the property which is accurately reflecting its current construction Payable to the Manager or Associates of the Manager status. In determining such costs the contractual commitments Manag er’s fe e 504 485 are taken into account. Investment Advisory fee 20,477 18,703 Real Estate Asset Management fee 311 318 The valuations of investment properties, investment properties 21,292 19,506 under construction and finance leases are based upon estimates Payable to the Truste e or Associates of the Truste e and subjective judgements that may vary from the actual values Trustee fee 244 244 and sales prices that may be realised by the Group upon Other expenses disposal. Administration fee 829 788 Fair value of investments in unconsolidated subsidiaries and Auditors’ remuneration 244 388 associates Independent Valuer fee 539 471 Legal and professional fees 66 61 Fair value is the amount for which an asset could be exchanged, or a Listing fees 62 50 liability settled, between knowledgeable, willing parties in an arm’s Loan facility set up costs 222 - length transaction. The fair value of investments that are actively Other expenses 130 1,353 traded in organised financial markets is determined by reference to Taxation charges 47 41 quoted market prices at the close of the business on the reporting 2,139 3,152 date. Total expenses 23,675 22,902 For investments in unconsolidated subsidiaries and associates where there is no active market, fair value is determined based on the latest a) Manag er’s fee: The Manager receives a fee of £125,000 per available net asset value of the unquoted investment as reported by annum, which accrues daily and is payable quarterly in arrears, the Administrator or Manager of the relevant investment. and a fee of 0.01% of the Net Asset Value of the underlying subsidiaries. As subsidiaries are SDLT exempt entities, the valuation of the investment may include an uplift element which reflects the SDLT b) Investment Advisory fee: The Investment Advisor recei ves a saving that would be achieved by disposing of the subsidiary rather fee of 0.5% of Net Asset Value (NAV) per annum accrued than the property. The uplift applied follows the Manager's policy on monthly and payable quarterly. NAV is defined as the aggregate SDLT adjustments. value of the assets of the Fund, excluding any and all net income whether accrued or received, but including any liabilities, calculated in accordance with the trust instrument.

The Investment Advisor also receives an acquisition fee of 0.25% of the acquisition price of the real estate asset payable from the capital of the Fund, provided that the aggregate of the acquisition fee and any sourcing fees payable to agents does not exceed 1% of the acquisition price of the asset. This acquisition fee amounted to £1,485,500 (2018: £69,835).

16 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

conditions are continuously met, the Fund shall not be subject to UK Notes to the Financial Statements tax on gains derived from sales of property (or other such chargeable events). Tax is instead levied on Unitholders in the Fund depending on their own tax status and linked to liquidity events at the Unitholder level. 7 Expenses (continued) The Fund is required to make annual reporting to the UK tax authorities in relation to the Unitholders in the Fund and relevant c) Real Estate Asset Management fee: The Real Estate Asset Manager receives an annual fee of £1,500 per material tenancy, transactions within the period. The first reporting will be required 12 calculated and paid quarterly in arrears. The fee is subject to months following the end of the first accounting period to which the indexation. new legislation applies. Uni tholders are responsible for their own taxation on their returns from d) Trustee fee: The Trustee receives a fee, calculated and paid the Fund depending on the tax regime that they are subject to. quarterly in arrears, at the following rates (subject to a minimum fee of £10,000 per annum) and £5,000 per unit trust: 9 Finance costs: Distributions and other finance costs Band Fee The following distributions were made or became payable during the On the first £250 million of the NAV 0.015% p.a. year: On the NAV of between £250 million and £500 million 0.0125% p.a. 2019 2018 On the NAV of between £500 million and £1 billion 0.0 1% p.a. £’000 £’000 On the NAV over £1 billion 0.0075% p.a. Quarterly distributions Quarter ende d 30 September 41,460 37,592 This variable fee is not applicable to the Fund’s assets where the Quarter ended 31 December 41,200 38,981 Trustee already acts as trustee to the underlying asset. Included Quarter ended 31 March 41,932 38,822 in the acquisition costs of the properties is an amount of £15,000 Quarter ended 30 June [a] 42,188 39,994 (2018: £nil) paid to the Trustee. Total quarterly distributions 166,780 155,389 Finance costs: Distributions 166,780 155,389 The Trustee is also entitled to a setup fee of £1,500 for each new unit trust and a fixed fee of £2,500 per transaction. Interest on secured borrowing 672 381 Non-utilisation fee 802 1,400 e) Administration fee: The Administrator receives a fee, calculated Finance costs: Interest 1,474 1,781 and paid quarterly in arrears, at the following rates (subject to a Total finance costs 168,254 157,170 minimum fee of £150,000 per annum): Net revenue per statement of total return 166,189 155,389 Over distributed income 591 - Band Fee On the first £250 million of the NAV 0.0 325% p.a. Finance costs: Distributions 166,780 155,389 On the NAV of between £250 million and £500 million 0.025% p.a. Comprising: On the NAV of between £500 million and £750 million 0.015% p.a. Distributions to Unitholders 161,460 150,458 On the NAV of between £750 million and £1 billion 0.013% p.a. Distributions to non-controlling interests 5,320 4,931 On the NAV of between £1 billion and £2 billion 0.011% p.a. [a] Distribution paid on 1 August 2019. On the NAV of between £2 billion and £3 billion 0.0075% p.a. On the NAV over £3 billion 0.007% p.a. 10 Cash flow 2019 2018 This variable fee is not applicable to the Group’s assets where £’000 £’00 0 the Administrator already acts as the administrator to the Reconciliation of total return before distributions to net cash flow from operating activities underlying assets. Total return before distributions 243,409 325,290 The Administrator also receives a setup fee of £5,000 for each Distributions received (19,291) (18,942) new unit trust, and an additional administration fee of £8,000 p.a. Interest income (1,787) (28) per unit trust. Interest on finance lease (253) (259) Net gains on investments (76,851) (170,013) 8 Taxation Amortisation of Lease inducement asset 183 112 Finance costs: Interest 1,474 1,781 The Fund principally invests in unit trusts established under the laws Movement in debtors (4,743) (1,247) of Guernsey (‘subsidiaries’). The Fund and its subsidiaries are Movement in creditors 3,589 2,496 exempt from Guernsey taxation under The Income Tax (Exempt Net cash inflow from operating activities 145,730 139,190 Bodies) (Guernsey) Ordinance, 1989. The Fund and its subsidiaries have applied for exempt status for the periods covered by these 11 Units in issue financial statements and will each be liable for a fixed fee of £1,200 (2018: £1,200) per annum. The following table shows the movement in Units in issue during the year. The Fund invests in a unit trust established under the laws of Jersey. Opening Movement Closing The income of this trust is exempt from Jersey Income Tax. The Unit class: 01.07.18 Issued Cancelled 30.06.19 income of the trust is not subject to overseas taxation. Institutional ‘A’ Units 33,505,584 3,065,355 3,764 36,567,175 Following the introduction of taxation on gains derived from UK commercial property by non-UK residents (“NRCGT”) as from 6 April 2019, the Manager has made an ‘exemption election’ for the Fund under the NRCGT legislation. This means that, provided certain

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 17 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

The valuation has been primarily derived using comparable recent Notes to the Financial Statements market transactions on arm’s length terms. The valuation was also determined using cash flow projections based on estimates of current and future cash flows, supported by the terms of any existing lease 12 Investment property and investment property and other contracts and by external evidence such as current market under construction rents for similar properties in the same location and condition, and Investment using capitalisation rates that reflect current market conditions. property Investment under property construction Total The future rental rates were estimated depending on the actual £’000 £’000 £’000 location, type and quality of the property, and by taking into account Valuation as at 30 June 2018 3,462,945 - 3,462,945 market data and projections at the valuation date. In addition to the Purchases of investment property and cost adjustments 155,431 - 155,431 condition and repair of buildings and sites, certain assumptions were Development costs - 222,991 222,991 also made as to the tenure, letting, and local town planning in order to Disposal of investment property (36,567) - (36,567) derive the valuation. Movement in unrealised gain on revaluation during the period 73,673 (10,913) 62,760 The below sensitivities illustrate the impact of changes in a key Valuation at 30 June 2019 3,655,482 212,078 3,867,560 unobservable input (in isolation) on the fair value of the Group’s Fair value as at 30 June 2019 3,655,482 212,078 3,867,560 property investments, analysed by sector in accordance with the Investment Portfolio Statement: property Investment under property construction Total Impact on valuation of 0.25% change in yield £’000 £’000 £’000 Increase Decrease Valuation as at 30 June 2017 3,209,132 81,904 3,291,036 2019 2019 Purchases of investment property 14,301 - 14,301 £’000 £’000 Development costs - 18,161 18,161 Retail (50,460) 56,020 Disposal of investment property and Office (58,991) 67,069 cost adjustments (778) - (778) Movement in unrealised gain Leisure (including hotels) (89,562) 102,948 on revaluation during the period 138,866 1,359 140,225 Other (60,592) 68,408 Transfers 101,424 [a] (101,424) [a] - Valuation at 30 June 2018 3,462,945 - 3,462,945 Impact on valuation of 0.25% change in yield Fair value as at 30 June 2018 3,462,945 - 3,462,945 Increase Decrease 2018 2018 £’000 £’000 [a] Construction on the development land held by The Westminster Unit Trust was completed during 2018. Retail (50,398) 56,003 Office (35,791) 40,764 The Group’s investment property assets were valued by the Leisure (including hotels) (73,892) 85,098 Independent Valuer, being a member of the Royal Institution of Other (59,149) 66,521 Chartered Surveyors, on 30 June 2019, at £3,538,012,000 (2018: £3,376,225,000). This excludes the directly held properties Future minimum rentals receivable under non-cancellable operating disclosed below. The valuations have been prepared in accordance leases within investment property are as follows: with the RICS Valuation – Global Standards 2017 and the UK national 2019 2018 supplement 2018 (‘the Red Book’). £’000 £’000 Included in investment property are properties held directly by the Not later than one year 173,563 165,016 Fund with a Fair Value as at 30 June 2019, of £117,470,000 (2018: Later than one year and not later than five years 694,250 660,064 Later than five years 5,455,023 5,206,169 £86,720,000). These properties were valued by the Independent Total 6,322,836 6,031,249 Valuer, as of 30 June 2019. Investment property also includes the values of the properties held by each Unit Trust, as detailed in note 20. The Group’s investment property under construction assets were valued by the Independent Valuer, as of 30 June 2019, at £212,078,000 (2018: £ nil) . Given the nature of the Fund, there are various leases in place that have a variety of contractual terms, including those that permit contingent rent, renewal/purchase options and escalation clauses and the option of sub-letting.

18 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

14 Net investment in finance leases Notes to the Financial Statements As at 30 June 2019 2018 £’000 £’000 13 Other investments Amounts receivable under finance leases: Investments in Within one year 454 454 Investments in unconsolidated In the second to fifth year inclusive 1,815 1,815 associates subsidiaries Total £’000 £’000 £’000 After five years 9,743 10,197 12,012 12,466 Valuation at 30 June 2018 305,218 78,494 383,712 Less: unearned finance: Income (3,761) (4,013) Purchases of investments 9 - 9 Present value of minimum lease payments receivable 8,251 8,453 Disposal of investments - (815) (815) Interest received in advance 63 64 Movement in unrealised gain Net investment in finance lease 8,314 8,517 on revaluation during the period 5,837 8,426 14,263 Valuation at 30 June 2019 311,064 86,105 397,169 The Group entered into a lease in the 2016 year for the completed Fair value as at 30 June 2019 311,064 86,105 397,169 property in the Aberfeldy Unit Trust with a third party tenant. The term of the finance lease is from 11 March 2016 (with the rent Investments in Investments in unconsolidated commencement date on 31 March 2016), and expires on 31 December associates subsidiaries Total 2045. The initial annual rent was £453,932. The principal rent is paid £’000 £’000 £’000 quarterly in advance and is increased from each rent review date in Valuation at 30 June 2017 266,197 79,204 345,401 accordance with the lease agreement (using a formula for an RPI Purchases of investments 11,226 - 11,226 adjustment). The 1st rent review date was on 1 September 2016 with Disposal of investments - (792) (792) each rent review being on each anniversary of that date thereafter. Movement in unrealised gain on revaluation during the period 27,795 82 27,877 The fair value of the finance lease receivable at 31 March 2016, being Valuation at 30 June 2018 305,218 78,494 383,712 inception of the lease, was £9,000,000. Fair value as at 30 June 2018 305,218 78,494 383,712 The average term of finance leases entered into is 30 years. The cost and unrealised gain / (loss) on revaluation split of the other investments, excluding development loans, is as follows: Unguaranteed residual values of assets held under finance leases at the balance sheet date are estimated at £nil (2018: £nil) due to the £1 Unrealised 2019 (losses)/gains 2019 buy back option given to the tenant as per the head lease agreement. Cost on revaluation Total £’000 £’000 £’000 The interest rate inherent in the leases is fixed at the contract date for The Car Auctions Unit Trust 137,461 67,947 205,408 all of the lease term. The average effective interest rate contracted The Swansea Unit Trust 31,450 54,655 86,105 approximates 3.01% (2018: 3.01%) per annum. Contingent rents are The Tesco Jade Unit Trust 96,433 9,167 105,600 recognised within income. The Jade (GP) Limited 32 24 56 265,376 131,793 397,169 15 Portfolio transaction costs 2019 2018 Unrealised £’000 £’000 2018 (losses)/gains 2018 Cost on revaluation Total a ) Acquisitions and Capital Additions £’000 £’000 £’000 Acquisitions excluding transaction costs 358,556 31,744 The Car Auctions Unit Trust 137,461 64,419 201,880 Agents’ fees 1,332 - The Swansea Unit Trust 32,265 46,231 78,496 Investment Advisory acquisition fee 1,485 - The Tesco Jade Unit Trust 96,424 6,863 103,287 Legal fees 1,174 28 The Jade (GP) Limited 32 17 49 Other costs 405 2 266,182 117,530 383,712 Stamp Duty Land Tax 15,054 660 Survey fees 376 28 The investments in associates relate to a 40% holding in The Tesco Trustee’s fees 40 - Jade Unit Trust and Tesco Jade (GP) Limited, and a 50% holding in Total transaction costs 19,866 718 The Car Auctions Unit Trust. Total acquisitions including transaction costs 378,422 32,462 Investments in unconsolidated subsidiaries relate to holdings in The b ) Disposals Swansea Unit Trust. This subsidiary holds finance lease assets which Disposals excluding transaction costs 36,994 800 do not meet the criteria of investment property and so are not Agents’ fees 298 13 consolidated. Legal fees 126 6 Marketing fees - 3 Other costs 3 - Total transaction costs 427 22 Total disposals net of transaction costs 36,567 778

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 19 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

20 Investments in consolidated subsidiaries Notes to the Financial Statements The Fund held the following investments in subsidiaries: 2019 2018 Total Total 16 Debtors £’000 £’000 The 250 Bishopsgate Unit Trust 248,174 251,474 Group 2019 2018 As at 30 June £’000 £’000 The 4M Supermarket Unit Trust 145,640 139,891 Distributions receivable 3,568 3,448 The Aberfeldy Unit Trust 78,854 74,558 Accrued rental income - 22 The Ashford Unit Trust 57,022 57,022 Other debtors and prepayments 8,356 3,590 The Avalon Unit Trust 14,180 44,305 Total 11,924 7,060 The Bedford Unit Trust 67,157 67,157 The Bingo Unit Trust 193,090 198,649 Fund 2019 2018 The Bournemouth Unit Trust 45,728 44,649 As at 30 June £’000 £’000 The Brentwood Unit Trust 79,808 79,808 Distributions receivable 43,865 41,670 The Bridewell Unit Trust 40,989 39,640 Other debtors and prepayments 810 400 The Cardiff Unit Trust 67,356 66,675 Total 44,675 42,070 The Charterhouse Unit Trust 142,905 - The Crown Unit Trust 126,277 - 17 Bank loans The Dorland House Unit Trust 85,720 82,772 The Dulwich Unit Trust 74,425 74,425 During the financial year the Fund had a £100,000,000 (2018: The Dunaskin Unit Trust 40,637 38,368 £200,000,000) revolving credit facility with an expansion option to The Gatwick Unit Trust 124,953 118,660 increase the facility limit by a further £150,000,000 if required, with The Gatwick 2 Unit Trust 47,194 45,476 The Royal Bank of Scotland International Limited, as per the The Glasgow Unit Trust 159,200 153,938 amended and restated agreement dated 18 October 2018. As at 30 The Health Clubs Unit Trust 131,587 126,001 June 2019, £nil (2018: £nil) of the facility was drawn down. For the The Heathrow Unit Trust 29,865 29,865 portion that is used during the year, interest is charged on the daily The Huddersfield Unit Trust 56,289 56,289 balance at LIBOR, plus 1.60% (2018: 1.75%), per annum. On the The Llanelli Unit Trust 58,862 57,857 remaining unused portion of the facility, interest is charged at 0.65% The North Wharf Gardens Unit Trust 85,246 - (2018: 0.7%) per annum. This loan is repayable on expiry of the The P6 Unit Trust 246,133 246,123 facility, being 18 October 2022. The Red Lion Street Jersey Property Unit Trust 42,717 41,577 The Rose Unit Trust 113,328 110,444 18 Derivative liability The Royston Unit Trust 63,753 63,753 The Sevenoaks Unit Trust 87,654 84,726 The 250 Bishopsgate Unit Trust, a subsidiary, entered into a rental The Sheldon Unit Trust 56,070 56,070 price swap agreement with Credit Suisse International on 5 June The Stratford Unit Trust 171,267 155,004 2007. The purpose of the swap is to hedge rental income deriving The Student Accommodation Unit Trust 32,291 32,291 from a lease agreement against RPI. The agreement with Credit The Sudbury Unit Trust 40,871 40,871 Suisse International has a maturity date of 29 June 2035 and a The Tennis Unit Trust 343,323 325,045 floating rate based on RPI is paid to Credit Suisse International in The Truro Unit Trust 51,081 51,081 order to receive a fixed amount per annum. The Wandsworth Unit Trust 108,193 105,202 The Westminster Unit Trust 113,725 113,725 At 30 June 2019 the fair value of this rental price swap was a liability The Wigan Unit Trust 40,612 40,851 of £23,174,986 (2018: £19,874,232). The movement in fair value Total 3,712,176 3,314,242 during the year was a loss of £3,300,754 (2018: gain of £1,546,949), resulting in an unrealised loss through the Consolidated statement of total return, in the current year (see note 5).

19 Creditors

Group 2019 2018 As at 30 June £’000 £’000 Deferred rental income 36,547 33,897 Management fees 5,411 4,846 VAT payable 3,082 4,884 Other creditors and accruals 5,585 3,378 Total 50,625 47,005

Fund 2019 2018 As at 30 June £’000 £’000 Management fees 5,323 4,763 Other creditors and accruals 2,104 1,602 Total 7,427 6,365

20 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

The financial statements of the Group consolidate the results, assets Notes to the Financial Statements and liabilities of the subsidiary undertakings listed below: Country Class % of of of Class Principal 20 Investments in consolidated subsidiaries (continued) establishment shares held activity The 250 Bishopsgate Unit Trust Guernsey Units 99.99% Property investment The cost and unrealised gain / (loss) on revaluation of the The 4M Supermarket Unit Trust Guernsey Units 99.99% Property investment investments in subsidiaries is as follows: The Aberfeldy Unit Trust Guernsey Units 99.96% Property investment The Ashford Unit Trust Guernsey Units 99.93% Property investment The Avalon Unit Trust Guernsey Units 99.83% Property investment Unrealised 2019 (losses)/gains 2019 The Bedford Unit Trust Guernsey Units 99.95% Property investment Cost on revaluation Total The Bingo Unit Trust Guernsey Units 99.99% Property investment £’000 £’000 £’000 The Bournemouth Unit Trust Guernsey Units 99.95% Property investment The 250 Bishopsgate Unit Trust 231,020 17,154 248,174 The Brentwood Unit Trust Guernsey Units 99.98% Property investment The 4M Supermarket Unit Trust 149,732 (4,092) 145,640 The Bridewell Unit Trust Guernsey Units 99.94% Property investment The Aberfeldy Unit Trust 44,670 34,184 78,854 The Cardiff Unit Trust Guernsey Units 99.96% Property investment The Ashford Unit Trust 44,839 12,183 57,022 The Charterhouse Unit Trust Guernsey Units 99.98% Property investment The Crown Unit Trust Guernsey Units 99.98% Property investment The Avalon Unit Trust 3,232 10,948 14,180 The Dorland House Unit Trust Guernsey Units 99.91% Property investment The Bedford Unit Trust 62,407 4,750 67,157 The Dulwich House Unit Trust Guernsey Units 99.97% Property investment The Bingo Unit Trust 170,781 22,309 193,090 The Dunaskin Unit Trust Guernsey Units 99.94% Property investment The Bournemouth Unit Trust 40,500 5,228 45,728 The Gatwick Unit Trust Guernsey Units 99.96% Property investment The Brentwood Unit Trust 81,415 (1,607) 79,808 The Gatwick 2 Unit Trust Guernsey Units 99.92% Property investment The Bridewell Unit Trust 33,679 7,310 40,989 The Glasgow Unit Trust Guernsey Units 99.97% Property investment The Cardiff Unit Trust 69,112 (1,756) 67,356 The Health Clubs Unit Trust Guernsey Units 99.98% Property investment The Charterhouse Unit Trust 142,226 679 142,905 The Heathrow Unit Trust Guernsey Units 99.87% Property investment The Crown Unit Trust 127,816 (1,539) 126,277 The Huddersfield Unit Trust Guernsey Units 99.94% Property investment The Llanelli Unit Trust Guernsey Units 99.94% Property investment The Dorland House Unit Trust 58,869 26,851 85,720 The North Wharf Gardens The Dulwich Unit Trust 71,389 3,036 74,425 Unit Trust Guernsey Units 99.98% Property investment The Dunaskin Unit Trust 32,811 7,826 40,637 The P6 Unit Trust Guernsey Units 99.99% Property investment The Gatwick Unit Trust 82,647 42,306 124,953 The Red Lion Street Jersey The Gatwick 2 Unit Trust 36,626 10,568 47,194 Property Unit Trust Jersey Units 99.94% Property investment The Glasgow Unit Trust 104,615 54,585 159,200 The Rose Unit Trust Guernsey Units 99.98% Property investment The Health Clubs Unit Trust 97,412 34,175 131,587 The Royston Unit Trust Guernsey Units 99.95% Property investment The Sevenoaks Unit Trust Guernsey Units 99.96% Property investment The Heathrow Unit Trust 22,263 7,602 29,865 The Sheldon Unit Trust Guernsey Units 99.94% Property investment The Huddersfield Unit Trust 54,204 2,085 56,289 The Stratford Accommodation The Llanelli Unit Trust 49,148 9,714 58,862 Unit Trust Guernsey Units 99.98% Property investment The North Wharf Gardens Unit Trust 86,235 (989) 85,246 The Student Accommodation The P6 Unit Trust 233,018 13,115 246,133 Unit Trust Guernsey Units 99.87% Property investment The Red Lion Street Jersey Property Unit Trust 31,864 10,853 42,717 The Sudbury Unit Trust Guernsey Units 99.91% Property investment The Rose Unit Trust 102,020 11,308 113,328 The Tennis Unit Trust Guernsey Units 66.67% Property investment The Truro Unit Trust Guernsey Units 99.94% Property investment The Royston Unit Trust 58,784 4,969 63,753 The Wandsworth Unit Trust Guernsey Units 99.96% Property investment The Sevenoaks Unit Trust 76,403 11,251 87,654 The Westminster Unit Trust Guernsey Units 99.98% Property investment The Sheldon Unit Trust 52,400 3,670 56,070 The Wigan Unit Trust Guernsey Units 99.93% Property investment The Stratford Unit Trust 114,207 57,060 171,267 The Student Accommodation Unit Trust 22,462 9,829 32,291 The Sudbury Unit Trust 32,299 8,572 40,871 The Tennis Unit Trust 265,516 77,807 343,323 The Truro Unit Trust 51,790 (709) 51,081 The Wandsworth Unit Trust 82,778 25,415 108,193 The Westminster Unit Trust 108,521 5,204 113,725 The Wigan Unit Trust 41,029 (417) 40,612 Total 3,170,739 541,437 3,712,176

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 21 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

Interest rate profile Notes to the Financial Statements The significant interest-bearing financial instruments of the Group are bank loans (nil balance but available facility as per note 17), on which interest is calculated at a variable rate. The majority of the Group’s 21 Financial instruments assets comprise properties which neither pay interest nor have a The policies applied in the management of financial instruments are maturity date. set out in note 3. The interest rate profile of the Group and Fund’s assets and liabilities Currency exposure at 30 June 2019 was:

There was no significant currency exposure within the Group at the Weighted average interest rate balance sheet date (2018: same). Group £’000 % Maturity Bank loans - Libor + 1.60% 18.10.22 Liquidity Weighted average The Fund’s liquidity position is monitored by the Manager and the interest rate Fund £’000 % Maturity Investment Advisor. Bank loans - Libor + 1.60% 18.10.22 A summary table with maturity of financial assets and liabilities presented below is used by the Manager to manage liquidity risks and The interest rate profile of the Group and Fund’s, assets and liabilities is derived from managerial reports at individual Trust level. The at 30 June 2018 was: amounts disclosed in the below tables are the contractual Weighted average interest rate undiscounted cash flows. Undiscounted cash flows in respect of Group £’000 % Maturity balances due within 12 months generally equal their carrying Bank loans - Libor + 1.75% 15.10.18 amounts in the Consolidated balance sheet as the impact of Weighted average discounting is not significant. interest rate Fund £’000 % Maturity Refer to note 23 for investor and capital commitments. Bank loans - Libor + 1.75% 15.10.18 The maturity analysis of financial assets / liabilities at 30 June 2019 is as follows: Fair values

Demand and From 1 to Later than Financial instruments and investment properties carried at fair value less than 1 year 5 years 5 years Total £’000 £’000 £’000 £’000 are classified using the following hierarchy that reflects the Assets significance of the inputs used in measuring their fair value: Cash and cash equivalents 166,428 - - 166,428 Level 1: Fair value based on a quoted price for an identical instrument Other debtors 7,987 - - 7,987 Distributions receivable 3,568 - - 3,568 in an active market and will generally include equities, some highly liquid bonds and exchange traded derivatives. Liabilities Level 2: Fair value based on a valuation technique using observable Other creditors 10,996 - - 10,996 market data and will generally include evaluated pricing techniques Distributions payable 42,188 - - 42,188 Derivative liability 3,387 16,558 74,317 94,262 using inputs such as quoted prices for similar instruments, interest Net assets attributable to Unitholders* 4,293,270 - - 4,293,270 rates, yield curves or credit spreads. Level 3: Fair value based on a valuation technique that relies The maturity analysis of financial assets / liabilities at 30 June 2018 is as follows: significantly on non-observable market data and will include values not primarily derived from observable market data. Demand and From 1 to Later than less than 1 year 5 years 5 years Total The determination of what constitutes ‘observable’ requires £’000 £’000 £’000 £’000 significant judgement by the Group. The Group considers observable Assets data to be that market data that is readily available, regularly Cash and cash equivalents 138,465 - - 138,465 distributed or updated, reliable and verifiable, not proprietary, and Other debtors 3,590 - - 3,590 provided by independent sources that are actively involved in the Distributions receivable 3,448 - - 3,448 Accrued rental income 22 - - 22 relevant market.

Liabilities Other creditors 8,224 - - 8,224 Distributions payable 39,994 - - 39,994 Derivative liability 3,102 15,339 78,924 97,365 Net assets attributable to Unitholders* 3,834,238 - - 3,834,238

* Based on reported NAV.

22 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

22 Related parties Notes to the Financial Statements The Manager, a company incorporated in Guernsey was a wholly- owned subsidiary of Prudential plc, a company registered in England. On 21 October 2019, M&G plc demerged from Prudential plc, with the 21 Financial instruments (continued) result that M&G plc is now the ultimate parent company of the Manager. Kleinwort Benson (Guernsey) Limited (the ‘Trustee’), a The level in the fair value hierarchy within which the fair value company incorporated in Guernsey is a wholly-owned subsidiary of measurement is categorised in its entirety is determined on the basis Société Générale S.A. With effect from 15 August 2019, Northern of the lowest level input that is significant to the fair value in its entirety. Trust (Guernsey) Limited replaced Kleinwort Benson (Guernsey) If a fair value measurement uses observable inputs that require Limited as Trustee of the Fund. Northern Trust (Guernsey) Limited, a significant adjustment based on unobservable inputs, that company incorporated in Guernsey, is a wholly-owned subsidiary of measurement is a Level 3 measurement. Assessing the significance Northern Trust Corporation, headquartered in Chicago, Illinois. The of a particular input to the fair value measurement in its entirety Fund has no ultimate controlling party. Refer to note 7 for further requires judgement, considering factors specific to the asset or information on related party transactions in the year, note 19 for liability. amounts payable at year end and note 13 for investments in The following table provides fair value analysed by the level of the associates and unconsolidated subsidiaries. defined fair value hierarchy for investment property and investment As at the date of this report, no Director of the Manager held Units in property under construction as at 30 June 2019: the Fund, except for Mr Francis who held 4,654.220 Units at 30 June Level 1 Level 2 Level 3 Total 2019 (2018: 4,654.220). £’000 £’000 £’000 £’000 Investment property - - 3,655,482 3,655,482 Distributions to related parties are as follows: Investment property under construction - - 212,078 212,078 Prudential Assurance Fair value analysed by level at 30 June 2018: Company Limited Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000 £’000 Distributions paid for 2019 period 6 Investment property - - 3,462,945 3,462,945 Distribution payable at 30 June 2019 1 Investment property under construction - - - - Distributions paid for 2018 period 8 The following table provides fair value analysed by the level of the Distribution payable at 30 June 2018 2 defined fair value hierarchy for financial instruments carried at fair value at 30 June 2019: 23 Capital commitments Level 1 Level 2 Level 3 Total £’000 £’000 £’000 £’000 The Fund has entered into a number of subscription agreements with Investments in associates - - 311,064 311,064 its subsidiaries to fund future capital commitments incurred through Investments in development funding or forward commitment agreements as detailed unconsolidated subsidiaries - - 86,105 86,105 Derivative liability - (23,175) - (23,175) below, which are authorised and contracted for, but for which no Net assets attributable to Unitholders - (4,175,747) - (4,175,747) provision has been made in the Fund’s Consolidated Financial Statements. Fair value analysed by level at 30 June 2018: Outstanding Original Level 1 Level 2 Level 3 Total As at 30 June 2019 commitments commitments £’000 £’000 £’000 £’000 The North Wharf Gardens UT £120,512,903 £126,824,206 Investments in associates - - 305,218 305,218 The Charterhouse UT £125,630,712 £175,000,000 Investments in unconsolidated subsidiaries - - 78,494 78,494 The Crown UT* £81,419,263 £81,419,263 Derivative liability - (19,874) - (19,874) Total £327,562,878 £383,243,469 Net assets attributable to Unitholders - (3,739,959) - (3,739,959) * Subject to planning approval. There is no material difference between the carrying values and fair values of the financial instruments disclosed in the balance sheet The Fund’s holding of cash together with commitments from investors (2018: same) and no transfers were made within the fair value is sufficient to cover the full cost of all amounts contracted for and hierarchy during the year. falling due within twelve months of 30 June 2019 amounting to c.£65m (2018: c.£7m). Credit risk The maturity analysis of the capital commitments at 30 June 2019 is The Group’s maximum exposure to credit risk by class of financial as follows: asset is as follows: 2019 2018 Outstanding commitments, falling due: £’000 £’000 Demand and less than From 1 to More than Trade receivables, net of provision for impairment where applicable As at 30 June 2019 1 year 5 years 5 years Total Other debtors and prepayments 8,356 3,612 The North Wharf Gardens UT £29,402,047 £91,110,856 £0 £120,512,903 Distributions receivable 3,568 3,448 The Charterhouse UT £35,630,712 £90,000,000 £0 £125,630,712 Total debtors, net of impairment 11,924 7,060 The Crown UT £0 £81,419,263 £0 £81,419,263 Cash and cash equivalents 166,428 138,465 Total £65,032,759 £262,530,119 £0 £327,562,878

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 23 The M&G Secured Property Income Fund Consolidated Financial Statements and notes

25 Distribution table Notes to the Financial Statements Accounting Payment Distribution paid/payable [a] reference date dates 2019 £ 24 Events occurring after the balance sheet date Institutional ‘A’ Units 30 September 01.11.18 1.182 With effect from 15 August 2019, Northern Trust (Guernsey) Limited 31 December 01.02.19 1.148 replaced Kleinwort Benson (Guernsey) Limited as Trustee of the 31 March 01.05.19 1.125 Fund. 30 June 01.08.19 1.122 The Fund has issued Units to the value of £17,704,724 and [a] redeemed Units to the value of £1,543,861 since the year end. Accounting Payment Distribution paid/payable reference date dates 2018 On 14 August the Fund completed on the acquisition of the Long £ Leasehold of the David Lloyd Health & Racquets club, Colchester for Institutional ‘A’ Units a consideration of £16,780,000. This transaction is a 30 year sale and 30 September 30.10.17 1.105 leaseback with David Lloyd Leisure. 31 December 30.01.18 1.142 31 March 30.04.18 1.127 The Fund has subscribed for / (redeemed) additional units to the 30 June 31.07.18 1.158 values listed below in the following unit trusts. [a] As the Fund is a Baker Trust, there is no income tax, tax credit or equalisation Unit trust Value of units issued/(redeemed) applicable to the distributions. Refer to Distribution Policy note 2 and note 8 on Taxation. The North Wharf Gardens UT £6,182,418 The Charterhouse UT £17,442,098 The Crown UT (£1,177,588)

On 5 July the Fund sold the Freehold interest in the Monkspath Nursing Home in Solihull for a consideration of £13,960,000 less sales costs. Subsequent to this sale, the Avalon Unit Trust made a capital distribution of £13,139,138 to the Fund. The Monkspath Nursing Home was the last asset in the Avalon Unit Trust which is now in the process of being terminated.

The Bingo Unit Trust made two disposals post the balance sheet date. Buzz Bingo – Wolverhampton on 22 August for a consideration of £2,115,000 less sales costs and Buzz Bingo – Bridlington on 20 September for £805,000 less sales costs. Capital distributions of £2,867,223 were made to return the sales proceeds for re-investment into new opportunities.

As at the date of issue of these Consolidated Financial Statements the Fund has outstanding commitments of £312,139,297.

On 21 October 2019, M&G plc demerged from Prudential plc, with the result that M&G plc is now the ultimate parent company of the Manager.

On 22 October the development loan on the North Wharf Garden was increased from £201.5m to £208.6m.

24 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Trustee’s responsibilities and report

Trustee’s responsibilities

Statement of the Trustee’s responsibilities in respect of the Consolidated Financial Statements of the Fund

The Trustee is responsible for safeguarding the assets of the Fund and hence for taking reasonable steps for the prevention and detection of fraud, error and non-compliance with law and regulations.

Trustee’s report

Report of the Trustee to the Unitholders of The M&G Secured Property Income Fund for the financial year ended 30 June 2019

We hereby state that in our opinion the Manager has managed the Fund during the year ended 30 June 2019 in accordance with the provisions of (i) the Scheme’s Principal Documents (ii) Scheme Particulars and (iii) The Authorised Collective Investment Schemes (Class B) Rules 2013, made under The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended).

In order to comply with our responsibilities as Trustee of The M&G Secured Property Income Fund we confirm that we have taken into our custody, or under our control, all the property of the Fund and held it in Trust for the unitholders in accordance with the Regulations and the Trust Instrument.

Kleinwort Benson (Guernsey) Limited

23 October 2019

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 25 The M&G Secured Property Income Fund Independent Auditor’s report

Independent Auditor’s report to the Conclusions relating to going concern We have nothing to report in respect of the following matters in Unitholders of The M&G Secured relation to which the ISAs (UK) require us to report to you where: Property Income Fund • the Manager’s use of the going concern basis of accounting in the preparation of the Consolidated Financial Statements is not Opinion appropriate; or In our opinion: • the Manager has not disclosed in the Consolidated Financial Statements any identified material uncertainties that may cast • The Consolidated Financial Statements of The M&G Secured significant doubt about the Group’s ability to continue to adopt the Property Income Fund (the “Fund”), together with its subsidiaries going concern basis of accounting for a period of at least twelve (“the Group”) (the “Consolidated Financial Statements”) give a months from the date when the Consolidated Financial true and fair view of the state of the Group’s affairs as at 30 June Statements are authorised for issue. 2019 and of the Group’s total return for the year then ended; and • the Consolidated Financial Statements have been properly Overview of our audit approach prepared in accordance with UK Accounting Standards including Key audit matters • Fair value of investment property and FRS102 ‘The Financial Reporting Standard applicable in the UK investment property under construction and the Republic of Ireland’. • Valuation of other investments What we have audited • Revenue recognition - Rental income and We have audited the Consolidated Financial Statements which distribution income comprise: Audit scope • The audits of all the consolidated entities were • Consolidated statement of total return; performed by the audit team. • Consolidated statement of change in net assets attributable to Materiality • Overall materiality of £41m which represents Unitholders; 1% of the Net assets attributable to Unitholders • Consolidated balance sheet as at 30 June 2019; (“NAV”) as at 30 June 2019. • Fund balance sheet as at 30 June 2019; Key audit matters • Consolidated cash flow statement; and Key audit matters are those matters that, in our professional • Related notes 1 to 25 to the financial statements. judgement, were of most significance in our audit of the The financial reporting framework that has been applied in the Consolidated Financial Statements of the current period and preparation of the Consolidated Financial Statements is applicable include the most significant assessed risks of material law and UK Accounting Standards, including FRS102 ‘The Financial misstatement (whether or not due to fraud) that we identified. Reporting Standard applicable in the UK and the Republic of Ireland’. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and Basis for opinion directing the efforts of the engagement team. These matters were We conducted our audit in accordance with International Standards addressed in the context of our audit of the Consolidated Financial on Auditing (UK) (ISAs (UK)) and applicable law. Our Statements as a whole, and in our opinion thereon, and we do not responsibilities under those standards are further described in the provide a separate opinion on these matters. Auditor’s responsibilities for the audit of the Consolidated Financial Statements section of our report below. We are independent of the Fund in accordance with the ethical requirements that are relevant to our audit of the Consolidated Financial Statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

26 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Independent Auditor’s report

Risk Our response to the risk Key observations communicated to those charged with governance Consolidated fair value of We performed the following procedures: There were no matters investment property and • We developed an understanding of the valuation process, by performing which we reported to investment property under walkthroughs of the processes and controls in place; the Audit Committee of construction (£3.9bn, 2018: • We assessed the qualifications, experience, independence and scope of work the Manager. £3.5bn) performed by management’s Independent Valuer; • We engaged our EY real estate valuation specialists to assess the Refer to accounting policies, Note methodology applied by management’s Independent Valuer in determining 4 and Note 12 of the the property values; Consolidated Financial • We performed review procedures across the portfolio of investments, focusing Statements on correlations with market data and any significant movements. We selected The valuation of investment a representative sample of investment properties and we engaged our EY real property (including those under estate valuation specialists to assess whether the reported value fell within a construction) are based on range of reasonable outcomes; judgements, estimates and • With respect to key objective inputs to the valuation, comprising rental income assumptions and may be and length of lease, we agreed the inputs to lease agreements or rent review schedules on a sample basis; materially misstated. • We recalculated the sample of property valuations based on inputs used by management’s Independent Valuer to confirm the clerical accuracy of the valuations; • We checked that the fair values derived by management’s Independent Valuer for the entire portfolio were correctly included in the Consolidated Financial Statements; and • We challenged the assumptions made by management based on recent transactions for comparable asset disposals, where applicable.

Valuation of other investments With respect to the fair values of the underlying properties held by the other There were no matters (£397m, 2018: £384m) investments, we performed the following procedures: which we reported to • We developed an understanding of the valuation process, by performing the Audit Committee of Refer to accounting policies, Note walkthroughs of the processes and controls in place; the Manager. 4 and Note 13 of the • We assessed the qualifications, experience, independence and scope of work Consolidated Financial performed by management’s Independent Valuer; Statements • We engaged our EY real estate valuation specialists to assess the Other investments comprises methodology applied by management’s Independent Valuer in determining investments in unconsolidated the value of property held in underlying investments; subsidiaries and associates. The • We performed review procedures across the portfolio of other investments, valuation of other investments is focusing on correlations with market data and any significant movements. We based on their net asset values selected a representative sample of investment properties and finance lease which depend primarily on the fair receivables held by the other investments and engaged our EY real estate values of the underlying valuation specialists to assess whether the reported value fell within a range of reasonable outcomes; properties. The fair values are based on judgements, estimates • With respect to key objective inputs to the valuation, comprising rental income and length of lease, we agreed the inputs to lease agreements or rent review and assumptions that may be schedules on a sample basis; materially misstated. • We recalculated the property valuations based on inputs used by management’s Independent Valuer to confirm the clerical accuracy of the valuations; • We challenged the assumptions made by management based on recent transactions for comparable asset disposals, where applicable; and • We checked that the fair values derived by management’s Independent Valuer were correctly included in the net asset values of the other investments; • We determined the appropriateness of net asset value as a proxy of fair value of the investment in unconsolidated subsidiaries and associates, after we had considered any other adjustments such as the SDLT uplift: • We reviewed the ‘Update on NAV adjustments’ prepared by management, particularly inquiring over the assumptions and judgements applied.

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 27 The M&G Secured Property Income Fund Independent Auditor’s report

Risk Our response to the risk Key observations communicated to those charged with governance Rental income and distribution We performed the following procedures: There were no matters income (£170m, 2018: £160m) • We developed an understanding of the rental income process, by performing which we reported to and (£19m, 2018: £19m) walkthroughs of the processes and controls in place; the Audit Committee respectively. • We performed analytical procedures by setting expectations on rental of the Manager. Refer to accounting policies and income and comparing quarterly rents to those expectations; Note 6 of the Consolidated • We obtained explanations and supporting evidence for variances above our Financial Statements testing thresholds; • For a sample of leases, we obtained the lease agreements, along with any Rental income and distribution subsequent rent reviews and we agreed rental amounts to the lease income are significant and accounting records; management may seek to and overstate income to increase performance and distributions to • On a sample basis, we have agreed the distribution income received by the Unitholders. Fund to the distributions paid by the underlying unit trusts.

An overview of the scope of our audit Performance materiality The application of materiality at the individual account or balance Tailoring the scope level. It is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected Our assessment of audit risk, our evaluation of materiality and our misstatements exceeds materiality. allocation of performance materiality determine our audit scope for the Group. This enables us to form an opinion on the Consolidated On the basis of our risk assessments, together with our assessment Financial Statements. We take into account size, risk profile, the of the Fund’s overall control environment, our judgement was that organisation of the Group and effectiveness of controls, including performance materiality was 50% (2018: 50%) of our planning controls and changes in the business environment when assessing materiality, namely £20.5m (2017: £19.5m). We have set performance the level of work to be performed. materiality at this percentage so that it is equivalent to the pricing error guidance in Guernsey regulations. The Group consists of the consolidated entities as explained in note 20 of the Consolidated Financial Statements. Reporting threshold Our application of materiality An amount below which identified misstatements are considered as being clearly trivial. We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit We agreed with the Audit Committee of the Manager that we would and in forming our audit opinion. report to them all uncorrected audit differences in excess of £2.1m (2018: £1.9m), which is set at 5% of planning materiality, as well as Materiality differences below that threshold that, in our view, warranted reporting on qualitative grounds. The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the We evaluate any uncorrected misstatements against both the economic decisions of the users of the Consolidated Financial quantitative measures of materiality discussed above and in light of Statements. Materiality provides a basis for determining the nature other relevant qualitative considerations in forming our opinion. and extent of our audit procedures. Other information We determined materiality for the Group to be £41m (2018: £39m), which is 1% (2018: 1%) of NAV. We believe that the NAV provides us The other information comprises the information included in the with an appropriate basis for audit materiality as the NAV is a key annual investment report other than the Consolidated Financial performance measure and is a key metric used by management in Statements and our auditor’s report thereon. The Manager is assessing and reporting on the overall performance of the Group. responsible for the other information.

28 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 The M&G Secured Property Income Fund Independent Auditor’s report

Our opinion on the Consolidated Financial Statements does not cover the other information and, except to the extent otherwise explicitly Use of this report stated in this report, we do not express any form of assurance This report is made solely to the Fund’s Unitholders, as a body, in conclusion thereon. accordance with Paragraph 4.02(3) of the Authorised Collective In connection with our audit of the Consolidated Financial Investment Schemes (Class B) Rules, 2013. Our audit work has Statements, our responsibility is to read the other information and, in been undertaken so that we might state to the Fund’s Unitholders doing so, consider whether the other information is materially those matters we are required to state to them in an auditor’s report inconsistent with the Consolidated Financial Statements or our and for no other purpose. To the fullest extent permitted by law, we do knowledge obtained in the audit or otherwise appears to be materially not accept or assume responsibility to anyone other than the Fund misstated. If we identify such material inconsistencies or apparent and the Fund’s Unitholders as a body, for our audit work, for this material misstatements, we are required to determine whether there report, or for the opinions we have formed. is a material misstatement in the Consolidated Financial Statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material Ernst & Young LLP misstatement of the other information, we are required to report that Guernsey fact. 23 October 2019 We have nothing to report in this regard.

Notes: 1. The maintenance and integrity of The M&G Secured Property Income Fund web Responsibilities of the Manager site is the responsibility of the Manager; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept As explained more fully in the Manager’s responsibilities statement no responsibility for any changes that may have occurred to the consolidated set out on page 2, the Manager is responsible for the preparation of financial statements since they were initially presented on the web site. the Consolidated Financial Statements and for being satisfied that 2. Legislation in Guernsey governing the preparation and dissemination of financial they give a true and fair view, and for such internal control as the statements may differ from legislation in other jurisdictions. Manager determines is necessary to enable the preparation of Consolidated Financial Statements that are free from material misstatement, whether due to fraud or error.

In preparing the Consolidated Financial Statements, the Manager is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Manager either intends to liquidate the Fund or to cease operations, or has no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the consolidated financial statements

Our objectives are to obtain reasonable assurance about whether the Consolidated Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Consolidated Financial Statements.

A further description of our responsibilities for the audit of the Consolidated Financial Statements is located on the Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 29 The M&G Secured Property Income Fund Other regulatory disclosures

Alternative Investment Fund Remuneration Manager’s Directive (AIFMD) In line with the requirements of the Alternative Investment Fund Managers Directive (“AIFMD”), M&G (Guernsey) Limited (the “AIFM”) The Directive, which was implemented by EU Member States in 2013, is subject to a remuneration policy which is consistent with the covers the management, administration and marketing of alternative principles outlined in the European Securities and Markets Authority investment funds (‘AIFs’). Its focus is on regulating alternative guidelines on sound remuneration policies under the AIFMD. investment fund managers (‘AIFMs’) established in the EU and The remuneration policy is designed to ensure that any relevant prohibits such managers from managing any AIFs or marketing conflicts of interest can be managed appropriately at all times and shares in such funds to investors in the EU unless an AIFMD that the remuneration of staff is in line with the risk policies and authorisation is granted to the AIFM. The Fund is a non-EU AIF and objectives of the alternative investment funds managed by the AIFM. the Manager is a non-EU AIFM for the purpose of the Alternative Further details of the remuneration policy applicable at an M&G Investment Fund Managers Directive 2011/61/EU (‘AIFMD’). Limited level can be found here: https://www.mandg.com/about- As a non-EU AIFM, the Manager distributes the Units of the Fund us/policies-andbusiness-principles. M&G’s remuneration policy and within the EEA under the AIFMD National Private Placement Regime its implementation is reviewed on an annual basis, or more frequently and will not be required to seek authorisation under the AIFMD. To where required, and is approved by the M&G Remuneration comply with the private placement regime in an EU state it is generally Committee. necessary to register th e non-EU AIF wit h, or obtain marketing The AIFM is required under the AIFMD to make quantitative authorisation fo r, th e no n-EU AIF from the regulator in that country. disclosures of remuneration. These disclosures are made in line with The Manager has retained responsibility for the collective portfolio M&G’s interpretation of currently available guidance on quantitative management and risk management in relation to the Fund. remuneration disclosures. As market or regulatory guidance evolves, In accordance with the AIFMD we are required to report to investors M&G may consider it appropriate to make changes to the way in on the ‘leverage’ of the fund and any ‘special arrangements’ that exist which quantitative disclosures are calculated. Members of staff and in relation to the Fund’s assets. senior management typically provide both AIFMD and non-AIFMD related services and have a number of areas of responsibility. Leverage and borrowing Therefore, only the portion of remuneration for those individuals’ services which may be attributable to the AIFM is included in the Under AIFMD, leverage is defined as any method by which the Fund remuneration figures disclosed. Accordingly the figures are not increases its exposure through borrowing or the use of derivatives. representative of any individual’s actual remuneration. This exposure must be calculated in two ways, the ‘gross method’ and the ‘commitment method’. The Fund must not exceed maximum M&G (Guernsey) Limited does not directly employ any staff exposures under both methods. members. However, the total remuneration paid in respect of 7 Directors and members of the senior management team, whose ‘Gross method’ is calculated as the sum of all positions of the Fund actions had a material impact on the risk profile of the Fund, for the (both positive and negative), that is, all eligible assets, liabilities and financial year ended 31 December 2018 amounted to £238,245 derivatives, including derivatives held for risk reduction purposes. (£235,704 in respect of fixed remuneration and £2,262 in respect of ‘Commitment method’ exposure is also calculated as the sum of all variable remuneration), of which £61,645 was paid in respect of positions of the Fund (both positive and negative), but after netting off senior management. derivative and security positions.

The total amount of leverage calculated as at 30 June 2019 is as follows: Gross method: 99.00% Commitment method: 97.92%

30 ANNUAL INVESTMENT REPORT AND AUDITED CONSOLIDATED FINANCIAL STATEMENTS • June 2019 56557_LR_311019