The Cubic Property Fund Annual Report 2016 1 Cubic Property Fund Chairman’s Statement Dear Shareholders, I am pleased to report to shareholders on 2016 being a successful year for the Cubic Property Fund. Several longer term strategic initiatives have over the last few years proved to have been very positive for the Fund. This is reflected in the performance for the year ended 31 March 2016 with a closing NAV price of 313.3 pence per share, representing a 14.3% increase from the March 2015 closing price of 274.0 pence per share. The total return for the year to shareholders, once the dividend payment of £2,759,000 is added to the closing NAV was 16.3%. The Funds’ performance for 2016 is ahead of all of the major benchmarks including the UK and European IPD. The excellent performance of the Fund is in the main because of the Fund continuing to follow its core strategy of the last year. Value for shareholders was achieved by the ongoing effective management of its property portfolio, the continued lowering of its interest rate payments through refinancing several of its loans and taking advantage of commercial property market conditions both in the UK and in Europe. The 2016 year saw the Fund sell some of its assets posting a strong blended profit of over £4.3m, the largest being the sale of the Viking 4 (Louis Vuitton) asset in Copenhagen at a record low yield. The benefit of this sale was that the remaining holdings in Copenhagen saw continued capital value increases. The Fund, with the cash generated from sale of some of its assets, increased cash generated from operations and further cash generated from refinancing, acquired several properties during the year. The highlights being: 50% interest in a further 19 Travis Perkins units situated throughout the UK. This acquisition is structured in the same way to the 35 Travis Perkins property portfolio acquired in 2014 and secured on 15-year lease contracts. The acquisition of commercial properties in Cheltenham, Nottingham, and Southport providing the Fund with not only stable income streams but also the potential, through management of the assets, to increase value. Two additional properties were acquired in Copenhagen in prime retail areas at a significant discount to market. At the end of the financial year, the Fund acquired a minority interest in an office building located within the heart of the City of London with significant potential to enhance rental income and capital growth through the development of the building. At balance sheet date, the Fund was in the process of acquiring a 40% share at cost, in three Curzon cinema sites, located in Aldgate, Canterbury and Sheffield. At the time of publication of this report, 2 Cubic Property Fund Contents Portfolio Report Headline Statistics 6 Performance Highlights 7 Portfolio Characteristics 9 Top 10 Assets 12 Investment Adviser’s Report 13 Strategy 20 Asset Management 23 Finance Initiatives 27 Audited Consolidated Financial Statements Management and Administration 31 Report of the Directors 33 Custodian’s Report 39 Independent Auditor’s Report 40 Consolidated Statement of Total Return 42 Consolidated Statement of Movements in Net Assets Attributable to 43 Participating Shareholders Consolidated Balance Sheet 44 Consolidated Cash Flow Statement 45 Notes to the Consolidated Financial Statements 46 4 5 Cubic Property Fund Headline Statistics 100% 84 £192m Focus on strong Assets Gross asset European real valuation of Fund’s estate markets portfolio 10.8 yrs 165 1.8m Average weighted Commercial unexpired lease tenancies sq. ft. term Of commercial 6 55% 98% Countries invested Of rental income Occupancy rate into secured against top 10 tenants £11.2m 7.20 yrs 3.64% Annual rent-roll Unexpired debt Average cost of term debt * All statistics as at 31st March 2016 6 Cubic Property Fund Performance Highlights The NAV per share increased to 313.33 pence as at 31 March 2016 (31 March 2015: 273.99 pence per share) representing NAV growth of 14.36% over the last 12 months. The UK investment market has continued to go from strength to strength with strong capital gains seen across the portfolio over the last 12 months, following on from a strong year in 2015. Whilst there continues to be downward pressure on yields, we are now beginning to see the impact of strengthening economic conditions in the occupational markets, which is driving rental value growth. Momentum in Denmark continues to build as large institutions increased their exposure with yields now heading towards historic lows (as evidenced by sale of Louis Vuitton in 2016). Elsewhere in Europe, strong gains have come from Spain as its long-awaited economic recovery began to gather pace. Despite currency losses in Europe owing to the current strength of Sterling against the Euro, Net Asset Value increased by 13.5% to £104.3m (31 March 2015: £ 91.9m). Fund’s loan to value NAV per share 53.38% 313.3p Mortgage Amortisation for the Increase in NAV year 14.36% £1.4m 7 Cubic Property Fund *WAULT – Weighted Average unexpired lease term 8 Cubic Property Fund Portfolio Characteristics Top 10 Tenants by Income 10.38% 9.14% 6.28% 6.01% 5.45% 4.58% 3.80% 3.65% 3.45% 2.45% 9 Cubic Property Fund Asset Locations 10 Cubic lease expiry profile 50.0% 46.5% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 12.4% 10.0% 7.5% 6.8% 6.1% 7.1% 4.1% 5.0% 1.5% 2.5% 3.0% 2.5% 0.0% Cubic debt expiry profile 25.0% 21.1% 20.2% 19.7% 20.0% 14.9% 15.0% 12.5% 10.0% 4.4% 5.0% 3.6% 3.6% 0.0% 0.0% 0.0% 0.0% 11 Cubic Property Fund Top 10 Assets Annual Market Owner- Let by Area Gross WAULT Asset Main Tenants Value ship Sector Area (sq. ft.) Rent (years) (£m) (%) (%) (£m) Banc de Sang Banc de Sang 45.5 15.5% Office 102,000 2.51 100 43.9 Barcelona 27 Ostensjoveien NCP 40.9 34.0% Office 180,000 2.53 100 7.3 Oslo Merchant Portfolio Travis Perkins 39.8 49.0% Industrial 449,400 2.45 100 15.7 35 UK locations Merchant Portfolio Travis Perkins 32.7 50.0% Industrial 403,275 2.09 100 14.6 19 UK Locations 26 Købmagergade Superdry 29.7 46.8% Retail 46,000 1.07 94 0.5 Copenhagen 22 Købmagergade Matas 21.9 46.8% Retail 45,750 0.94 100 4.0 Copenhagen Synoptik 24 Købmagergade Benetton 20.7 46.8% Retail 16,500 0.79 100 5.4 Copenhagen West End Quay Tesco Retail/ 17.1 96.0% 26,250 0.84 100 6.13 London Post Office Leisure Viking 7 Sand, Havana 15.6 46.8% Retail 11,152 0.58 100 0.5 Copenhagen Shoes 50 La Colomberie, Colomberie 11.6 50.0% Office 28,487 0.85 100 9.1 Jersey Services Ltd 12 Cubic Property Fund Investment Adviser’s Report Global Economic Overview Between Q1 2015 and Q1 2016 the global economic scene was dominated by developments in the oil market, monetary policy decisions and the possibility of a downturn in China’s economy. While economic uncertainty remained high, reduced volatility in global financial markets and the fact that policy measures in China took off at the end of Q1 2016 helped to ease concerns about the health of the global economy. At the end of the first quarter of 2016, the European Central Bank and the Bank of Japan – two of the world’s four most important monetary institutions – along with several smaller central banks, were pushing their nominal interest rates negative in an effort to stimulate spending and stave off the threat of deflation. Overall, negative interest rates are good for property values – particularly on prime assets, which, even at low capitalisation rates, offer a good income at a relatively low risk. Investors generally take advantage of this by increasingly allocating greater shares of their portfolios to real estate. The below chart shows global interest rates since 2000 with interest rates reaching positive territory in 2015. Figure: OECD Real Interest Rates 13 Global Property Market Outlook Globally, real estate is sought after as an income-producing investment, as global investors seek sound income streams. One of the features of the post-Global Financial Crisis economic landscape has been investors’ relative preference for prime real estate. This preference for prime real estate is not just a preference for lower-risk assets; rent growth, though weak, has been higher in prime real estate (see below). Figure: EMEA Prime vs. Secondary Market Rental Growth As the world economy works its way through this soft patch, this preference for prime real estate is expected to reassert itself. As growth picks up again in the second half of 2016, investors’ preferences will shift again toward secondary and value-add real estate situations. More broadly, growth—even sub-par growth—alongside low interest rates is a good environment for real estate. The income returns provided by real estate will continue to attract investors. European Economic Overview In 2015, the European economy entered its fourth year of recovery. Throughout the first quarter of 2016, the EU experienced strong GDP growth thanks to loose monetary policies, improving labour markets and low oil prices. All of the bigger European countries except Italy managed to grow by more than 1% in 2015, the first time this has happened since 2007 and even Italy managed to arrest a three year losing streak on GDP.