1. Interim report
1.2 Financial Statements as of June 30, 2010
1.2.2 Notes
1. GENERAL INFORMATION
SILIC is the leading business park operator in the Paris region. It is a major player in office property, with a developed portfolio of 1,165,000 m² at 30 June 2010.
Socomie, a wholly-owned subsidiary of SILIC, is responsible for developing, managing and marketing the group’s business parks. It also provides services for third parties.
The group employs 96 people.
SILIC shares are listed on NYSE-Euronext Paris, Segment A and are eligible for deferred settlement (SRD).
The Board of Directors approved the interim consolidated financial statements for the half year ending 30 June 2010 at its meeting of 27 July 2010.
2. SIGNIFICANT EVENTS
After a year of strong growth in 2009, the first half of 2010 was characterised by the consolidation of SILIC's operating and financial performance.
Rental income increased by 2.6% to €86.0 million, compared to the first half year 2009, as acquisitions of fully-let buildings in 2009 and early 2010 more than offset the drop in the indexation of the rents. All in all, the average rent continued rising and reached €183 per m².
EBITDA increased by 3.6% to €77.3 million, outpacing revenue growth.
As announced, cash flow was unchanged excluding the impact of the sale of derivative instruments in 2009, and reached €59.0 million.
In the first half of 2010, investments totalled €147.2 million, half of which was spent on the acquisition of a 13,800 m² office building in Nanterre-Préfecture and the other half on the construction work on 80,000 m² in progress at the end of 2009.
Sources of financing were strengthened by €60 million, to total €1,592.4 million, of which €1,334.9 million were used as of 30 June. €257.5 million are available to complete projects in progress and finance new investments.
The property portfolio was valued at €3,333.3 million including transfer taxes at 30 June 2010, giving a replacement net asset value of €110.71 per share.
3. CONSOLIDATION PRINCIPLES
SILIC's consolidated financial statements of the first half of 2010 for the 6 months ending on 30 June 2010 have been prepared in condensed form and in accordance with the International Accounting Standard 34 (IAS) "Interim Financial Reporting". As these are condensed accounts, they do not include all the information required by the International Financial Reporting Standards (IFRS) for the establishment of the annual financial statements and must therefore be read together with the consolidated financial statements of the Group prepared in accordance with the IFRS standards as adopted by the European Union for the fiscal year ended 31 December 2009.
include the IAS/IFRS standards published by IASB as well as the interpretations published by IFRIC and that have been adopted by the European Union. These standards are available on the
European Commission website
(http://ec.europa.eu/internal_market/accounting/ias_fr.htm#adopted-commission)
The main accounting standards used during the preparation of the consolidated financial statements are described below.
The new interpretations and amendments of standards in force since 1 January 2010 and applicable to SILIC are the following:
• IFRIC 15 – Agreement for the construction of real estate
• IFRS 3 Amended – Business Combinations (Phase 2)
• Amendment to IAS 27 – Consolidated and separate financial statements
• Amendments to IAS 39 – Financial instruments: Recognition and Measurement – Eligible covered items
The main new interpretations and amendments of standards in force since 1 January 2010 and that are not applicable to SILIC are the following:
• IFRIC 12 - Service concession arrangements
• IFRIC 16 - Hedges of a net investment in a foreign operation
• IFRIC 18 - Transfers of assets from customers
• IFRIC 17 - Distributions of non-cash assets to owners
• Amendment to IFRS 5, IFRS 2 and April 2009 annual improvement process of existing standards
The standards and interpretations adopted by the European Union but not effective for the current year, or those adopted by IASB or IFRIC but not yet adopted by the European Union at 30 June 2010 did not give rise to an early adoption.
Among these, only the following standards and interpretations are applicable to the SILIC group, although the impact of their adoption, which is currently being reviewed by the management, would not appear to be significant:
• Amendment to IAS 32 – Financial instruments - Ranking of right issues
• IFRIC 19 – Extinguishing financial liabilities with equity instruments
• May 2010 annual improvement process of existing standards, in particular IFRS 7 Financial instruments – Presentation in appendix, IAS 34 – Interim Financial Reporting – Disclosures on significant events and operations and IAS 1 – Presentation of financial statements – Disclosures on changes of the statement of comprehensive income.
The preparation of the financial statements in accordance with the IFRS standards requires making a number of essential accounting estimates. The management is also needs to use its judgment for the adoption of the Group's accounting policies. The areas in which the stakes are the highest in terms of judgment or sophistication or those for which assumptions and estimates are significant for the consolidated financial statements are detailed in note 6.
3.1 SCOPE OF CONSOLIDATION
All companies over which SILIC has exclusive control or exercises significant influence are fully consolidated from the date of acquisition. At this time, we draw a distinction between:
• The property investment companies whose sole business is to rent the buildings in their portfolio. Viewed as isolated acquisitions of assets, they are recognised pursuant to IAS 40.
• The companies whose takeover corresponds to the acquisition of a business as per IFR 3 Amended, in other words, which itself consists of a set of inputs, processes applied to inputs and possibly outputs, and not only of an asset or a group of related assets and liabilities and that this set or group can be conducted or managed as a business.
At 30 June 2010, the scope of consolidation was as follows:
Company Address Reg. no. Business % control %
Sarl EPP PERIPARC 422 115 097
00038 Holding company 100.00% 100% IG
SILIC acquired 100% of the securities of the 21/29 rue des Fontanot, joint stock company, which owns a 13,800 m² office building in Nanterre-Préfecture in early 2010 (Note 8). Due to its nature, this transaction is viewed as the acquisition of an isolated asset pursuant to IAS 40.
The Group owns no none-consolidated holdings.
3.2 YEAR-END
All group companies have a financial year beginning on 1 January and ending on 31 December.
4. SIGNIFICANT ACCOUNTING POLICIES
4.1 Property portfolio
The portfolio consists of investment properties intended to be held for the long-term, although certain assets may be acquired or sold depending on future opportunities.
Property assets are stated at cost, being either the acquisition cost for properties that have been acquired or contributed, or the cost price of new construction or redeveloped properties.
The acquisition cost includes all expenses and transfer taxes related directly to the purchase.
The cost price of property assets includes all direct construction-related expenses such as works, fees, internal management costs and interest charges incurred during the construction period.
Properties acquired under finance leases are recognised in the same way as owned properties.
The acquisition cost corresponds to the principal amount outstanding due to the lessor plus any contract acquisition expenses.
Within each building, components which need replacing at regular intervals are identified and accounted for separately.
The following components have been identified and valued at their actual cost where the relevant information was available, or otherwise by analogy with similar buildings developed by SILIC:
- Building structure (external envelope and services);
- External rendering;
- Technical equipment;
- Fixtures and fittings.
The property portfolio (land and buildings) was revalued by independent appraisers on 1 January 2003 at the time of election for SIIC tax status.
All redevelopment, renovation and refurbishment work is capitalised:
- Redevelopment consists in the complete transformation of an existing building and is similar to new construction (alterations to the external envelope, changing floor areas, remodelling the space, etc…),
- Renovation consists in the redevelopment of part of a building, where the total utilisation period remains unchanged;
- Refurbishment consists in improving the level of services offered to tenants (e.g. air conditioning, etc.).
Similarly, replacement work on building components (weatherproofing, heating systems, etc.) is capitalised.
The cost of ongoing maintenance work designed to keep the property portfolio in a proper state of repair is expensed as incurred. This principally concerns repairs to the common parts of a business park or a building and repairs to premises upon a change of tenant.
Building work is accounted for using the percentage of completion method. The residual financial commitment, being the total of all future expenditure until completion, is recorded as an off-balance sheet item.
On each reporting date, investment property is measured at amortised cost, revalued on 1 January 2003 where applicable.
Investment and owner-occupied property is depreciated by component on a straight-line basis over the following periods:
- New office and light industrial buildings located in business parks:
- Building structure: 40 to 60 years depending on the nature of the building;
- External rendering: 40 years,
- Technical equipment, weatherproofing: 20 to 25 years;
- Fixtures and fittings: 10 years.
Acquired existing buildings are depreciated over a period that takes account of their age.
- Renovations:
- Structural modifications: residual depreciation period for the buildings concerned;
- Other components: by component, using the same criteria as for a new building.
- Refurbishment: by component, 10 to 25 years.
- Land developments: 60 years.
Marketing fees paid to third parties are capitalised and amortised over the firm period of the lease.
Investment property is valued on an open market basis building by building, using an independent external appraiser. The open market value is updated on a half-yearly basis.
The same firm is used for periods of three years renewable in order to ensure continuity, but the appraisal teams are in any event changed every six years. Fees are paid on a fixed-rate basis and are not linked to the appraisal values.
The valuation methods used comply with the European Valuation Standards published by the European Group of Valuers' Associations (TEGoVA) and with the recommendations made by the Conseil National de la Comptabilité and the Autorité des Marchés Financiers.
Open market value is the price at which an asset or property right can be sold at any given time under normal market conditions and is determined as follows:
- by comparison with current market prices for property assets of a similar type and in a similar location (direct comparison method);
- and by capitalising the net rental income using current market yields2 observed in the market (capitalisation method).
Net rental income is calculated as actual rents plus potential rents on vacant premises,less property expenses not charged to tenants under the terms of their lease and expenses related to vacant premises based on the estimated period required for reletting. Where a property has structural vacancies, the corresponding rental income is also deducted.
Assets are valued on the basis of their state of repair on the date of valuation.
However, properties under development (new construction and redevelopments) are valued at their projected completion value less all costs not yet incurred and interest charges. If less than 60% of the space has been pre-let on the valuation date, an additional amount is deducted from the projected completion value to take account of the risk inherent in the property development business.
The open market value is expressed as "disposal value" when transfer taxes and acquisition-related expenses are excluded and "replacement value" when they are included.
If there is a significant fall in the replacement value of a business park, a detailed cash flow analysis is carried out and an impairment loss recognised where necessary in addition to the depreciation charge.
On 30 June 2010, the date of the last independent appraisal, the replacement value of each business park was, as in previous years, higher than its carrying value.
4.2 Other non-current assets
Plant & equipment and intangible assets principally comprise equipment, furniture and software, which are depreciated over a period of 5 to 10 years.
Financial assets comprise prepayments and FNAIM security deposits accounted for at amortised cost.
Other non-current assets also include derivative financial instruments eligible for hedge accounting, which are measured at fair value.
4.3 Revenue and operating receivables
Leases entered into by the Group as landlord are commercial leases governed by the 1953 decree. They meet the criteria for classification as operating leases under IAS 17, as SILIC retains the majority of the risks and rewards inherent in ownership of the assets.
Rental income is recognised according to the payment terms of each lease. However, the impact of any rent-free periods and step rents, where material, is spread over the period for which the tenant has made a firm commitment.
In the event of a dispute, only the undisputed portion of the rental income is recognised, in accordance with IAS 18.
Fee income represents fees charged for property management and marketing services provided to non-Group companies.
Trade receivables are initially measured at their fair value, discounted at the effective interest rate where applicable. They are subsequently measured at amortised cost on each reporting date.
Trade receivables past due are reviewed on a case-by-case basis and if necessary provided for in full with no set-off against security deposits held. Tenant credit balances arising either due to advance rent payment or an excess of service charges over those actually due, are recognised as
"other liabilities" (advances and downpayments received).
4.4 Cash and cash equivalents
Cash and cash equivalents are financial assets measured at fair value through profit or loss.
Cash comprises cash in hand, credit balances with banks and funds held by Socomie as part of its third party property management business. In the latter case, the corresponding liability is booked under "other creditors".
Cash equivalents comprise money market mutual funds initially recognised at cost and negotiable certificates of deposit. On each reporting date, cash equivalents are measured at their fair value and any difference is recognised through profit or loss.
In the statement of cash flows, cash and cash equivalents comprise cash in hand, sight deposits and money market investments, net of short-term bank facilities.
4.5 Equity
Revaluation surplus
The revaluation surplus arising on non-current assets as a result of electing for SIIC status are transferred from the revaluation surplus to other reserves as and when the assets concerned are amortised, depreciated or sold.
Treasury shares
Any SILIC shares acquired, sold or cancelled by Group companies are deducted from equity and any gain on disposal cancelled.
Stock options and stock awards
Stock options and stock awards granted to employees and executive officers after November 2002 are valued by an independent expert on the date of grant.
Their value is a function of SILIC's share price on the date of grant, vesting conditions for stock awards or exercise conditions for stock options, and the volatility of SILIC shares.
4.6 Net asset value (NAV)
Replacement net asset value is the sum of consolidated equity plus potential capital gains on the portfolio including transfer taxes.
Socomie's business is not revalued.
Consolidated equity is restated for the impact of measuring derivative financial instruments at fair value, which is recognised in equity in accordance with IFRS adopted as of 1 January 2005.
Liquidation net asset value is calculated after deducting taxes (transfer taxes calculated by the property appraiser) and the market value of debt and derivative financial instruments.
NAV per share corresponds to NAV divided by the number of shares in issue (excluding treasury shares).
4.7 Earnings per share
Earnings per share correspond to consolidated net profit divided by the number of shares in issue (excluding treasury shares).
For the purpose of calculating diluted earnings per share, it is assumed that all convertible securities are exercised, and notably all outstanding stock options and stock awards.
4.8 Taxes Current taxes
The Group's property investment companies have elected the status of Société d'Investissements Immobiliers Cotée (SIIC).
Their rental income and capital gains on asset disposals are exempt from corporation tax provided they distribute at least:
- 85% of their pre-tax profit on ordinary activities;
- 50% of their capital gains, within a period of two years1. Their non-SIIC activities, if any, are subject to standard corporation tax.
Socomie, the Group's property management company, is subject to standard corporation tax.
Exit tax
Election for SIIC status gives rise to the recognition of exit tax, deferred over a period of four years, applicable to any annualised capital gains.
Deferred taxes
For Socomie, deferred taxes are calculated on all temporary differences between the restated book value and tax base of assets and liabilities, using the liability method.
The tax rates used are those resulting from the laws in force.
Net deferred tax assets are recognised only if their recovery is probable.
4.9 Provisions for liabilities and charges Provisions for liabilities
Provisions for liabilities represent the best estimate of the expenditure required to extinguish the Group's obligations.
Provisions for retirement and other employee benefits
The Group's commitments to employees in respect of retirement and other benefits comprise end-of-career bonuses and length of service awards payable under the terms of the collective bargaining agreement governing the property industry and the company agreement.
1 For the purpose of determining the distribution requirement, capital gains are calculated with respect to the
The Group's actuarial liability is calculated at the year end using the projected unit credit method, being the present value of benefits payable in the future in respect of service to date, assuming departure at 65 years old at the employee's initiative.
Assumptions are determined using historical data.
The discount rate used is the TME (average yield to redemption on long-term French government bonds).
4.10 Bank loans and financial instruments
Bank finance principally comprises repayment loans and medium and long-term credit facilities which may be drawn down for variable periods. Amounts drawn down are recognised in the balance sheet at their nominal amount and the residual undrawn amount is recorded under off-balance sheet items.
Debt is recognised net of issue expenses, which are deferred over the repayment term using the effective interest rate method.
Property leasing liabilities comprise the principal outstanding under the lease and the cost of exercising any purchase option.
The corresponding interest charges are recognised in the income statement under "Net financing cost".
Derivative financial instruments: Derivative financial instruments are used solely for hedging interest rate exposure. They mainly consist of swaps and caps which guarantee either a fixed rate of interest or a maximum rate of interest.
They are recognised in the balance sheet at their market value (fair value) at inception and on each reporting date. The fair value of financial instruments which are not traded on an active market (mainly interest rate derivatives) is determined using valuation techniques based on existing market conditions on the reporting date (level 2 of the IAS 32).
Interest on these instruments is recognised in the income statement under "Net financing cost".
SILIC has elected to use hedge accounting ("cash flow hedges") for these instruments, and particularly its swap portfolio, given their effectiveness):
• A hedging relationship is documented at inception between the hedging instrument and the hedged item;
• For each hedging relationship documented, effectiveness is tested both prospectively and retrospectively.
In this case, changes in fair value of the "effective" portion are recognised in a special hedging reserve, with no impact on results. The "ineffective" portion is recognised in profit or loss.
The distinction between hedging instruments and other derivative financial instruments is made at inception and documented in accordance with IAS 39.
The distinction between hedging instruments and other derivative financial instruments is made at inception and documented in accordance with IAS 39.