Invista European Real Estate Trst Scf : Half Yearly Report

30 May 2014

INVISTA EUROPEAN REAL ESTATE TRUST SICAF

("IERET" or the "Company')

ANNOUNCEMENT OF HALF YEARLY RESULTS AND UNAUDITED NAV

Report for the six month period ENDed 31 March 2014

Invista European Real Estate Trust SICAF today announces its results for the six month period ending 31 March 2014, including its unaudited Net Asset Value ("NAV") for the last quarter, calculated using International Financial Reporting Standards as adopted by the European Union and adjusted to add back the deferred taxation liability position at the period end.

Highlights

·      Unaudited NAV per share decreased by 13% over the quarter and 20% over the six month period to €0.20 or £0.17 (30 September 2013: €0.25; 31 December 2013: €0.23) principally from the reduction in valuation of the Company's property portfolio by €16.9 million (5.34%) in the first six months of the financial year on a like for like basis.

·      Property portfolio valued at €299.7 million on 31 March 2014 (30 September 2013: €316.6 million; 31 December 2013: €309.3 million on a like-for-like basis) comprises 31 properties.

·      Successfully executed the sales of four assets for total gross proceeds of €7.6 million, at a weighted average discount to valuation of 15.6%. Thirteen other properties being actively marketed as part of a disposal programme, with encouraging levels of buyer interest.

·      A number of active management initiatives over the last six months have resulted in the signing of new leases on 21,546 sqm of space, representing 4.21% of total portfolio area, contributing to the reduction of rental vacancy across the portfolio from 19.8% as at 30 September 2013 to 15.6% as at 31 March 2014.

·      Debt repayment of €14.7 million during the six month period (€7.3 million of outstanding debt was repaid through sales proceeds and a further €7.4 million was repaid from cash reserves.

·      Agreed an extension of the maturity of the Company's credit facility with Bank of Scotland Plc ("BoS") for four months from 31 December 2013 to 30 April 2014. Post quarter-end the Company successfully refinanced this loan.

Debt Refinancing

The Company announced on 1 May 2014 that it had entered into a new credit facility (the "New Loan") with Blackstone Real Estate Debt Strategies ("BREDS"), an affiliate of the Blackstone Group LP ("Blackstone"). As a result, it has repaid all outstanding amounts due to BoS, the economic interest of whose loans to IERET had been sold in November 2013 to funds affiliated to Cerberus Capital Management, LP. The New Loan is structured so as to be closely aligned with the disposal programme underway and the Company is exploring additional means of raising capital to cover, inter alia, capital expenditure requirements related to certain properties in the portfolio.

Tom Chandos, Chairman, commented:

"The Company has made progress during the first half of the current financial year as the continued pursuit of its disposal strategy has contributed towards further reductions in vacancy, enhanced also by letting activity. This was particularly helpful in the refinancing of the portfolio, and the terms of the new credit facility are closely aligned with our ongoing disposal plans."

For further information:

Ludovic Bernard

Internos Global Investors                                                                        020 7355 8800

Michael Sandler

Hudson Sandler                                                                                      020 7796 4133

Financial highlights

v Unaudited NAV per share decreased by 13% over the quarter and 20% over the six month period to €0.20 or £0.17 (30 September 2013: €0.25 December 2013: €0.23) principally due to the reduction in valuation of the Company's property portfolio by €16.9 million (5.34%) in the first six months on a like for like basis.

v Loss per share of €0.0243  (September 2013: €0.1323)

Sources: Internos Global Investors Ltd

1 NAV is calculated using International Financial Reporting Standards and adjusted to add back the change in fair value of the warrants and deferred tax. IFRS NAV was €52.1m on 31 March 2014 and €64.2m on 30 September 2013.

2 As at 31 March 2014, deferred tax liabilities of €17.1 million, based upon temporary differences at the time of initial recognition arising from transactions treated as asset acquisitions have not been recognised in accordance with IAS 12. The Group has deferred tax assets of €14.9 million which also have not been recognised.

3           Loss for the period divided by the weighted average number of ordinary shares in the period/year.

4           €:£ exchange rate used was €1.2103 as at 31 March 2014, €1.19673 as at 30 September 2013.

5           The NAV per preference share is equal to the nominal value plus accrued interest divided by the total number of preference shares.   

6           Current liabilities include banking facilities as at March 2014.

Chairman's Statement

Although the depressed economic conditions and weak tenant markets in the Eurozone led to further falls in the valuation of the Company's properties in the first half of the financial year, I am pleased to report that the Company was able to conclude a successful refinancing of its debt facility after the period end.

Adjusted net asset value decreased by 20% over the six month period from €0.25 (£0.21) to a figure of €0.20 (£0.17), reflecting a fall in property valuation of 5.34% on a like for like basis. Four properties with high levels of vacancy were sold during the period in France and the Czech Republic, contributing to a fall in vacancy from 19.78% to 15.59%. A disposal programme of a further thirteen properties was initiated before the end of the period.

Over the six month period ending 31 March 2014, the Company has signed new leases representing the addition of €1 million in new gross rental income, for a weighted average lease term to first termination of 5.0 years.

Prior to the debt refinancing completed after the period end, the maturity of the previous facility from Bank of Scotland had been extended from the end of December 2013 to the end of April 2014. The Company benefitted during this period from the expiry of the swap contract at the end of December 2013, so that the significantly lower interest cost payable enabled the second quarter of the financial year to deliver positive net recurring income of €1.1 million.

Property Portfolio

As at 31 March 2014 the Company held a diversified portfolio of 31 assets mainly located in the core European markets of France and Germany. The Company's portfolio was valued by Savills at the end of the quarter at €299.7 million. This represents a valuation decline of 5.34% on a like-for-like basis from 30 September 2013, as Estimated Rental Values in some markets were revised downwards and shortening lease lengths on some assets were further discounted.

Results

The Company reports a decrease in the unaudited NAV per share (adjusted to add back warrants and deferred taxation) to €0.20 (£0.17), equating to a fall of 20% over the six month period to 31 March 2013. The decrease in NAV has arisen principally from the reduction in valuation of the Company's property portfolio outlined above, offset by the effect of the previous interest rate swap contract maturing.

Debt Refinancing

The Company entered into a new credit facility with Blackstone Real Estate Debt Strategies ("BREDS") following the end of the quarter. The BREDS facility is for a principal amount of €220 million with an interest margin over three month EURIBOR of 7.7%, with the potential to reduce to 4.7% over three month EURIBOR, subject to the Company's adherence to its non-core disposal and deleveraging plans.

The initial Loan to Value covenant is set at 85%, falling to 80% in the event that the Company unlocks the lower interest margin. The BREDS facility also includes a cash sweep that will remain in place until the interest margin has been reduced, preventing the distribution of dividends to both preference and ordinary shareholders until the Company has achieved its deleveraging objectives.

Outlook

The debt refinancing completed at the end of April 2014 provides the Company with an extended potential time horizon within which to restructure the portfolio and the Company for the benefit of shareholders. There is encouraging progress in the marketing of properties designated for the disposal programme, with patchy improvements in the underlying property investment markets, and there is continuing positive activity on the day to day asset management of the properties.

The repayment of the previous debt facility has, however, required not only the full proceeds of the new facility from Blackstone but, along with the costs of the transactions, also eaten into the remaining cash reserves of the Company. There is essential capital expenditure required to maintain and enhance the value of some properties and to enable targeted disposals to be completed. The Board and Investment Manager are intensely focused on finding ways of addressing this over the next few months and in being able to repay as quickly as possible the portion of the new Blackstone facility that would trigger the lower interest margin and the elimination of the cash sweep.

Tom Chandos

Chairman

Invista European Real Estate Trust SICAF

30 May 2014

INVESTMENT MANAGER'S REPORT

As at 31 March 2014, the Company's property portfolio was valued at €299.7 million and comprised 31 assets (€325.6 million and 35 assets: 30 September 2013). On a like for like basis, the portfolio value decreased by  €9.7 million or 3.13% during the quarter to 31 March 2014 and €16.9 million or 5.34% in the six months ending 31 March 2014. The decline in values occurred in recognition of the continued constraints in the secondary market, particularly affecting the valuations of vacant properties and assets with shortening lease lengths.

The Company's portfolio generated gross income of €27.6 million per annum as at 31 March 2013 from 323 individual leases. The portfolio had a Gross Income Yield ("GIY") of 9.20% and a Net Initial Yield ("NIY") of 7.65%.

As at 31 March 2013, the portfolio vacancy rate measured by rental value was 23.4%. However, the vacancy level has improved over the last 12 months through a combination of new lettings and the disposal of assets with high levels of structural vacancy. On a like for like basis in the last six months vacancy has reduced from 17.18% as at 30 September 2013 to 15.59% as at 31 March 2014. Negotiations are ongoing on potential new lettings which represent an additional 2.9% of existing rental income and possible further reductions in vacancy.

The Company is currently pursuing a programme of fourteen targeted asset disposals, of which the sale of the property at Modletice in the Czech Republic has already been completed. The New Loan has a flexible structure that will enable the Company to pursue its non-core disposal plan by providing €85 million of freely prepayable proceeds which can be repaid via asset sales or contributions of additional equity. As at 31 March 2014, two more of the 14 assets being marketed for sale were under offer, for total expected proceeds of approximately €54 million.

During the last six months a further €7.4 million of cash on the balance sheet was used to pay down the loan to maintain an LTV level below 70.0%, the loan covenant with the BoS loan. As a result of cash payments and sales, a total of €14.7 million of debt has therefore been repaid in the six months to 31 March 2014. Post quarter end the entirety of the BoS loan was replaced by the New Loan with Blackstone, with an outstanding balance of €220 million.

Under the terms of the New Loan, a cash sweep will be applied to the Company's income prior to the time that it achieves a Loan to Value ratio ("LTV") below 70% and has repaid amounts to reduce the principal balance to €135 million or less. As a consequence, no distributions to ordinary or preference shareholders can be made for the duration of the cash sweep, with the preference share dividend therefore being accrued. The Company regards making the repayments necessary to eliminate the cash sweep as an objective of the highest priority.

The Company maintains a relatively stable weighted average lease length profile, which at 31 March 2014 was 3.8 years to first break and 5.5 years to lease expiry. This is compared to 3.8 years to break and 5.6 years to expiry as at 31 December 2013. The Company's credit rating, as measured by Investment Property Databank M-IRIS credit analysis system as at May 2014, improved to 71 out of 100, compared to 61 out of 100 at the same time 12 months previously. However, this rating is still classified within the "Low to Medium risk band".  As at 31 March 2014 the portfolio composition was as follows:

Sector Weightings

*Percentage of aggregate asset value as at 31 March 2014

Country Weightings

*Percentage of aggregate asset value as at 31 March 2014

Top 10 Properties

*Percentage of aggregate asset value plus cash as at 31 March 2014

Top 10 Tenants

* Percentage of aggregate gross rent as at 31 March 2014

Click or paste the following link into your web browser to view the associated PDF document.  Refer to page 8 for the relevant chart.

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Break dates of lease contracts

Click or paste the following link into your web browser to view the associated PDF document.  Refer to page 9 for the relevant chart.

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Expiry dates of lease contracts

Property Market Performance

Economy

The European economy continues to show tentative signs of recovery with recent manufacturing data, private sector output surveys and business confidence indices all pointing towards continued modest expansion. However, as the estimates for Q1 2014 indicate the recovery is likely to remain uneven in the short term with the German economy again leading the recovery with quarterly growth of 0.8% quarter on quarter and is in contrast to the Eurozone's other major economies with Spain (0.4%) France (0.0%) and Italy (-0.1%) all experiencing lower growth. However, the positive news is that the 0.4% growth recorded for Spain represents an acceleration in the pace of the recovery having endured years of painful internal devaluation to boost international competitiveness.   

The political crisis in Ukraine weighed on German business confidence in March and remains a downside risk for the European economy as does the threat of deflation with the ECB under pressure to further ease monetary policy to prevent the economy falling into a deflationary trap and stimulate economic growth.

In the public equity markets the year-to-date return on benchmark indices indicate that investor appetite for risk has increased with peripheral European indices, the IBEX-35 and FTSEMIB, out-performing the FTSE 100, S&P 500 and DAX indices. The public debt markets provided positive news with Greece and Portugal issuing new debt and yields on Spanish and Italian 10 year bonds continuing on a downward trend. 

Occupier Market

Occupiers in the French logistics market appear to have returned to a cautious approach over leasing activities with take-up volumes for Q1 2014 that were down 42% on Q1 2013. Occupier activity in Q1 was focused in the main logistics markets located along the North-South that accounted for over 70% of take-up in Q1 (BNP Paribas). Availability of space increased by 4% across France since the end of 2013, although the majority of stock that has been released is reportedly of Grade B and C specification (BNP Paribas). Grade A stock experienced a decline of 26% during the quarter and highlights the clear preference amongst occupiers to upgrade facilities where possible (BNP Paribas).

With rising levels of employment, real wage growth, low inflation and low interest rates the underlying economic fundamentals for the German retail and office sectors remains positive. In the retail sector, national and international retailers target Germany as a key market for sales growth but are focused on securing the locations offering optimal sales volumes. This has led to a polarisation in the occupier market with strong demand for prime and well located secondary assets whilst the outlook for lower quality secondary and tertiary assets remains weak. In the office sector occupier activity remained positive in Q1 2014 with total take-up within the major office markets up 15% on Q1 2013 and vacancy rates declining 20bps to 7.8% (Savills). With economic activity picking up some tier two cities are starting to experience stability in demand although poor quality assets remain difficult to re-let once vacant. 

Investment Market

The appetite for European real estate assets continued to increase during Q1 2014 with a total of €37.9bn completed and represents an increase of 18% on Q1 2013. Interestingly, the UK experienced a marginal decline of 3% year on year compared to an increase in volumes for the core European markets of Germany (+47%) and France (+37%). This trend is probably a reflection on the limited supply of prime investment product available in London. The quarter also experienced a continuation in the growth of investment in peripheral European markets with the fastest year-on-year growth rates recorded in Austria (+182%), Ireland (+179%), Spain (+131%) and Finland (+102%). This illustrates the trend of investors widening target locations in search of higher yielding assets.  

Results from the annual CBRE investor intentions survey provide an interesting insight into the challenges and opportunities facing investors. The survey identified that the UK is the most popular target location in Europe, however, the number of investors interested in Spain had increased with Madrid second on the list for target cities in 2014 (9th in 2013). Two thirds of respondents also stated that the most attractive opportunities are to be found outside of the core/prime markets with 50% of investors stating that the risk appetite for secondary assets is higher than in 2013.

Disposals

Over the six months period ending 31 March 2014, the Company successfully achieved disposals of three logistics assets in France and one logistics asset in the Czech Republic. Combined these sales removed 26,237 sqm of space that was considered to be structurally vacant. The sale of the Czech asset meant that the Company moved out of the Czech market completely, therefore reducing associated corporate costs and contributing to an overall cost saving to the Company from the four disposals completed in the last six months of €0.78m.

A further 13 assets are currently on the market for sale, with a combined total valuation of €91.08 million as at 31 March 2014. Of these, two assets are currently under offer for potential sales proceeds of approximately €54 million.

Active Asset Management

Weak occupational markets and a high proportion of breaks in 2012 and 2013 created a challenging environment for the Company in retaining income stability and it has taken relentless asset management to stabilise current income and attract new tenants in order to reduce portfolio vacancy.

Over the last six months to 31 March 2014, the Company signed four new leases on 21,546 sqm of vacant space. These lettings increased the Company's rental income by an additional 4% of the current annual rent. Also over the same time period the Company regeared leases representing 7% of the annual gross rent of the portfolio. Combined, these regears and new lettings together composed an additional weighted average lease length to expiry of 5.07 years.

Finance

As at 31 March 2014, the Company had drawn down a total of €215.0 million of senior debt in respect of its €359.3 million facility with BoS, excluding the additional exit fee liability of €5.9 million. In addition, the Company had cash balances of €10.7 million (excluding tenant deposits of €2.9 million and escrow items of €3.3 million).

The Company's gross LTV under the Finance Documents with the Bank of Scotland amounted to 69.50% (30 September 2013: 68.9%) which still remained below the LTV covenant of 70%. Over the past six months, the Company announced that it had used €7.4 million from its existing cash balances to make a further repayment of the senior debt facility and thus reduce its drawn debt facilities, thereby decreasing the LTV to below 70%.

Under the terms of the New Loan, the LTV covenant is currently at 85%. The terms of the New Loan also require the Company's debt to be hedged against changes to the EURIBOR rate in the form of an interest rate cap. Post quarter end the Company bought two interest rate caps, one for 1 year to cover the €85 million freely repayable portion of the New Loan, and another to cover the remaining €135 million with a maturity in 2017. Both caps have a strike of 1%.

Terms of the Refinancing

The New Loan has a maturity of three years, with an option on the part of the Company to extend for two additional twelve month periods, subject to certain conditions. The initial margin is 7.7% over three month EURIBOR, with an agreed path for a potential reduction to 4.7% as set out below.

Once the total amount of the New Loan has been reduced to €135 million and so long as the LTV is below 70%, the ("Step-Down Event"), the margin will be reduced to 470bp over three month EURIBOR. The LTV covenant, which is set initially at 85%, falls to 80% following the Step-Down Event.

For the first thirty months of the New Loan, any early repayments beyond the first €85 million (or any repayment from the proceeds of properties that are not designated as part of the disposal programme) will trigger an early redemption premium equivalent to the full interest rate on the amount repaid for the balance of that period.

Under the terms of the New Loan, a cash sweep will be applied to the Company's income prior to the Step-Down Event. As a consequence, no distributions to ordinary or preference shareholders can be made for the duration of the cash sweep, with the preference share dividend therefore being accrued. The Company regards making the repayments necessary to eliminate the cash sweep as an objective of the highest priority.

Outlook

The interest cost of the New Loan will initially account for the majority of the Company's expected income and the Company has low levels of working capital as a result of the costs of the refinancing. The lower margin triggered by a reduction in the amount of the New Loan outstanding to €135 million would, however, leave the Company with more substantial income attributable to shareholders and open out the range of options for the Company's future strategy.

The Company will work relentlessly, through the disposal programme and other initiatives, both to enhance its working capital position and to reduce the outstanding amount of the New Loan to the level that eliminates the cash sweep and triggers the lower interest margin. At the same time, the actions being pursued with the support of Blackstone, consolidating the portfolio around core logistics while enhancing the value of the Company's German retail properties through selective capital expenditure, should strengthen the longer term position of the Company.

Over the past eighteen months, against a background of challenging market conditions and changing circumstances, the Company has explored a large number of avenues for refinancing, with both the existing and potential new lenders. From the options open to the Company at this time, new Blackstone facility represented the best solution for shareholders. The new loan provides a significant extension of time for the asset management and, in some cases, disposal of properties. The Board and the Investment Manager are committed to using that time to identify and implement the next steps for the Company in the best interests of shareholders.

Ludovic Bernard

Fund Manager

Internos Global Investors Ltd

30 May 2014

Responsibility Statement

We confirm that to the best of our knowledge:

(a)  the condensed consolidated interim financial information for the six months ended 31 March 2014 has been prepared in accordance with International Accounting Standard (IAS) 34 - "Interim Financial Reporting" and give a true and fair view of the assets, liabilities, financial position and profit or loss of Invista European Real Estate Trust SICAF ("the Group");

(b)  the interim Financial Information includes a fair review of:

i.     important events having occurred during the six months ended 31 March 2014, together with their impact on the condensed consolidated interim financial information;

ii.    the principal risks and uncertainties for the remaining six months of the financial year; and

iii.   the information relating to related parties' transactions and changes therein.

By order of the Board,

Tom Chandos                                                                               Robert DeNormandie                 

Chairman                                                                                     Chairman of Audit Committee

30 May 2014                                                                                30 May 2014

CONDENSED CONSOLIDATED INTERIM INCOME STATEMENT

Unaudited for the six months ended 31 March 2014

The accompanying notes 1 to 19 form an integral part of the condensed consolidated interim financial information. The figures of 31 March 2014 and 2013 are unaudited whilst the twelve months figures of 30 September 2013 are audited.

CONDENSED CONSOLIDATED INTERIM STATEMENT OF COMPREHENSIVE INCOME

Unaudited for the six months ended 31 March 2014

All items in the above statement are derived from continuing operations.

The accompanying notes 1 to 19 form an integral part of the condensed consolidated interim financial information. The figures of 31 March 2014 and 2013 are unaudited whilst the twelve months figures of 30 September 2013 are audited.

CONDENSED CONSOLIDATED INTERIM STATEMENT OF FINANCIAL POSITION

Unaudited as at 31 March 2014

The accompanying notes 1 to 19 form an integral part of the condensed consolidated interim financial information. The figures of 31 March 2014 and 2013 are unaudited whilst the twelve months figures of 30 September 2013 are audited.

The condensed consolidated interim financial information was approved by the Board of Directors on 30 May 2014 and signed on its behalf by:

Tom Chandos                                                                                        Robert DeNormandie

Chairman                                                                                              Chairman of Audit Committee

CONDENSED CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY

Unaudited for the six months ended 31 March 2014

The accompanying notes 1 to 19 form an integral part of the condensed consolidated interim financial information. The figures of 31 March 2014 and 2013 are unaudited whilst the twelve months figures of 30 September 2013 are audited.

CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS

Unaudited for the six months ended 31 March 2014

CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS (CONTINUED)

Unaudited for the six months ended 31 March 2014

All items in the above statement are derived from continuing operations.

The accompanying notes 1 to 19 form an integral part of the condensed consolidated interim financial information. The figures of 31 March 2014 and 2013 are unaudited whilst the twelve months figures of 30 September 2013 are audited.

NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION FOR THE SIX MONTHS ENDED 31 MARCH 2014

1.       Reporting entity

Invista European Real Estate Trust SICAF ("the Company") was incorporated as a "société anonyme" under the laws of Luxembourg on 6 June 2005. On 17 November 2006 the Company was converted into an investment company with fixed capital "société d'investissement à capital fixe" ("SICAF"). Through its subsidiaries (together "the Group") its main activity is to evaluate, make and actively manage direct and indirect investments in real estate in Continental European countries.

The Company is a public limited liability company incorporated for an unlimited term. The registered office of the Company is established at 25C, Boulevard Royal, L-2449 Luxembourg. Information pertaining to the Company is included to the extent required by the London Stock Exchange listing rules. This information should not deem to represent statutory annual accounts, which are separately prepared in accordance with International Financial Reporting Standard (IFRS) as adopted by the European Union.

2          Basis of preparation

2.1        Statement of compliance

The condensed consolidated interim financial information for the six months ended 31 March 2014 has been approved for issue by the Board of Directors ("the Board") on 23 May 2014 and has been prepared in accordance with IAS 34 Interim Financial Reporting and in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).

The condensed consolidated interim financial information does not include all the information and disclosures required in the annual consolidated financial statements, and should be read in conjunction with the Group's annual consolidated financial statements for the year ended 30 September 2013.

2.2        Going concern

As noted in the latest Annual Report and Accounts of the Company, the key strategic concern of the Board has recently been the refinancing of the Loan Facility with Bank of Scotland ("BoS"). This loan was replaced in full by a new €220 million credit facility provided by funds affiliated to Blackstone Real Estate Debt Strategies ("BREDS") on 30 April 2014. This new facility will enable the Company to continue working towards its longer term strategic objective: carrying out a number of selected asset realisations while holding a diversified commercial real estate portfolio in Continental Europe with the potential for income and capital growth.

Given the selected asset disposals mentioned above, it is anticipated that nominal rental income will reduce over the next twelve months. The proportion of vacancy in the portfolio will also decrease as a result of selling a number of vacant assets and the expected achievement of some new lettings. There is always the risk of tenants defaulting and vacating ahead of their lease contract break or expiry, though this risk is monitored by the Company through the commissioning of a quarterly credit rating review on each tenant in the portfolio. As at January 2014, the tenant credit rating profile of the portfolio was 65.91 (out of 100) which is classified as 'low to medium risk band'. In May 2014 this rating was reassessed, and the credit profile of the Company's tenancy base has improved to 71.05 (out of 100), remaining in the 'low to medium risk band'. Thus the Company does not anticipate a significant risk of tenant default.

Under the terms of the new facility, once the total amount of the unpaid principal balance has been reduced to €135 million and as long as the LTV is below 70%, the ("Step-Down Event"), the margin will be reduced from 770bp to 470bp over three month EURIBOR. The LTV covenant, which is set initially at 85%, falls to 80% following the Step-Down Event. The disposal program is intended to provide the majority of the requisite €85 million amortization payment that will trigger the Step-Down Event. In any case, the Step-Down Event will unlock an interest margin that would be favourable to the Company. The Company is incentivised to carry out the planned sales by the potential Step-Down in its financing costs, but there is no further penalty imposed by the Facility Agreement in the event that the Company does not reach this target.

The cash position of the Company will need to be managed carefully in the interim period before the Step-Down Event, balancing the need for capital expenditure at Riesa and Roth properties with the requirement to sell a number of assets, some of which are income-producing. Under the terms of the new loan, a cash sweep will also be applied to the Company's income prior to the Step-Down Event. As a consequence, no distributions to ordinary or preference shareholders can be made for the duration of the cash sweep, with

2          Basis of preparation continued

the preference share dividend therefore being accrued. The Company regards making the repayments necessary to eliminate the cash sweep and trigger the Step-Down Event as an objective of the highest priority.

With the aforesaid in mind, the Board is satisfied that the Group has sufficient resources to continue in operation for the foreseeable future, a period of not less than 12 months from the date of this report. Accordingly, it continues to adopt the going concern basis in preparing the condensed consolidated interim financial information.

2.3        Basis of measurement

The condensed consolidated interim financial information have been prepared on the historical cost basis except for the following material items:

-      Investment in properties has been revalued as at 31 March 2014 (note 5),

The significant accounting estimates and judgment applied in the preparation of the condensed consolidated interim financial information are consistent with those applied in the preparation of the Company's annual consolidated financial statements for the year ended 30 September 2013.

2.4        New and amended standards and interpretations

The Group has adopted the following new and amended standards and interpretations issued by the International Accounting Standards Board (IASB) or the IFRS Interpretations Committee (previously IFRIC) as of 1 October 2013:

i.          IFRS 13, Fair Value Measurement - IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements. The requirements of IFRS 13, which are largely aligned between IFRSs and US Generally Accepted Accounting Principles (US GAAP), do not change when an entity is required to use fair value, but rather provide guidance of how to measure fair value under IFRS when fair value is required or permitted. The Group applied IFRS 13 from 1 October 2013 as adopted by the European Union. The adoption of this standard did not have a material impact on the financial position or performance of the Group. Additional disclosures, where required, are provided in the individual notes relating to the assets and liabilities.

Standards and Interpretations recently issued but not yet effective

A number of new standards, amendments to standards and interpretations have been issued but are not yet effective up to the date of issuance of the Group's condensed interim financial information, and have not been applied in preparing the condensed interim financial information.

Those which may be relevant to the Group are set out below. The Group does not plan to adopt these standards early.

ii.          IAS 27 (as revised in 2011) - As a consequence of the new IFRS 10 and IFRS 12, what remains in IAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The Group will apply IAS 27 (revised 2011) prospectively from 1 October 2014.

iii.         IAS 28 (as revised in 2011) - As a consequence of the new IFRS 11 and IFRS 12, IAS 28 has been renamed IAS 28 Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The standard defines significant influence as the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies. The Group will apply IAS 28 (revised 2011) prospectively from 1 January 2014. There are currently no investments in associates and joint ventures in the Group.

iv.         IFRS 9, Financial Instruments: Classification and Measurement - IFRS 9 as issued reflects the first phase of the IASB's work on the replacement of IAS 39 and applies to classification and measurement of financial assets and financial liabilities as defined in IAS 39. The standard is effective for annual periods beginning on or after 1 January 2013. IFRS 9 has two measurement categories: amortized cost and fair value through profit or loss. All equity instruments are measured at fair value. A debt instrument is stated at amortized cost only if the entity is holding it to collect contractual cash flows and the cash flows represent principal and interest. Otherwise it should be measured at fair value through profit or loss. The adoption of the first phase of IFRS 9 will have no impact on classification and measurements of the Group's financial assets/financial liabilities. The Group will apply IFRS 9 retrospectively from 1 January 2015.

v.          IFRS 10, Consolidated Financial Statements - IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12 Consolidation - Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities including 'special purpose entities'. The changes introduced by IFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore are required to be consolidated by a parent, compared with the requirements that were in IAS 27. The Fund will apply IFRS 10 retrospectively except for certain provisions from 1 October 2014.

vi.         IASB issued Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) on 31 October 2012. The amendments provide an exception to the consolidation requirements in IFRS 10 and require investment entities to measure particular subsidiaries at fair value through profit or loss. The amendments are effective from 1 January 2014 with early adoption permitted, which allow an investment entity to adopt the amendments at the same time as IFRS 10.

IERET does not qualify as an investment entity mostly from the fact that it has a separate business activity (property and asset management) which goes beyond earning returns from capital appreciation and/or investment income (IFRS 10.IE9 to IE11). The Fund has assessed that the implementation of the standard will have no material impact on the consolidated financial statements. If IERET had qualified as an investment entity, no consolidated financial statements would have been prepared in subsequent years.

vii.        IFRS 11, Joint Arrangements - IFRS 11 replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly-controlled Entities - Non-monetary Contributions by Venturers - This standard provides for a more consistent reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than its legal form. There are two types of joint arrangements: joint operations and joint ventures. IFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture must be accounted for using the equity method. The Group will apply IFRS 11 retrospectively from 1 October 2014.

viii.        IFRS 12, Disclosure of Involvement with Other Entities - IFRS 12 includes all of the disclosure requirements that were previously in IAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in IAS 31 and IAS 28. These disclosures relate to an entity's interests in subsidiaries, joint ventures, joint arrangements, associates and structured entities. A number of new disclosures are also required. The Group will apply IFRS 12 retrospectively from 1 October 2014.

The Group has considered the above new standards, interpretations and amendments to published standards and concluded that they are not expected to have a significant impact on the Group's consolidated financial statements, apart from additional disclosures.

3          Use of judgements and estimates

The significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 30 September 2013.

Measurement of fair values

The Group has an established control framework with respect to the measurement of fair values. This includes a valuation team that has overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the valuation team assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified. Significant valuation issues are reported to the Audit Committee.

When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorises into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:

a.   Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

b.   Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or the liability, either directly (e.g. as prices) or indirectly (i.e. derived from prices);

c.   Level 3: inputs for the asset or liability that are not based on observable market data.

The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change occurred.

4          Seasonality of operations

Rental income, other revenues and costs are received and incurred smoothly over the accounting period. Therefore no additional disclosures need to be made in the condensed consolidated interim financial information as a result of seasonality.

5          Investment property

The decline in values can be attributed to the continued discount on vacant properties and assets with shortening lease lengths.

All of the above investment properties have been pledged as collateral on the interest bearing loans and borrowings disclosed in note 11.

The net change in the value of the investment property also includes the valuation of assets sold:

The investment properties disposed composed of 2 assets, Modletice in the Czech Republic and Amiens C in France. The Modletice asset was sold through a share deal (disposal of subsidiary) for a net loss of €153K while the Amiens C disposal was direct investment property deal for a net loss of €1,146K.

5          Investment property continued

Investment property - valuation techniques and significant unobservable inputs

The following table provides a description of valuation techniques used and quantitative information about the significant unobservable inputs used by the independent valuers referenced above in determining the fair value of the investment properties for the period ending 31 March 2014 by geographical location.

6          Assets classified as held for sale

As at 31 March 2014, one non-current asset, Heustenstamm in Germany, was classified as held for sale.

7          Issued capital

Issuance of ordinary shares

The Company has issued share capital of €25,998,090 (30 September 2013: €25,998,090; 31 March 2013: €25,998,090) consisting of 259,980,909 shares (30 September 2013: 259,980,909 shares; 31 March 2013 259,980,909 shares) without indication of nominal value all of which have been fully paid up.

The right to exercise warrants to ordinary shares expired in November 2013 in line with the deadline provided in the prospectus of 30 December 2009.

The net asset value per ordinary share is based on net assets of €52.1 million as at 31 March 2014 (30 September 2013: €64.2 million; 31 March 2013: €66.0 million) and 260.0 million ordinary shares outstanding at 31 March 2014 (30 September 2013: 260.0 million; 31 March 2013: 260.0 million).

(1)  €:£ exchange rate of €1.21013 as at 31 March 2014; €1.19673 as at 30 September 2013; € 1.1856 as at 31 March 2013.

(2)  Exercise price of warrants of £0.29

The calculation of the basic earnings per share for the financial period ended 31 March 2014 is based on the loss attributable to ordinary shareholders of €6.3 million (30 September 2013: loss of €34.4 million; 31 March 2013: loss of €33.1 million), and the weighted average number of ordinary shares outstanding during the period ended 31 March 2014. The calculation of diluted earnings per share at 31 March 2014 is based on a diluted loss attributable to ordinary shareholders of €6.3 million (30 September 2013: loss of €34.4 million; 31 March 2013: loss of €33.1 million), and a weighted average number of ordinary shares outstanding during the period ended 31 March 2014 after the adjustment for the effect of all dilutive potential ordinary shares.

The conversion and assumed exercise of warrants to ordinary shares are ignored in the calculation of diluted loss per share since these are anti dilutive.

10         Preference shares dividend

On 30 December 2009 the Company issued 29,137,134 redeemable preference shares with one warrant attached per preference share. The preference shares confer the right to a cumulative preference share dividend payable semi-annually. The holders of preference shares are entitled to receive a preferential cumulative dividend of 9% per annum of the preference share issue price of £1.00. The preference dividend is payable semi-annually in June and December each year from 2010 to 2016 inclusive.

Under the terms of the New Loan, a cash sweep will be applied to the Company's income prior to the Step-Down Event (note 2.2). As a consequence, no distributions to ordinary or preference shareholders can be made for the duration of the cash sweep, with the preference share dividend therefore being accrued. The Company regards making the repayments necessary to eliminate the cash sweep as an objective of the highest priority. As a result, the accrued amount of preference share dividend as at 31 March 2014 was €0.9 million.

11         Interest bearing loans and borrowings

This note provides information about the contractual terms of the Group's interest bearing loans and borrowings, which are measured at amortised cost.

Included in the gross book value of the bank loans is an amount of €35.4 million (30 September 2013: €nil; 31 March 2013: €5.0 million) classified under liabilities held for sale (note 6).

In accordance with the terms of the Facility Agreement with Bank of Scotland ("BoS"), the last test of the Company's loan to value ("LTV") was held as at 25 January 2014. On that date, the Group had €221.2 million of outstanding indebtedness with BoS, the economic benefit of which Loan had been acquired by Cerberus (25 October 2013: €226.7 million); the Company's LTV was measured under the terms of the Loan documentation at 69.98% (25 October 2013: 68.93%), against a covenant of 70% (25 October 2013: 70%).

Tax expense is recognised based on management's best estimate of the applicable income tax rate expected in the year multiplied by the pre-tax income of the interim period.

According to the Luxembourg regulations concerning undertakings for collective investments, the Company is not subject to income taxes in Luxembourg. It is, however, liable to an annual subscription tax of 0.05% (taxe d'abonnement) of its total net assets, payable quarterly, and assessed on the last day of each quarter. Real estate revenues, or capital gains derived thereon, may be subject to taxes by assessment, withholding or otherwise in the countries where the real estate is situated.

The subsidiaries of the Group are subject to taxation in the countries in which they operate. Current taxation is provided for at the current applicable rates on the respective taxable profits.

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax base of assets and liabilities and their carrying amounts in the consolidated financial statements.

The Company and the Group have related party transactions with its subsidiaries, shareholders and certain Directors.

There has been no material change in the related party transactions described on page 59 of the annual report for the year ended 30 September 2013.

Directors' fees

The Directors of the Company and its subsidiaries were paid a total of €86,000 (2013 six months: €85,650) in Directors' fees during the period.

The Group also operates an inter-group trading account facility with its subsidiaries whereby it may receive income on behalf of its subsidiaries or pay expenses on their behalf. These balances are non-interest bearing and are settled on demand. All these transactions are conducted at arms length.

Internos Global Investors Limited ("Internos") acted as the Investment Manager of the Group in the period under review. Internos received Investment Management fees of €0.5m (2013 six months: €0.5m). The conditions for payment of a performance fee to the Investment Manager were not met during the period under review and as such no performance fee has been recorded.

In addition the Group accrued to Internos accounting provisions fee of €0.3m (2013 six months: €0.1m) for the period.

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

i. Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;

ii. Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or the liability, either directly (e.g. as prices) or indirectly (i.e. derived from prices);

iii.      Level 3: inputs for the asset or liability that are not based on observable market data.

There were no transfers from Level 2 to Level 1 during the six months ended 31 March 2014 and no transfers in either direction during the six months ended 31 March 2013. All the interest rate swaps associated with the BOS loan reached maturity on 31 December 2013 and were not renewed.

16        Risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results. The directors do not consider that the principal risks and uncertainties have changed since the publication of the annual report for the year ended 30 September 2013 except of those relating to the going concern. The debt of the Group matured on 31 December 2013 and was extended for 4 months to 30 April 2014. The old uncertainties related to the BoS facility have been superseded by the new refinancing. This loan was replaced in full by a new €220 million credit facility provided by funds affiliated to Blackstone Real Estate Debt Strategies ("BREDS") on 30 April 2014. A detailed explanation with regards to this issue is provided in Note 2.2.

Under the new debt facility, the Group is required to conducted asset sales. The risks and uncertainties related to delayed asset sales mainly impacts the borrowing costs. The borrowing margin would stay at 7.7% and covenants would reflect the pre step-down period. There is no time expiry on sale of assets and there is no linked penalty if the sales are not achieved.

Compared to the Company's low costs of capital during the four month period between 1 January 2013 and 30 April 2014, during which time there was no interest hedging, the interest cost of the new debt facility will take up a greater portion of the Company's recurring revenues. However, the new interest margin is comparable to the levels of debt service that the Company sustained prior to the end of its interest swap contracts, and the Company is expected to continue to meet its obligations in this regard.

The level of working capital held by the Company has reduced as a result of the costs of the refinancing. The cash position of the Company will therefore require careful management in the interim period before the Company reaches its objective of a lowered interest margin in accordance with the terms of the new loan facility (see note 2.2 Going Concern for more details).

The new loan facility has been agreed for a minimum term of 3 years, with two optional extensions, each for a 12 month additional term. Therefore the financial risk to the Company presented by the BoS loan has been substantially reduced for the foreseeable future.

A detailed explanation of the risks summarised below, together with the Group's objectives, policies and processes for measuring and managing them, can be found on pages 59 - 64 of the annual report and cover the following areas:

·      market and operational risks;

·      currency risk;

·      credit risk;

·      liquidity risk; and

·      financial risk management.

The operating segments derive their revenue primarily from rental income from lessees. All of the Group's business activities and operating segments are reported within the segments below.

The segment information for the year ended 30 September 2013 is as follows:

Certain subsidiaries of the Group are involved in litigation resulting from operating activities. These legal disputes and claims for damages are routine resulting from the normal course of business. None of these legal disputes and claims are expected to have a material effect on the statement of financial position, the result or liquidity of the Group.

The bank loan of the Group matured on 31 December 2013 and was extended for 4 months to 30 April 2014. On 30 April 2014, the Company entered into a new credit facility (the "New Loan") with Blackstone Real Estate Debt Strategies ("BREDS"), an affiliate of the Blackstone Group LP ("Blackstone") in an amount of €220 million. As a result, it repaid all outstanding amounts due to Bank of Scotland, the economic interest of whose loans to the Group had been sold in November 2013 to funds affiliated to Cerberus Capital Management, LP. The New Loan has a maturity of three years, with an option on the part of the Company to extend for two additional twelve month periods, subject to certain conditions. The initial margin is 770bp over three month EURIBOR, with an agreed path for a potential reduction to 470bp as set out below. The New Loan has a flexible structure that will enable the Group to pursue its non-core disposal plan by providing €85 million of freely prepayable proceeds which can be repaid via asset sales or contributions of additional equity. Once the total amount of the New Loan has been reduced to €135 million and so long as the LTV is below 70%, the ("Step-Down Event"), the margin will be reduced to 470bp over three month EURIBOR. The LTV covenant, which is set initially at 85%, falls to 80% following the Step-Down Event. For the first thirty months of the New Loan, any early repayments beyond the first €85 million (or any repayment from the proceeds of properties that are not designated as part of the disposal programme) will trigger an early redemption premium equivalent to the full interest rate on the amount repaid for the balance of that period. Under the terms of the New Loan, a cash sweep will be applied to the Company's income prior to the Step-Down Event. As a consequence, no distributions to ordinary or preference shareholders can be made for the duration of the cash sweep, with the preference share dividend therefore being accrued. Furthermore as a result of this new loan, the Company incurred standard arrangement fees and these will be capitalized and amortised over the initial tenure of the loan.

As part of its disposal program, the Company has received an offer in relation to the Heusenstamm office building. The prospective buyer has completed full due diligence on the property and the Group is considering the terms of the offer.

Adjusted gross assets is the aggregate value of all of the assets of the Group, including net distributable but undistributed income, less current liabilities of the Group (excluding from current liabilities any proportion of monies borrowed for investment whether or not treated under accounting rules as current liabilities), as shown in the consolidated accounts of the Group.

CSSF, " Commission de Surveillance du Secteur Financier", which is responsible for the prudential supervision of credit institutions, other professionals of the financial sector, undertakings for collective investment, pension funds, SICARs, securitisation undertakings issuing securities to the public on a continuous basis, regulated markets and their operators, multilateral trading facilities and payment institutions. It also supervises the securities markets, including their operators.

Earnings per share (EPS) is the profit after taxation divided by the weighted average number of shares in issue during the period.

Net equivalent yield is the time weighted average yield between the net initial yield and the reversionary yield.

Estimated rental value (ERV) is the Group's external valuers' reasonable opinion as to the open market rent which, on the date of valuation, could reasonably be expected to be obtained on a new letting or rent review of a property.

Gross rental income orgross rent is the annualised rental income receivable in the period prior to payment of non-recoverable expenditure such as ground rents, local taxes, insurance and property outgoings.

Gross initial yield (GIY) is the gross rent expressed as a percentage of the net valuation of property portfolio.

Group is Invista European Real Estate Trust SICAF and its subsidiaries.

Net asset value (NAV) are shareholders' funds, plus the surplus of the open market value over the book value of both development and trading properties, adjusted to add back the change in fair value of the warrants and deferred tax.

Net initial yield (NIY) is the net rental income expressed as a percentage of the gross valuation of the property portfolio.

Net rental income or net rent is the annualised rental income receivable in the period after payment of non-recoverable expenditure items such as ground rents, local taxes, insurance and property outgoings.

Potential rent is the rent achievable if all the remaining vacant space is let at the estimated rental value and added to the current gross rental income.

Reversionary yield is the anticipated yield, which the Net initial yield will rise to once the rent reaches the estimated rental value.

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