Audit Committee Report

I am pleased to present my first report following my appointment as Chairman of the Audit Committee on 10 April 2014. I am supported by Alun Jones and two independent non-executive Directors, Dr Ian Rutter and Mark Creedy. All members served throughout the year.

Alun Jones and I are both Chartered Accountants and, as can be seen from our biographies on page 33, we both possess the recent and relevant commercial knowledge and experience to satisfy the provisions of the Code. There are no employees of the Adviser on the Committee. The Committee may invite the Managing Director, representatives of the Adviser and non-independent Directors to attend the meetings as appropriate.

Responsibilities
The main roles and responsibilities of the Audit Committee include:

• monitoring the integrity of the Group’s financial statements and reviewing significant financial reporting issues and judgments contained therein;
• reviewing the Group’s systems of financial control and risk management;
• making recommendations to the Board on the appointment and dismissal of the external Auditor and approving their remuneration and terms of engagement;
• monitoring and reviewing the external Auditor’s independence, objectivity and effectiveness, taking into account professional and regulatory requirements; and
• annually considering the need for an internal audit function.

There are arrangements in place whereby employees of the Adviser may, in confidence, raise concerns about possible improprieties in matters of financial reporting amongst other things. The Committee ensures that the Adviser has in place arrangements for the proportionate and independent investigation of such matters.

Report on the Committee’s activities during the year
During the year, the Committee discharged its responsibilities under its terms of reference, by:

• reviewing the Group’s draft annual financial statements and 2014 half year results statement prior to discussion and approval by the Board, and reviewing the external Auditor’s reports thereon;
• reviewing and approving the Group’s property portfolio valuation at each Balance Sheet date;
• reviewing the continuing appropriateness of the Group’s accounting policies;
• reviewing the Auditor’s plan for the audit of the Group’s 2014 financial statements, receiving and reviewing confirmations of auditor independence and approving the terms of engagement and proposed fees for the 2014;
• considering the qualifications, expertise, resources and independence of the Auditors through reviews of their reports and performance;
• recommending the re-appointment of the Auditor for 2015;
• the Committee chairman meeting with the Auditor and with employees of the Adviser in February, early August and October to review the audit plans and progress, accounting processes and to discuss emerging points and the financial reports; and
• the Committee receiving presentations from the Adviser on the subject of risk, its identification, management and control, accounting and control and property portfolio management.

The Audit Committee has reviewed the contents of this year’s Annual Report and Financial Statements and advised the Board that, in its view, the report is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy.

Auditor independence
The Company has a policy governing the provision of non- audit work by the Auditor. Under that policy, the Auditor is prohibited from performing services where the Auditor may be required to audit their own work, participate in activities that would normally be undertaken by management, are remunerated through a ‘success fee’ structure where the success of a project is dependent upon the accounting treatment, or act in an advocacy role for the Company. Other than the above, there is not an automatic ban in place on the Auditor undertaking non-audit work. Each possible appointment is, however, reviewed on a case by case basis. Activities that may be perceived to be in conflict with the role of the external Auditor must be submitted to the Committee for approval prior to engagement, regardless of the fee involved. The Committee pays particular attention to matters it considers to be important due to their impact on the Group’s results and where a high level of complexity, judgement or evaluation is involved. Details of the amounts paid to the external Auditor during the year for audit and other services are set out in note 4 to the financial statements.

Effectiveness of external Auditor
The effectiveness of the audit process is dependent on appropriate audit risk identification at the start of the audit cycle. The Committee received from Deloitte LLP a detailed audit plan, identifying their assessment of these key risks. For 2014, the primary risks identified were in relation to the valuation of the property portfolio, revenue recognition, financing and valuation of financial instruments and going concern.

The Board and the Adviser take responsibility for exercising judgement when necessary in preparing the Annual Report and Financial Statements. They prepare and review papers provided to the Auditor, setting out their judgements and approaches taken to specific items. The work undertaken by the Auditor in this area to test management’s assumptions and estimates is challenged by the Audit Committee who assess the effectiveness of the audit process through the reporting received from Deloitte LLP at both half-year and year end. In addition, the Audit Committee seeks feedback from the Adviser on the effectiveness of the audit process. The Committee is satisfied with the effectiveness of the Auditor.

Deloitte LLP have been Auditors of PHP since being appointed in June 2013 which is also the date of the last audit tender.

Significant accounting matters
The Committee considers all financial information published in the Annual and Half Year Financial Statements and considers accounting policies adopted by the Group, presentation and disclosure of financial information and, in particular, the following key judgements made in preparing the Financial Statements.

Valuation of the property portfolio
The Group has property assets of £1.03 billion as detailed on the Group Balance Sheet. As explained in Note 11 to the Financial Statements, properties are independently valued by Lambert Smith Hampton in accordance with IAS 40: Investment Property. The Audit Committee reviewed and discussed with management the judgements and assumptions made in respect of the property valuation, reviewed the Valuer’s report and the Auditor’s comments thereon, and concluded that the valuation remains appropriate.

Revenue recognition
Following objective assessments, the Group adopts a policy of recognising 90% of the expected uplift from rent reviews from the date a rent review falls due until the date it is settled, when any additional balance due is recognised. The Committee reviewed the judgments made in respect of this policy, reviewed past experience of settlements and challenged management as to its continued appropriateness. The Committee received confirmation from management that the policy remained appropriate. The Committee also received detailed reporting from Deloitte LLP, the external auditors, on this matter and is satisfied that the policy remains appropriate.

Financing: repayment and restructuring of loan facilities
The Group undertook a number of financing transactions during the year.

The Aviva debt assumed with the acquisition of the PPP portfolio in December 2013 was refinanced in a number of tranches through 2014. An initial sum of £15 million was repaid in January 2014. A further £50 million was refinanced in April 2014 through a combination of a new £50 million facility with HSBC Bank PLC and the utilisation of an element of headroom on existing debt facilities. In August 2014, the remaining loans were restructured into two consolidated tranches with Aviva.

In August 2014, the Group (i) extended the term of its £165 million Club debt facility with Royal Bank of Scotland plc and Santander Banking Group plc, for a new three year term, and (ii) enlarged the quantum of its loan facility with Barclays Bank plc, extending the duration to a new five year term. In both transactions, the margins over LIBOR charged by the lending banks were reduced.

The Committee considered the potential impact of the early settlement of these transactions and the resulting accounting impact. This was achieved by holding discussions with management and Deloitte LLP and reviewing reports received from both parties.

The key accounting issues arising from these transactions concerned the treatment of breakage costs related to such repayments and the treatment of unamortised arrangement fees in accordance with classifying the nature of the loan transaction in accordance with IFRS.

The Group recognised costs of £1.2 million in respect of the early repayment of elements of the Aviva debt assumed with the PPP portfolio acquisition. This included both contractual early repayment fees and an element of unamortised arrangement fees resulting from the repayment and restructuring being classified as the inception of a new debt facility in accordance with IAS 39.

The extension of the Club and Barclays facilities were classified as modifications and no adjustment was made to the balance of unamortised arrangement fees carried forward by the Group.

The Committee was satisfied that the accounting guidelines had been followed appropriately.

Financing: Convertible Bond issue
In May 2014, the Group issued an £82.5 million, five year Convertible Bond. This transaction served to diversify the Group’s funding sources and procure a greater proportion of unsecured loan capital, leading to increased transactional flexibility and reduced overall risk.

The Board has opted to account for the Convertible Bond at fair value through profit and loss in accordance with IAS 32. Further detail is provided in Notes 17 and 19 to the Financial Statements.

The Committee is satisfied that the Group has adopted appropriate accounting policies and treatment and that appropriate accounting guidelines have been followed.

Financing and valuation of financial instruments
The Group hedges its exposure to interest rate risks swaps using financial instruments. The Group accounts for these instruments in accordance with IAS 39 and makes the additional required disclosures under IFRS 7 ‘Financial Instruments: Disclosures’.

The valuation of the financial instruments is undertaken by J C Rathbone (“JCRA”), an independent specialist in this area. The Committee has considered the Group’s compliance with the requirements of IFRS 13, concerning the measurement of credit risk in the valuation of financial instruments. The Group received detailed written reporting from JCRA and accordingly the Committee is satisfied that the accounting guidelines have been applied appropriately.

INTERNAL CONTROL

The Audit Committee reviews the Group’s system of internal control for effectiveness, which has been in operation throughout the year and to the date of this Report. It believes that the key risks facing the business have been identified and it has implemented an ongoing system to identify, evaluate, monitor and manage these risks that is based upon, and relevant to, the Group’s business as a UK REIT.

Following the Financial Reporting Council’s publication of “Internal Control: Revised Guidance for the Directors on the Combined Code”, and the FRC’s Guidance on Audit Committees published in September 2012, the Committee believes key features of the system of internal control include a comprehensive system of budgeting, financial reporting and business planning, formal documentation procedures and the close involvement of the Managing Director and the Adviser in all aspects of the day-to-day operations. The scope and quality of the Adviser’s systems of internal controls are regularly monitored and reviewed. Any incidences of significant control failings or weaknesses that have been identified and the extent to which they have impacted on the Group are reported to the Board who ensures that the Adviser takes the necessary actions to remedy those failings or weaknesses immediately. Nevertheless, the Committee believes that, although robust, the Group’s system of internal control is designed to manage, rather than eliminate, the risk of failure to achieve the Group’s business objectives. Therefore the system can provide only reasonable and not absolute assurance against material misstatement or loss.

In reviewing the periodic financial reports of the Group, the Committee is reliant on the policies and procedures followed by the Adviser to ensure that the records accurately reflect transactions so as to facilitate the production of consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) and other applicable reporting standards. In addition, the integrity of the financial reporting and consolidation processes and the completeness and accuracy of financial information are subject to review by the Audit Committee and the Board.

At the time of reviewing the half yearly and annual financial reports, the Audit Committee also receives a comfort letter from the Adviser to assist the Board in making the disclosures.

No significant deficiencies in internal control have been identified.

INTERNAL AUDIT

The Audit Committee considers annually the requirement for an internal audit department and the Board, on the recommendation of the Audit Committee, having regard to the matters considered above, have concluded that one is not currently required.

Steven Owen
Chairman of the Audit Committee
18 Febuary 2015