Asset Buyout Partners Annual Report 2019

Fair value measurement A number of assets and liabilities included in the Group’s financial statements require measurement at, and/or disclosure of fair value. The fair value measurement of the Group’s financial and non-financial assets and liabilities utilizes market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorized into different levels based on how observable the inputs used in the valuation technique utilized are (the ‘fair value hierarchy’): · Level 1: Quoted prices in active markets for identical items (unadjusted) · Level 2: Observable direct or indirect inputs other than Level 1 inputs · Level 3: Unobservable inputs (i.e. not derived from market data). The classification of an item into the above levels is based on the lowest level of the inputs used that has a significant effect on the fair value measurement of the item. Fair value of investment properties Group management is responsible for the valuation of the invest- ment properties, both when acquiring an investment property and for the valuation of the properties at year-end. The valuation process includes both preparing internal valuations and obtaining separate valuations from the external valuation expert, Cushman & Wakefield Realkapital (“C&W”). Internal valuations are performed when acquiring new properties and external valuations are performed for accounting purposes. The same method has been used for both the internal and the external valuations. C&W has valued the properties with the use of a discounted cash flow analysis. Different discount rates have been used depending on the risk associated with each segment of the cash flows. At year-end all properties were valued by C&W. Each property is considered a separate asset based on its unique nature, character- istics and risks. The internal valuation team did not prepare a full valuation for all properties at year-end. However, analysis based on historical experience and expectations on future events were made of the movements in each property’s value. Furthermore, the analysis performed includes inspections and technical reviews of all properties. The external valuation report was also considered during the process. The internal valuation team verifies major inputs applied in the external valuation report by agreeing the information in the valuation computation to amounts in lease agreements, market reports and other relevant documentation. If the fair value changes in the external valuation report are different from expectations based on internal analysis, the changes are further discussed with the external valuation expert. When the Group’s management has finalized their assessment, the valuation results are presented to the Board of Directors and the major assumptions used in the valuations are discussed with the Board of Directors. It has been concluded that the valuations prepared by the external valuation expert may be used as basis for the accounting of investment properties at fair value at the balance sheet date. The following assumptions are considered to be the key inputs to the valuations: Rental cash inflows Future cash inflows consist of both contracted cash flows, from non-cancellable leases, and future lease income which is estimated based on assumptions on market rent and re-let costs. The market rent is estimated based on property location and type. C&W assists in estimating market rent by performing individual assessments of each property based on research and knowledge of the relevant area. The assessment of market rent distinguishes between property and land in line with contractual rent. Property costs Cost levels used in the valuation are based on normalized cost levels over the life of the building. Costs mainly consist of owner’s costs (e.g. maintenance, administration, insurance and taxes) and common costs. Inflation rate The inflation rate is used to forecast the development in rent levels. Inflation prognosis is based on yearly average forecast from Norges Bank, commercial bank(s) and Statistics Norway. Discount rates Discount rates are used for discounting contracted cash flows. Applied discount rates are set by performing individual assessments of tenants and properties. Exit yields Exit yield equals the expected normalized net initial yield for a prop- erty in a given geographical location and type. The overall building type and age is taken into account and seen against lifetime and reletting cost. The exit yield is given in real terms but is discounted with a higher nominal discount rate to take the effect of inflation in the DCF model. In short words, it is the expected real return for a property within a given geographical location and type. It used for discounting future lease income and residual value of each asset. Undeveloped land The value of undeveloped land is estimated as if the land were sub- divided, developed, and sold. Development costs, incentive costs, and carrying charges are subtracted from the estimated proceeds of sale, and the net income projection is discounted over the estimated period required for market absorption of the developed sites. The table below shows to which degree the investment property portfolio is affected by change in exit yield, property cost, discount rate, inflation and market rent, given that all other factors are unchanged (undeveloped land not included). Asset Buyout Partners | Annual Report 2019 28