Interim Results
To: RNS
Date: 24 February 2015
From: F&C UK Real Estate Investments Limited
Interim results in respect of the period ended 31 December 2014
- Share price total return of 15.0 per cent for the 6 months
- Portfolio ungeared total return of 8.9 per cent for the 6 months
- Net asset value per share total return of 11.9 per cent for the 6 months
- Net asset value per share total return since launch of 98.4 percent
- Dividend of 2.5 pence per share for the period
- Dividend yield of 5.3 per cent as at 31 December 2014
The Chairman, Quentin Spicer, stated:
The Group has experienced another robust six months with sentiment
towards UK commercial property remaining positive. The net asset value (`NAV')
total return per share for the period was 11.9 per cent with this return being
positively impacted by the effects of gearing and the reduction in the swap
liability. The NAV per share at the period end was 90.8 pence.
The share price performance was also strong with a total return of
15.0 per cent over the period and the shares were trading at a premium to the
NAV of 3.5 per cent at the period end, compared to a premium of 0.7 per cent
as at 30 June 2014.
The shareholders authorised the Company to issue up to 23 million
Ordinary Shares without pre-emption rights at the recent Annual General
Meeting. Following this authority and with the Company's share price
consistently trading at a premium to the NAV, 3 million Ordinary Shares have
been issued at a 4 per cent premium to the prevailing NAV since the period
end. This has helped to satisfy the continuing demand for the Company's
shares. It is expected that a prospectus will be published in the near future,
providing the Company with the flexibility to raise additional share capital
through a Placing Programme of up to 100 million shares. Once the Annual
General Meeting authority has been exhausted, the Company will convene further
general meetings to seek shareholder approval for the additional
disapplication of pre-emption rights in relation to the issue of New Shares
under the Placing Programme.
Property Market
The UK commercial property market continued to deliver a strong
performance in the six months to 31 December 2014. Total returns at the all
property level for standing investments were 8.6 per cent, according to the
Investment Property Databank Quarterly Index (`IPD'). The income return during
the period was 2.6 per cent with performance being driven by a 5.9 per cent
rise in capital values. Rental growth improved to 1.7 per cent over the
period.
Although performance has been supported by a growing economy and
some improvement in the occupational market, total returns have been boosted
by strong inflows of investment into the asset class. This contributed to a
period of further yield compression in most parts of the market. London has
continued to out-perform but the recovery is broadening and industrial
property and South East offices have also recorded above average performance.
The period has also seen greater interest in more secondary stock and the
yield gap between prime and secondary has narrowed. All the IPD standard
segments recorded positive total returns and higher capital values during the
six month period.
Property Portfolio
The six month period to 31 December 2014 recorded further capital
growth in the Company's portfolio, with overall values increasing by 6.0 per
cent over the period. Industrial properties witnessed the highest capital
returns at 8.7 per cent, followed by Offices which increased in value by 6.9
per cent. Retail performance was rather more lack lustre with Retail
Warehouses increasing in value by 5.9 per cent and standard High Street retail
by 1.8 per cent. With the benefit of an income return of 2.8 per cent over the
period, the portfolio produced an ungeared total return of 8.9 per cent for
the six months ended 31 December 2014.
At the property level, 1-2 Lochside Way, Edinburgh produced the
largest capital uplift of £1.7 million, or 23.5 per cent, to £9.0 million on
the back of an improving market and the lease renewal with the tenant HSBC
plc. The property, located in Edinburgh Park, Scotland's premier out of town
office location, comprises two linked buildings totalling 42,400 square feet
constructed in 1998. The existing lease expired in August 2014 and terms
agreed for a renewal for a period of 10 years, with a break at the fifth year,
at a rent that equated to £16.50 per square foot, subject to a rent free
period of 12 months but a penalty if the tenant exercises the break.
14 Berkeley Street, London W1, remains the Company's largest asset
and is strategically situated in a prime Mayfair location between Berkeley
Square and Piccadilly. The property comprises 6 floors of offices, and a Land
Rover showroom on the ground and basement floors let to Pendragon. Over the
last few years, the property has produced strong rental and capital growth,
not only due to its prime West End location, but also due to a program of
upgrading and refurbishment which has been carried out to the property. Over
the six months to 31 December 2014 further inward yield movement as well as
rental growth, pushing rental values to £95 per square foot, has led to the
value increasing by a further £1.6 million over the period to £23.7 million,
an increase of 7.6 per cent.
With industrial properties producing the highest sector returns,
Echo Park, Banbury, a regional distribution of 195,000 square feet is the
Company's second largest asset. Let to the parent company of `3663' and
Bidvest for a further 11 years, it increased in value by 8.4 per cent to £20.8
million, an initial yield of 5.6 per cent. At Eastleigh, the value of two
prime industrial units totalling 111,000 square feet at Southampton
International Park, increased by £1.3 million, or 11.1 per cent, to £13.5
million.
High Street retail remains a mixed picture with a number of the
Company's properties located in strong locations producing above average
returns. On the flip side, we witnessed further falls in value on some of the
shops in poorer locations, where the occupational market is challenging.
However, we do see an improving picture which should lead to lettings and the
eventual sale of some of these assets.
Following the capital raising, and the acquisition of Rotherham and
Bromsgrove earlier in the year, the Company completed the acquisition of Unit
A3, Glory Park, Wooburn Green, High Wycombe in July 2014 for £6.97 million,
reflecting a yield of 7.0 per cent. The property comprises a Grade A
specification, modern business park office building, close to the M40
motorway. Totalling 19,572 square feet on three floors, the building is let to
two tenants in the pharmaceutical sector with the majority of the income
secured for 10 years.
The portfolio continues to be well and securely let with all of the
ten largest tenants by rent paid, either classified as Negligible or Low risk,
according to IPD. The vacancy rate stood at 5.0 per cent by estimated rental
value as at 31 December 2014, and good progress is being made to let vacant
units. The average unexpired weighted lease term stands at 8.1 years, compared
to 7.8 years at 30 June 2014.
The Company has continued to sell some of the smaller and poorly
performing assets and disposed of three properties with a total value of £5.3
million, during the first half. This brings the number of sales since the
merger to 10 properties with total receipts of £22.8 million.
UK REIT Regime
An extraordinary general meeting was held in December 2014, primarily to make
the necessary amendments to the Company's articles of incorporation in connection
with the proposals for the Company to become tax resident in the UK for the
purposes of entering into the UK REIT regime. As previously announced, all
resolutions proposed at the general meeting were duly approved by shareholders
and the Company entered the UK REIT regime with effect from 1 January 2015.
As explained in a recent Circular to shareholders, by obtaining UK-REIT status,
the Group is no longer subject to UK income tax on the profits and gains from
their qualifying property rental business provided that it meets certain conditions.
This will effectively reduce the burden of taxation for most shareholders as the
payment of UK income tax on the Group's property rental income was likely to
increase significantly moving forward, if UK REIT status had not been obtained.
Board Composition
Following the Company's entry into the UK REIT regime Mr
Christopher Sherwell and Mr Graham Harrison have retired from the Board with
effect from 31 December 2014.
Christopher has been on the Board since the launch of the Company
in 2004, and Graham was an original member of the ISIS Property Trust Board,
joining the Board as part of the merger in 2013. We wish them both every
success in the future and I would like to record formally our gratitude to
them for their significant contribution over the years.
We are currently in the process of recruiting suitable replacements
and expect to be in a position to make a formal announcement on Board
refreshment in the very near future.
Dividends
The first interim dividend for the year ending 30 June 2015 of 1.25
pence per share was paid in December 2014, with a second interim dividend of
1.25 pence per share to be paid on 31 March 2015 to shareholders on the
register on 13 March 2015.
The dividend is currently at a sustainable level and in the absence
of unforeseen circumstances, it is expected that the Company will continue to
pay quarterly dividends at this rate, the equivalent of 5 pence per share per
annum.
Borrowings
The net gearing level as at 31 December 2014 was 30.7 per cent,
which compares with 31.7 per cent as at 30 June 2014 and 40.0 per cent at
launch on 1 June 2004. The fall in the gearing percentage was a combination of
the loan drawn down being reduced to £102.0 million from £109.0 million and
the increase in the overall market value of the portfolio.
The Group had £6.1 million of cash available at 31 December 2014
and an undrawn loan facility of £13.0 million. The Company continues to
maintain a prudent attitude to gearing.
Outlook
This reporting period has delivered exceptional performance which
is unlikely to be sustained, but with property yields remaining attractive
against the risk free rate and interest rates expected to stay low for some
time, the outlook for property remains favourable. The approaching UK election
and possible EU referendum together with global economic and political
uncertainty may act to temper performance and at some point the scope for
property yields to compress further will end and some outward adjustment is
possible. The Manager is predicting a gradual return to more sustainable
levels of performance over the coming five years with rental growth becoming a
more important factor in performance, and for total returns to be increasingly
driven by income return. The portfolio remains robust with 58 per cent by
value situated in London and the South East region, and with a varied and
balanced portfolio there are further opportunities to identify asset
management opportunities to add value. The Company has announced the details
of a further placing of shares and the Manager is working to identify suitable
properties to purchase.
Enquiries to:
The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
Tel: 01481 745001
Fax: 01481 745051
I McBryde, S Macrae
F&C Investment Business Limited
Tel: 0207 628 8000
Fax: 0131 225 2375
F&C UK Real Estate Investments Limited
Consolidated Statement of Comprehensive Income
Six months to Six months to Year to
31 December 31 December 30 June
2014 2013 2014
Notes (unaudited) (unaudited) (audited)
£'000 £'000 £'000
Revenue
Rental income 9,523 10,159 19,603
Gains on investment 2 17,851 8,569 21,253
properties
Total income 27,374 18,728 40,856
Expenditure
Investment management fee (1,007) (839) (1,707)
Expenses of merger - (32) (32)
Direct operating expenses of let (396) (385) (733)
rental property
Direct operating expenses of vacant (121) (137) (259)
property
Provision for bad debts (24) 3 (15)
Administrative fee (51) (52) (102)
Valuation and other professional (211) (82) (170)
fees
Directors' fees (72) (66) (131)
Other expenses (168) (142) (287)
Total expenditure (2,050) (1,732) (3,436)
Net operating profit before finance 25,324 16,996 37,420
costs
Net finance costs
Interest receivable 9 26 49
Finance costs (2,951) (3,102) (6,016)
(2,942) (3,076) (5,967)
Net profit from ordinary activities
before taxation 22,382 13,920 31,453
Taxation on profit on ordinary (136) (320) (540)
activities
Net profit for the period 22,246 13,600 30,913
Other comprehensive income to be
reclassified to profit or loss in
subsequent periods:
Net gain on cash flow hedges, net of 524 3,090 5,198
tax
Total comprehensive income for the 22,770 16,690 36,111
period, net of tax
Basic and diluted earnings per 3 9.6p 6.4p 14.4p
share
F&C UK Real Estate Investments Limited
Consolidated Balance Sheet
31 December 31 December 30 June
2014 2013 2014
(unaudited) (unaudited) (audited)
Notes £'000 £'000 £'000
Non-current assets
Investment properties 2 314,923 278,195 295,387
Current assets
Trade and other receivables 6,435 6,389 6,061
Cash and cash equivalents 6,093 8,471 16,773
12,528 14,860 22,834
Total assets 327,451 293,055 318,221
Non-current liabilities
Interest-bearing bank loan (102,988) (109,940) (109,930)
Interest rate swap (4,234) (6,784) (4,776)
(107,222) (116,724) (114,706)
Current liabilities
Trade and other payables (5,992) (7,187) (6,110)
Income tax payable (193) (467) (377)
Interest rate swap (4,477) (4,560) (4,459)
(10,662) (12,214) (10,946)
Total liabilities (117,884) (128,938) (125,652)
Net assets 209,567 164,117 192,569
Represented by:
Share capital 2,309 2,131 2,309
Special distributable reserve 169,327 157,222 170,704
Capital reserve 39,864 9,329 22,013
Other reserve (1,933) (4,565) (2,457)
Equity shareholders' funds 209,567 164,117 192,569
Net asset value per share 4 90.8p 77.0p 83.4p
F&C UK Real Estate Investments Limited
Consolidated Statement of Changes in Equity
Six months to Six months to Year to
31 December 2014 31 December 30 June
(unaudited) 2013 2014
Notes £'000 (unaudited) (audited)
£'000 £'000
Opening net assets 192,569 149,115 149,115
Net profit for the period 22,246 13,600 30,913
Dividends paid 5 (5,772) (5,326) (10,840)
Movement in other reserve 524 3,090 5,198
Issue of ordinary shares - 3,638 18,183
Closing net assets 209,567 164,117 192,569
F&C UK Real Estate Investments Limited
Consolidated Cash Flow Statement
Six months Six months Year
to 31 to 31 to 30
December December June
2014 2013 2014
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Cash flows from operating activities
Net profit for the period before taxation 22,382 13,920 31,453
Adjustments for:
Gains on investment properties (17,851) (8,569) (21,253)
(Increase)/decrease in operating trade and
other receivables (374) (20) 301
(Decrease)/increase in operating trade and
other payables (118) 1,006 (71)
Interest received (9) (26) (49)
Finance costs 2,951 3,102 6,016
6,981 9,413 16,397
Taxation paid (320) (325) (636)
Net cash inflow from operating activities 6,661 9,088 15,761
Cash flows from investing activities
Purchase of investment properties (6,935) - (18,812)
Capital expenditure (22) (38) (48)
Sale of investment properties 5,272 1,475 15,789
Interest received 9 26 49
Net cash (outflow)/inflow from investing (1,676) 1,463 (3,022)
activities
Cash flows from financing activities
Shares issued (net of costs) - 3,638 18,183
Dividends paid (5,772) (5,326) (10,840)
Bank loan interest paid (479) (860) (1,467)
Payments under interest rate swap arrangement (2,414) (2,307) (4,617)
Bank loan repaid (7,000) (3,000) (3,000)
Net cash outflow from financing activities (15,665) (7,855) (1,741)
Net (decrease)/increase in cash and cash (10,680) 2,696 10,998
equivalents
Opening cash and cash equivalents 16,773 5,775 5,775
Closing cash and cash equivalents 6,093 8,471 16,773
F&C UK Real Estate Investments Limited
Notes to the Consolidated Financial Statements
for the six months to 31 December 2014
1) The condensed consolidated financial statements have been
prepared in accordance with International Financial Reporting Standards
(`IFRS'), IAS 34 `Interim Financial Reporting' and the accounting policies
set out in the statutory accounts of the Group for the year ended 30 June
2014. The condensed consolidated financial statements do not include all
of the information required for full annual financial statements and
should be read in conjunction with the consolidated financial statements
for the Group for the year ended 30 June 2014 which were prepared under
full IFRS requirements.
The Group has adopted the following new amendments effective as of
1 January 2014. The following changes are also expected to be reflected in the
Group's consolidated financial statements as at and for the year ending 30
June 2015.
- In October 2012, the IASB issued amendments to IFRS 10 `Consolidated
financial statements', IFRS 12 `Disclosure of interests in other entities' and
IAS 27 `Separate financial statements' - Investment entities. The amendments
define an investment entity and introduce an exception to consolidating
particular subsidiaries for investment entities. These amendments require an
investment entity to measure those subsidiaries at fair value through profit
or loss in accordance with IFRS 9 `Financial Instruments' in its consolidated
and separate financial statements. The amendments also introduce new
disclosure requirements for investment entities in IFRS 12 and IAS 27. These
amendments do not have any material impact on the consolidated financial
statements as presented.
2) Investment properties
Six month period to
31
December 2014
£'000
Opening market value 300,590
Capital expenditure and purchases 6,957
Sales (5,272)
Gains on investment properties 17,851
Movement in lease incentive receivable 279
Closing market value 320,405
Adjustment for lease incentives (5,482)
Balance sheet carrying value 314,923
All the Group's investment properties were valued as at 31 December
2014 by qualified professional valuers working in the company of DTZ Debenham
Tie Leung Limited (`DTZ'), Chartered Surveyors. All such valuers are chartered
surveyors, being members of the Royal Institute of Chartered Surveyors
(`RICS'). There were no significant changes to the valuation techniques used
during the period and these valuation techniques are detailed in the
consolidated financial statements as at and for the year ended 30 June 2014.
The market value of these investment properties amounted to £320,405,000 (31
December 2013: £283,695,000; 30 June 2014: £300,590,000), however an
adjustment has been made for lease incentives of £5,482,000 that are already
accounted for as an asset.
3) Earnings per Ordinary Share are based on 230,855,539 Ordinary
Shares, being the weighted average number of shares in issue during the
period (31 December 2013: 212,603,916 and 30 June 2014: 214,347,657).
Earnings for the six months to 31 December 2014 should not be taken as a
guide to the results for the year to 30 June 2015.
4) The net asset value per Ordinary Share is based on net assets of
£209,567,000 (31 December 2013: £164,117,000 and 30 June 2014:
£192,569,000) and 230,855,539 Ordinary Shares (31 December 2013:
213,050,491 and 30 June 2014: 230,855,539) being the number of shares in
issue at the period end.
5) Dividends paid
Six months to Six months to Year ended 30 June
31 December 2014 31 December 2013 2014
Rate Rate Rate
£'000 (pence) £'000 (pence) £'000 (pence)
Fourth interim 2,886 1.25 2,663 1.25 2,663 1.25
dividend
First interim 2,886 1.25 2,663 1.25 2,663 1.25
dividend
Second interim 2,663 1.25
dividend
Third interim 2,851 1.25
dividend
5,772 2.50 5,326 2.50 10,840 5.0
A second interim dividend for the year to 30 June 2015, of 1.25
pence per share, will be paid on 31 March 2015 to shareholders on the register
at close of business on 13 March 2015.
6) The fair value measurements for financial assets and financial
liabilities are categorised into different levels in the fair value
hierarchy based on the inputs to valuation techniques used. The different
levels are defined as follows:
- Level 1 - Unadjusted, fully accessible and current quoted prices in active
markets for identical assets or liabilities. Examples of such instruments
would be investments listed or quoted on any recognised stock exchange.
- Level 2 - Quoted prices for similar assets or liabilities, or other directly
or indirectly observable inputs which exist for the duration of the period of
investment. Examples of such instruments would be those for which the quoted
price has been suspended, forward interest rate contracts and certain other
derivative instruments. The interest rate swap entered into in order to hedge
the interest rate on the £100 million bank loan is included in Level 2. The
fair value of the interest rate swap at 31 December 2014 was £8,711,000 (31
December 2013: £11,344,000; 30 June 2014: £9,235,000).
- Level 3 - External inputs are unobservable. Value is the Directors' best
estimate, based on advice from relevant knowledgeable experts, use of
recognised valuation techniques and on assumptions as to what inputs other
market participants would apply in pricing the same or similar instrument. All
investments in direct property are included in Level 3.
There were no transfers between levels of the fair value hierarchy
during the six month period ended 31 December 2014.
The Group's financial risk management objectives and policies are
consistent with those disclosed in the consolidated financial statements as at
and for the year ended 30 June 2014.
7) The Board has considered the requirements of IFRS 8 `Operating
Segments'. The Board is of the view that the Group is engaged in a single
segment of business, being property investment, and in one geographical
area, the United Kingdom, and that therefore the Group has only a single
operating segment. The Board of Directors, as a whole, has been identified
as constituting the chief operating decision maker of the Group. The key
measure of performance used by the Board to assess the Group's performance
is the total return on the Group's net asset value, as calculated under
IFRS, and therefore no reconciliation is required between the measure of
profit or loss used by the Board and that contained in the condensed
consolidated financial statements.
8) No Director has an interest in any transactions which are or were
unusual in their nature or significant to the Group. F&C Investment
Business Limited received fees for its services as Investment Managers.
The total charge to the Income Statement during the period was £1,007,000
of which £nil remained payable at the period end.
The Directors of the Company received fees for their services
totalling £72,000, of which £nil remained payable at the period end.
9) The accounts have not been audited nor reviewed under the
requirements of ISRE 2410 `Review of interim financial information
performed by the independent auditor of the Company'.
10) The Group results consolidate those of F&C UK Real Estate
Finance Limited, which owns 100 per cent of the issued share capital of
IRP Holdings Limited (`IRPH') and IPT Property Holdings Limited (`IPTH').
IRPH and IPTH are companies incorporated in Guernsey whose principal
business is that of an investment and property company.
11. The report and accounts for the half-year ended 31 December
2014 will be posted to shareholders and made available on the websites
www.fcre.co.uk or www.fcre.gg shortly.
Statement of Principal Risks and Uncertainties
The Group's assets consist of direct investments in UK commercial
property. Its principal risks are therefore related to the UK commercial
property market in general but also the particular circumstances of the
properties in which it is invested and their tenants. Other risks faced by the
Group include market, investment and strategic, regulatory, tax efficiency,
financial, reporting and operational risks. The Group is also exposed to risks
in relation to its financial instruments. These risks, and the way in which
they are mitigated and managed, are described in more detail under the heading
`Principal Risks and Risk Management' within the Business Model and Strategy
in the Group's Annual Report for the year ended 30 June 2014. The Group's
principal risks and uncertainties have not changed materially since the date
of that report and are not expected to change materially for the remaining six
months of the Group's financial year.
Directors' Responsibility Statement in Respect of the Half-yearly
Financial Report
We confirm that to the best of our knowledge:
- the condensed set of consolidated financial statements has been
prepared in accordance with IAS34 `Interim Financial Reporting';
- the Chairman's Statement constituting the Interim Management
Report together with the Statement of Principal Risks and Uncertainties
include a fair review of the information required by the Disclosure and
Transparency Rules (`DTR') 4.2.7R, being an indication of important events
that have occurred during the first six months of the financial year and their
impact on the condensed set of consolidated financial statements; and
- the Chairman's Statement together with the consolidated financial
statements include a fair review of the information required by DTR 4.2.8R,
being related party transactions that have taken place in the first six months
of the current financial year and that have materially affected the financial
position or performance of the Group during that period, and any changes in
the related party transactions described in the last Annual Report that could
do so.
On behalf of the Board
Quentin Spicer
Chairman
23 February 2015
Friday, 3rd January 2025
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