Final Results

RNS Number : 7035E

F&C Commercial Property Trust Ld

14 April 2014

 



To:                   RNS

Date:               14 April 2014

From:              F&C Commercial Property Trust Limited

Results in Respect of the Year Ended 31 December 2013 (audited)

Highlights

·     Share price total return of 22.7 per cent

·     Net asset value total return of 13.0 per cent

·     Portfolio total return of 13.7 per cent, compared with a total return of 10.9 per cent from the IPD benchmark

·     Top quartile performance of the portfolio over 1 year and top decile over 3 and 5 years within the IPD Quarterly Universe

·     Dividend level maintained at 6.0p per Ordinary Share, providing a yield of 5.0 per cent at the year end

·     Completion of £65 million acquisition of office blocks in Aberdeen since the year end with a further £30 million acquisition on the same Park expected to complete shortly

Chairman's Statement

Review of the Year

It is pleasing to report that the Company continued to perform strongly in 2013. Its net asset value ('NAV') total return for the year was 13.0 per cent, comparing favourably with a total return of 10.9 per cent from the benchmark Investment Property Databank ('IPD') Quarterly Universe. The ungeared total return from the property portfolio was 13.7 per cent, also comparing favourably with the IPD total return. The portfolio continues to be in the top quartile of the IPD Quarterly Universe over one year and top decile over three and five years.    

The share price total return during the year was 22.7 per cent and the share price at the year-end was 120.5p. This represented a premium of 14.4 per cent to the NAV per share of 105.3p. The Company's shares traded at a strong premium throughout the year, reflecting the attractive dividend yield, a well covenanted income stream and the potential for capital gains from a portfolio of well-managed prime commercial property.

The strengthening of investor appetite for UK commercial property as reported at the interim stage continued for the full year. Improving economic data, a lessening of fears of a breakup of the Eurozone and a continuing environment of low interest rates all helped contribute to an increase in demand for the asset class. Overseas investors continued to provide the largest source of demand, but with an increasing demand from UK institutions as the year progressed.

Prime property continued to outperform secondary stock and the best performing regions were, again, London and the South East. However, as the year progressed yields in those sectors compressed further. The Managers bid on a number of properties during the year, and, while not completing any purchases, their disciplined approach signalled their unwillingness to pay the aggressive levels being bid, both in the regions and for more secondary properties.

As previously reported, the Company completed the development of student accommodation at Burma Road, Winchester in August. There were no other developments or acquisitions during the year but asset management activity has continued to be an important area of focus for the Company. There were several significant initiatives undertaken during the year which have enhanced the quality of the income stream and improved capital values. Detailed information regarding the activities undertaken during the year is contained within the Managers' Review.

Shareholders will recall a commitment made by the Company in July 2012 to purchase four office blocks in Aberdeen. The Company completed the purchase of Blocks 1 and 2 in March 2014 for a cost of £65.0 million. Blocks 3 and 4 are expected to be purchased later in April for a cost of around £30.4 million. The valuations of Blocks 1 and 2 will be reflected in the NAV per share as at 31 March 2014 and the valuations of Blocks 3 and 4 will be recognised in the NAV per share at the first quarter end following their purchase. The office blocks are all being purchased as pre-let on terms of between 15 and 20 years and will generate income of £6.9 million per annum, equivalent to a net initial yield of 6.8 per cent. This is a significant transaction for the Company, providing it with exposure to one of the most buoyant office markets in the UK and an increase in the level of dividend cover.

The following table provides an analysis of the movement in the NAV per share for the year:

                                                                                                                        Pence

NAV per share as at 31 December 2012                                                       98.8

Realised loss on sale of properties                                                                  (0.1)

Unrealised increase in valuation of direct property portfolio                              9.0       

Movement in interest rate swaps                                                                       0.3   

Net revenue                                                                                                        3.3

Dividends paid                                                                                                  (6.0)  

                                                                                                                        ---------

NAV per share as at 31 December 2013                                                       105.3    

                                                                                                                        ---------

Dividends

Twelve monthly interim dividends, each of 0.5p per share, were paid during the year maintaining the annual dividend of 6.0p per share and providing a dividend yield of 5.0 per cent based on the year-end share price. Barring unforeseen circumstances, the Board intends that dividends in 2014 will continue to be paid monthly at the same rate.

The Company's level of dividend cover for the year (excluding property gains/losses) was 56.0 per cent compared to 72.5 per cent in 2012. The reduction in dividend cover has been due primarily to property sales over the past two years, the proceeds of which were largely committed although un-invested as at 31 December 2013. This cash included that earmarked for the acquisition of the office blocks in Aberdeen. The income stream from this property, the student accommodation at Winchester and a number of successful lease events undertaken in recent months will be of significant benefit to the level of dividend cover in future years. In addition, the Company continues to look for further attractive investment opportunities to deploy its modest remaining cash balance and, as long as there are no significant adverse changes to the outlook for interest rates, the Board believes that the Company can benefit from the current low interest rate environment as the maturity date for its bonds and one bank loan approaches.

Borrowings and Cash Balances

At the year end the Company's borrowings were represented by its £230 million secured bonds which mature in June 2015 and which have been assigned an 'Aaa' rating by Moody's Investor Services, and a £50 million secured bank loan which is repayable in 2017. Since the year-end, as part of the funding of the purchase of office blocks in Aberdeen, the Company has drawn down a £30 million committed bank facility which was taken out in 2012 and which will mature in June 2015.

Had the Company been fully invested at 31 December 2013, the level of gearing would have been 26.0 per cent. However, since July 2012, when the Company made its commitment to purchase the office blocks in Aberdeen, it has held a higher level of cash in order to fund part of the purchase cost. The total amount of cash held at the year-end was £160.9 million, resulting in gearing, net of cash, of 13.1 per cent.

Since the year end, the cash balance has decreased to £122 million following a small acquisition and the purchase of the first two office blocks in Aberdeen. The cash balance is expected to decrease further to around £91 million following the completion of the remainder of the Aberdeen transaction.

Maturity of Secured Bonds and Bank Loan, and Continuation Vote

Given the Company's £230 million bonds and £30 million bank loan are both due to mature in June 2015, the Board has been considering various options in relation to refinancing this debt, either on or before its maturity. The Board believes that the current low interest rate environment and quality of the Company's portfolio make it well placed to refinance on attractive terms.

As shareholders may be aware, the Company is required by its Articles of Incorporation to propose an ordinary resolution for the continuation of the Company at its Annual General Meeting in 2015. The timing of the continuation vote was set at launch in 2005 so as to coincide with the maturity of the £230 million bonds. In the event of the bonds and bank loan being refinanced in advance of their maturity date, the Board will bring the continuation vote forward.

Real Estate Investment Trusts ('REIT') Regime

The Board has continued to keep under review the recent changes to the REIT regime, and in particular how these changes might impact the Company. The Board remains satisfied that for the time being it continues to be in the Company's interests to maintain the current group structure but this could change, particularly in light of any structural changes which may take place as a result of refinancing the debt.

Alternative Investment Fund Managers' Directive

This Directive is European legislation which creates an EU-wide framework for regulating an alternative investment fund manager ('AIFM'). The Company's activities fall within the remit of these new regulations and it has until July 2014 to comply. The Board is in an advanced stage of its planning. It has reviewed the impact of the Directive on the Company's operations and is considering two options: either to appoint a subsidiary of F&C Asset Management plc ('F&C') as the Company's AIFM; or for the Company itself to act as the AIFM. If the Board appoints a subsidiary of F&C as the AIFM then it will also be required to appoint a depository. There would be no additional fee payable to F&C should it be appointed as the AIFM and the Board does not expect other costs relating to compliance with the Directive to be significant. 

Issue of New Ordinary Shares

During the year, the Company issued 14 million Ordinary Shares for a net consideration of £14.1 million. All new shares were issued at a premium to the most recently announced NAV. The Board will seek new share issuance authority at the forthcoming Annual General Meeting.

Board Composition

Owing to other commitments, Jonathan Hooley retired as a Director on 31 December 2013.  On behalf of the Board I would like to thank Jonathan for his significant contribution to the Company since his appointment in 2009.

As previously announced, Trudi Clark was appointed as an independent non-executive Director on 4 February 2014. Trudi is a former Chief Executive Officer of Schroders (C.I.) Limited and is a non-executive director of a number of unlisted funds and companies in Guernsey. She brings accounting, property and banking experience to the Board.

Annual General Meeting

The Annual General Meeting will be held at 12.30pm on Wednesday 21 May 2014 at Trafalgar Court, Les Banques, St. Peter Port, Guernsey.

Outlook

The economic environment in the UK has improved over the past year and this should help to support the momentum in the commercial property market. While there are concerns about developments in the Eurozone and emerging markets as well as uncertainty as to when interest rates will start to increase, in the absence of any major economic disappointments the year ahead should be another successful one for the asset class. The Managers expect London and the South East to continue to outperform other regions in 2014, but with a broadening of investor demand towards some UK regions and properties containing secondary characteristics.

The imminent completion of the acquisition in Aberdeen is a significant transaction for the Company. The Managers continue to seek attractive investment opportunities and in particular to add value through pro-actively managing the existing portfolio where there are many opportunities to enhance revenue and capital returns for shareholders.

Chris Russell

Chairman

Managers' Review

Highlights over the Year

·   Top quartile performance, maintaining strong performance over the short, medium and long term

·   Total relative return outperformance of 2.5 per cent

·   Capital growth from the portfolio was 8.0 per cent, compared with the 4.9 per cent from the benchmark

·   Void levels of 6.0 per cent compared with the benchmark rate of 7.4 per cent

·   Lettings at Sears Retail Park, Solihull producing an income return of 7.9 per cent and a total return of 21.2 per cent

·   Asset management initiatives at 6a Hams Hall Distribution Park, Birmingham, resulting in  a total return of 37.8 per cent

·   Asset management initiatives at 16 Conduit Street, London W1 resulting in  a total return of 58.4 per cent

Property Market Review

The market portfolio total return for the year, as measured by the benchmark Investment Property Databank ('IPD') Quarterly Universe was 10.9 per cent. The year saw momentum building from quarter to quarter. An improving UK economic backdrop coupled with a lessening of fears of disorderly Eurozone fracture supported an improvement in investor sentiment as the year progressed.

Investment activity in 2013 totalled more than £53 billion compared with £33 billion in 2012, with transactions in the final quarter at a new high, according to figures from specialist information business, Property Data. While overseas investors continued to be the largest single group of investors, the year witnessed a return to positive net investment by UK institutions. Central London offices remained a major focus for buyers but interest broadened to other sectors of the market, both mainstream and alternative, and to the regions. The popularity of index-linked long leases as an alternative to low-yielding gilts persisted in 2013.

Capital values eased further in early 2013, after moving lower in 2012. Since then, capital growth has recovered, with 4.9 per cent from the IPD Quarterly Universe for the full year. Although London capital value growth continued to outpace that seen in the regions, the recovery broadened as 2013 progressed. The year saw higher capital values in most parts of the market with Rest of UK offices the main exception, although the final quarter did witness an uplift.

The benchmark income return for the year was 5.7 per cent compared with 5.8 per cent in 2012.

Growing the income stream has remained challenging. IPD market data indicates that although the growth in net income improved from the previous year, it remained below the ten year average in 2013. The market void rate as a percentage of total income moved below 10 per cent according to IPD data, with improvements seen in the three main property sectors.

The occupational market has been patchy, with falls in retail rental values the norm outside London. The office and industrial markets recorded positive rental growth focused on London and the South East, although the regions also witnessed a move to rental stabilisation. There are indications of some improvement in tenant demand, with a greater volume of enquiries apparent and signs of shortages of top quality space emerging in established core office and industrial locations. New supply was sharply reduced during the downturn but some schemes are now being progressed and some development has commenced on a speculative basis.

Prime property remained in favour during the year and the market saw initial yields compress. As the year progressed, investors started to look beyond prime, reflecting keen pricing and competition for this type of stock. Towards the end of 2013, the yield gap between prime and more secondary assets began to narrow. However, the occupational market for "true" secondary remained difficult and the year saw negative rental growth, net income growth and capital values for secondary standard retails, shopping centres, retail warehouses and offices in both the Rest of South East and the Rest of UK, according to IPD market data.

The year was marked by a sharp turnaround in performance, led by a more buoyant investment market. The recovery broadened to the regions and to some more secondary markets as the year progressed, but with London, the South East and prime assets still generally out-performing.

Property Portfolio

The property portfolio was externally valued at £927.9 million as at 31 December 2013.

The total return from the portfolio during the period was 13.7 per cent (14^th percentile), outperforming the 10.9 per cent benchmark return. The portfolio continues to deliver good performance over the long term recording top decile performance over three and five years.

Total Return Analysis
Market Segment - Direct Property	Portfolio	Benchmark
	(%)	(%)
St Retails - South East*	17.6	13.4
St Retails - Rest of UK	5.8	6.4
Shopping Centres	0.0	7.2
Retail Warehouses	12.2	7.1
Offices - City	19.4	14.0
Offices - West End	13.6	18.3
Offices - South East	10.2	15.0
Offices - Rest of UK	5.8	5.8
Industrials - South East	6.7	13.3
Industrials - Rest of UK	17.6	11.8
Other Commercial	14.4	9.4
All Segments	13.7	10.9

*Includes West End Retail

Retail

The retail sector IPD benchmark portfolio total return was 8.3 per cent in 2013, a significant improvement on the 2012 out-turn, but still the weakest of the three main property sectors. IPD market data showed West End retail recording an 18.0 per cent total return for the year, but retail property in regions outside Central London failed to reach 8 per cent. There are a few bright spots outside the capital but the sector has continued to struggle with the impact of trade diversion from traditional stores to other forms of retailing and constrained consumer budgets. Secondary property has been particularly affected but retail rental growth was negative across every region outside London in 2013, underlining the problems facing the occupational market. The improvement in employment, rising house prices and lower inflation strengthened consumer sentiment later in the year to the benefit of retailers providing the right offer, but retailers generally still remained cautious and cost sensitive.

The Company's largest holding, St. Christopher's Place Estate, London W1, delivered a total return for the year of 18.9 per cent, which was in excess of the West End retail benchmark. Key highlights during the year were securing planning consent for a redevelopment of 71-77 Wigmore Street and the contracted purchase of 1 Barrett Street from an adjoining owner, which should complete shortly. The acquisition will open up attractive opportunities for the redevelopment of a strategic corner site that overlooks the main Barrett Street piazza. On lettings, a record rent of £73 per sq. ft. was achieved for refurbished office space at St. Christopher's House and new retail lettings were concluded with Jones The Bootmaker, Diverso and Les 100 Ciels. A further seven apartments were created as part of our ongoing programme of upgrading the Estate's building stock and void levels generally are at historically low levels, which is helping to drive net income levels, rental values and investment performance.

The Company's other West End retail holding at 16 Conduit Street delivered an outstanding return of 58.4 per cent as a result of the surrender of the headlease and the re-grant of a new lease of the shop premises to Christian Dior. This transaction saw income rise for the holding as a whole by 54.1 per cent. Conduit Street benefits from its proximity to Bond Street, where rents have also seen huge increases, and this rental trend is now extending into the nearby streets due to supply issues and occupiers searching for relatively lower total occupation costs. Outside the West End the Company's holding in Wimbledon, which has a heavy bias towards leisure uses, continues to deliver satisfactory performance largely as a result of active demand for space from food and beverage operators, a trend we expect to continue.

2013 was a year of two halves for retail warehousing with the first half of the year being one of the quietest on record in terms of deal flow because of vendors' reluctance to sell due to disparity in pricing expectations. The second half of the year saw a marked increase in transactional activity with UK institutions continuing to dominate the market but oversees money playing a more significant part. Throughout the year, demand for prime assets of all lot sizes offering long, secure income streams continued to outweigh supply. As prime yields continued to harden (50-75 bps inward shift), more stock began to come to the market, including some rather opportunistic disposals of secondary assets. The usual year end flurry saw a huge leap in activity in the final quarter with total Out of Town Retail disposals for 2013 of around £2.7 billion (90 deals).

The improving economic picture during 2013 started to feed through to the retailers with some renewed occupational activity. The last round of high profile failures (Comet, JJB, Dreams), took average vacancy rates in the sector to just under 10 per cent, but this began to decrease as space was taken up.

A prolonged lack of new development (down to less than 1 million sq. ft. completed and opened in the previous 12 months), created some competition for prime space, especially in the South-East.

Asset management activity within the Company's retail warehouse holdings focused on Sears Retail Park, Solihull. The lease of Unit 2 was surrendered by Homebase and the unit was subdivided to create two smaller units, which were relet to M&S Simply Food at a rent of £462,000 per annum until 2033 (tenant only break option in 2028) and TJX Homesense at a rent of £315,000 per annum until 2029 (tenant only break option in 2023).  As a result, footfall to the Park has been enhanced and future rental growth prospects are improving. The lease term to Homebase for Unit 1 was extended until 2027, at the existing rental level, thus increasing the unexpired terms of leases across all three units. The former Comet unit, which extends to 30,000 sq. ft., has been let to Next Home & Garden on a 15 year lease at rent of £800,000 per annum. We believe this letting will be transformational for the Park.

Offices

The office market as a whole delivered an IPD portfolio benchmark total return of 14.8 per cent in 2013. Within the sector, West End offices delivered a benchmark total return of 18.3 per cent reflecting both strong investor demand and uplifts where potential existed to convert to residential use. The City provided a benchmark total return of 14.0 per cent, lagging behind some more fringe areas of the capital. The Rest of the South East office market registered a benchmark total return of 15.0 per cent, following a prolonged period of under-performance, helped by improved tenant demand, very low new supply and increased investor interest. The office market outside London and the South East was significantly weaker, with a benchmark total return of 5.8 per cent for the year. There were marked differences in performance between cities, with Aberdeen, Cambridge and Edinburgh all delivering double digit annual market returns in 2013 but Glasgow, Leeds and Manchester seeing total returns of less than 5 per cent.

The Central London market had another positive year. Increasing occupier activity and reducing availability, in part because of change of use to residential, drove rental growth and continuing weight of money, approaching 70 per cent from overseas, compressed yields further.

During the year, the Company completed the sale of Charles House, 5-11 Regent Street, London SW1 to the Crown Estate for £36 million, reflecting a net initial yield of 5.96 per cent. The sale price bettered the last external valuation by £1.6 million. Selling Charles House took advantage of the strong demand for Central London properties and avoided the risk of lease expiries and requirements for imminent capital expenditure when £965,000 (54.3 per cent) of annual rental income was due to expire in March 2014 with the remaining income expiring in 2017/2018.

The year also saw 25 Great Pulteney Street, London W1 fully let, with the final floor being taken by WPP at the asking rent of £75 per sq. ft. WPP occupy 60 per cent of the building by area on leases all expiring in June 2022 without breaks. The sixth floor at 17a Curzon Street, London W1 has been refurbished and let at a rent of £95 per sq. ft.

The South East office portfolio produced a total return of 10.2 per cent, underperforming the IPD benchmark of 15.0 per cent. This underperformance was a result of valuers marking out capitalisation yields on shorter leases. In the regions, the market remains challenging but there are notable signs of recovery. Increased occupational demand has been witnessed at Watchmoor Park, Camberley, 125 Princes Street, Edinburgh and Alhambra House, Glasgow, and refurbishment initiatives at 82 King Street, Manchester and Thames Valley Park Two, Reading are in the process of being completed.

Industrial

IPD market data indicates that the greatest total return was seen in the Midlands in 2013 and also that distribution warehouses out-performed standard industrials for the fifth consecutive year to deliver a 14.9 per cent annual total return. Investor demand has come from buyers seeking assets with a relatively high income return, exposure to longer leases and from overseas investors, and yields have responded. The occupational market saw improved take-up with shortages emerging in some areas. Rental growth turned positive during the year but there was a quality threshold. Rental growth remained negative at the secondary end in 2013 and net income for secondary industrials has now been falling for nine consecutive years. In contrast, distribution warehouses have become increasingly institutionally acceptable and their share in the IPD Quarterly Universe has more than doubled since 2001.

The Company's industrial South East properties provided a total return of 6.7 per cent, which was below the IPD benchmark of 13.3. This level of underperformance was outstripped by the Rest of UK registering a total return of 17.6 per cent compared with an 11.8 per cent total return for the benchmark.

At Hams Hall Distribution Park, Birmingham the Company accepted a surrender of the lease of Unit 6a and simultaneously contracted with Syncreon Automotive (UK) Limited to grant a seven year lease at the passing rent of £707,712 per annum.  As the previous tenant had not been in occupation and had been marketing its lease for approximately two years, this asset management initiative resulted in a 26 per cent (approximately £2 million) uplift in value in the fourth quarter of the year.

The assignment of the lease on Unit 8 Hams Hall from Wincanton to their occupational client, Nestlé Purina Petcare (UK) Ltd, was completed after the year-end. This transaction, despite providing Nestlé with the equivalent of ten months' rent free and settling the 2010 and 2015 reviews without increase, importantly allows for the removal of the 2015 break clause, thereby providing continuous income until at least 2020, and should result in substantial capital appreciation in the first quarter of 2014.

At Cowdray Avenue, Colchester, lettings have been secured of Unit 16 to Pickford Move Management Ltd and Unit 5 to Cowdray Carpets Limited with a combined rental income in excess of £86,000 per annum.  This has equated to a reduction in the void rate across the estate from approximately 22 per cent to 14 per cent by ERV. Lease re-gearings have been agreed for Unit 22 to Teleplan Colchester Ltd and Unit 3 to Rexel UK Limited extending 16 per cent of the total rental income across the estate, and terms have been agreed on a new letting of Units 7 and 8 with Howdens Properties Limited for a new 15 year term with a tenant only break option at year ten. This letting will generate an annual income of over £50,000 and should complete shortly, resulting in a further reduction in the void rate from 14 per cent to under 10 per cent.

The refurbishment of Unit 1 Strategic Park, Hedge End, Southampton is nearly complete and there is a good level of tenant interest in the facility.  

The 'Other' Sector

This sector comprises alternative property assets such as healthcare, student accommodation, hotels, data centres and automotive uses. The sector is growing in importance and now comprises 7.7 per cent of the IPD benchmark. The sector offers an opportunity to acquire properties secured on long leases, usually at least 15 years, with fixed uplifts or RPI linkage. These can be attractive in an environment of low gilt yields and given the limited amount of stock in the traditional three sectors offering long leases. The "Other Commercial" sector recorded an IPD benchmark total return of 9.4 per cent in 2013.

The Company's exposure to this sector produced a total return of 14.4 per cent, equivalent to 4.6 per cent relative outperformance. This was entirely attributable to the ownership of student housing accommodation at Burma Road, Winchester. The development of five blocks of accommodation comprising 499 bedrooms is let to the University of Winchester on a new 25 year lease with RPI linkage, subject to a collar. All properties have now been finished and handed over to the University.

Purchases and Disposals

After the year-end the Company purchased the freehold of the Magnet and Multiyork units at Sears Retail Park, Solihull. The acquisition increases the Company's exposure to the Solihull Out of Town Retail market, which is set to strengthen over the short term, through the asset management initiatives outlined above.

The Company's acquisition of Prime Four Business Park, Aberdeen was delayed due to the late completion of the building programme. As reported previously, the four pre-let headquarter office buildings are being acquired for £95.4 million, plus costs, with an overall rent of £6.9 million per annum and the overall net initial yield on completion will be 6.84 per cent. Since the end of the year the Company has completed the purchase of the 103,000 sq. ft. building let to Apache North Sea Limited and the 100,000 sq. ft. building let to Nexen Petroleum UK Ltd for an aggregate price of £65.0 million and a contracted rent of £4.7 million per annum. Construction of the two other buildings is continuing and it is anticipated that they will be acquired before the end of the second quarter.

Property Management

The management of income remains key in what is still a challenging environment. The strategy of sustaining and protecting rental income within the portfolio is a key focus.

Void levels over the year reduced from 7.0 per cent to 6.0 per cent of estimated rental value (excluding properties held for development) compared with the benchmark rate of 7.4 per cent. This equates to approximately £3.7 million of rental value. We remain totally focused on leasing the vacant accommodation in the portfolio. During 2013 we contracted 39 lettings, producing a total rental income of £1.6 million per annum. We also contracted nine rent reviews with a total uplift of £0.3 million per annum over the previous passing rent.

The provision of overdue debt (90 days) is 1.2 per cent of gross annualised rents, a decrease from 2.1 on the quarter. The total bad debt charge for the year was 1.3 per cent of gross annualised rents, which is higher than previously experienced and is due in the main to the retailer defaults at Solihull (Comet and JJB Sports). As reported elsewhere in this report, progress has been and continues to be made in securing long term occupational tenants for these units.

We are making significant progress in dealing with the 2014 and 2015 lease expiries as evidenced by the activity at Hams Hall Distribution Park, Birmingham, highlighted above.

Outlook

The economic outlook has brightened, with UK consensus forecasts being upgraded, but uncertainties remain. Investors are concerned about potential adverse developments in the US, the Eurozone and emerging markets, while the timing and trajectory of changes to official interest rates in the UK is unclear. The property market upturn has gathered momentum and if the forecast improving economic performance is realised, 2014 could be another year of double digit total returns.  Total returns may see some moderation thereafter if monetary policy becomes less accommodative but, in the absence of major shocks, we expect total returns to remain positive both in real and nominal terms over the medium-term and to out-pace the long-run (ten year) average. London and the South East are predicted to continue to out-perform, while towns with a local economy based on expanding industries such as oil, technology and media may also do well. We also believe that the recovery will broaden and deepen in other parts of the UK but that property performance will continue to be governed by local market fundamentals and the characteristics of the asset.

Richard Kirby

Investment Manager

F&C REIT Property Asset Management plc

F&C Commercial Property Trust Limited

Consolidated Statement of Comprehensive Income (audited)

		Year ended 31 December 2013	Year ended 31 December 2012
		£'000	£'000
Revenue
Rental income		52,558	57,212
		---------	---------
Total revenue		52,558	57,212
Gains/(losses) on investment properties
Unrealised gains/(losses) on revaluation of investment properties		66,765	(11,393)
(Losses)/gains on sale of investment properties realised		(198)	10,380
		----------	----------
Total income		119,125	56,199
		----------	----------
Expenditure
Investment management fee		(6,302)	(5,994)
Other expenses		(6,802)	(5,649)
		----------	----------
Total expenditure		(13,104)	(11,643)
		-----------	-----------
Operating profit before finance costs		106,021	44,556
		-----------	-----------
Net finance costs
Interest receivable		958	530
Finance costs		(14,716)	(14,719)
		-----------	-----------
		(13,758)	(14,189)
		-----------	-----------
Profit before taxation		92,263	30,367
Taxation		(278)	(233)
		----------	----------
Profit for the year		91,985	30,134
		----------	----------
Other comprehensive income
Items that are or may be reclassified subsequently to profit or loss
Movement in fair value of interest rate swaps		2,317	(660)
		----------	----------
Total comprehensive income for the year		94,302	29,474
		----------	----------
Basic and diluted earnings per share		12.2p	4.2p

All of the profit and total comprehensive income for the year is attributable to the owners of the Company.

All of the items in the above statement derive from continuing obligations.

F&C Commercial Property Trust Limited

Consolidated Balance Sheet (audited)

	As at 31 December 2013 £'000	As at 31 December 2012 £'000
Non-current assets
Investment properties	914,183	833,147
	------------	------------
	914,183	833,147
	------------	------------
Current assets
Properties held for sale	-	36,000
Trade and other receivables	22,845	15,575
Cash and cash equivalents	160,937	153,143
	------------	------------
	183,782	204,718
	------------	------------
Total assets	1,097,965	1,037,865
	------------	------------
Current liabilities
Trade and other payables	(17,530)	(18,340)
	------------	------------
Non-current liabilities
Interest-bearing bonds	(229,811)	(229,675)
Interest-bearing bank loan	(49,207)	(49,099)
Interest rate swaps	(2,403)	(4,720)
	------------	------------
	(281,421)	(283,494)
	------------	------------
Total liabilities	(298,951)	(301,834)
	------------	------------
Net assets	799,014	736,031
	------------	------------
Represented by:
Share capital	7,587	7,447
Share premium	78,566	64,612
Reverse acquisition reserve	831	831
Special reserve	556,082	562,366
Capital reserve - investments sold	(18,856)	(28,002)
Capital reserve - investments held	108,423	51,002
Hedging reserve	(2,403)	(4,720)
Revenue reserve	68,784	82,495
	------------	------------
Equity shareholders' funds	799,014	736,031
	------------	------------
Net asset value per share	105.3p	98.8p

F&C Commercial Property Trust Limited

Consolidated Statement of Changes in Equity

for the year ended 31 December 2013 (audited)

	Share Capital £'000	Share Premium £'000	Reverse Acquisition Reserve £'000	Special Reserve £'000	Capital Reserve - Investments Sold £'000	Capital  Reserve - Investments Held £'000	Hedging Reserve £'000	Revenue Reserve £'000	Total £'000
At 1 January 2013	7,447	64,612	831	562,366	(28,002)	51,002	(4,720)	82,495	736,031
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	-	-	91,985	91,985
Movement in fair value of interest rate swaps	-	-	-	-	-	-	2,317	-	2,317
Transfer in respect of unrealised gains on investment properties	-	-	-	-	-	66,765	-	(66,765)	-
Losses on sale of investment properties realised	-	-	-	-	(198)	-	-	198	-
Transfer of prior years' revaluation to realised reserve	-	-	-	-	9,344	(9,344)	-	-	-
Transfer from special reserve	-	-	-	(6,284)	-	-	-	6,284	-
Total comprehensive income for the year	-	-	-	(6,284)	9,146	57,421	2,317	31,702	94,302
Transactions with owners of the Company recognised directly in equity
Issue of ordinary share capital	140	13,954	-	-	-	-	-	-	14,094
Dividends paid	-	-	-	-	-	-	-	(45,413)	(45,413)
At 31 December 2013	7,587	78,566	831	556,082	(18,856)	108,423	(2,403)	68,784	799,014

Consolidated Statement of Changes in Equity

for the year ended 31 December 2012 (audited)

	Share Capital £'000	Share Premium £'000	Reverse Acquisition Reserve £'000	Special Reserve £'000	Capital Reserve - Investments Sold £'000	Capital  Reserve - Investments Held £'000	Hedging Reserve £'000	Revenue Reserve £'000	Total £'000
At 1 January 2012	6,805	-	831	562,366	(48,817)	72,830	(4,060)	94,288	684,243
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	-	-	30,134	30,134
Movement in fair value of interest rate swaps	-	-	-	-	-	-	(660)	-	(660)
Transfer in respect of unrealised losses on investment properties	-	-	-	-	-	(11,393)	-	11,393	-
Gains on sale of investment properties realised	-	-	-	-	10,380	-	-	(10,380)	-
Transfer of prior years' revaluation to realised reserve	-	-	-	-	10,435	(10,435)	-	-	-
Total comprehensive income for the year	-	-	-	-	20,815	(21,828)	(660)	31,147	29,474
Transactions with owners of the Company recognised directly in equity
Issue of ordinary share capital	642	64,612	-	-	-	-	-	-	65,254
Dividends paid	-	-	-	-	-	-	-	(42,940)	(42,940)
At 31 December 2012	7,447	64,612	831	562,366	(28,002)	51,002	(4,720)	82,495	736,031

F&C Commercial Property Trust Limited

Consolidated Statement of Cash Flows (audited)

	Year ended 31 December 2013	Year ended 31 December 2012
	£'000	£'000
Cash flows from operating activities
Profit for the year before taxation	92,263	30,367
Adjustments for:
Finance costs	14,716	14,719
Interest receivable	(958)	(530)
Unrealised (gains)/losses on revaluation of investment properties	(66,765)	11,393
Losses/(gains) on sale of investment properties realised	198	(10,380)
Increase in operating trade and other receivables	(7,270)	(4,378)
(Decrease)/increase in operating trade and other payables	(908)	67
	-----------	-----------
	31,276	41,258
	-----------	-----------
Interest received	958	530
Interest paid	(14,472)	(14,484)
Tax paid	(180)	(255)
	-----------	-----------
	(13,694)	(14,209)
	-----------	-----------
Net cash inflow from operating activities	17,582	27,049
	-----------	-----------
Cash flows from investing activities
Purchase/development of investment properties	(8,523)	(12,159)
Sale of investment properties	36,000	77,165
Capital expenditure	(5,946)	(10,583)
	-----------	-----------
Net cash inflow from investing activities	21,531	54,423
	-----------	-----------
Cash flows from financing activities
Issue of ordinary share capital, net of costs	14,094	65,254
Dividends paid	(45,413)	(42,940)
Set-up costs of bank facility	-	(465)
	-----------	-----------
Net cash (outflow)/inflow from financing activities	(31,319)	21,849
	-----------	-----------
Net increase in cash and cash equivalents	7,794	103,321
Opening cash and cash equivalents	153,143	49,822
	-----------	-----------
Closing cash and cash equivalents	160,937	153,143
	-----------	-----------

F&C Commercial Property Trust Limited

Principal Risks and Risk Management

The Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council, and has established an ongoing process designed to meet the particular needs of the Company in managing the risks and uncertainties to which it is exposed. The principal risks and uncertainties faced by the Company are described below and in note 2 which provides detailed explanations of the risks associated with the Company's financial instruments.

·     Market - the Company's assets comprise principally direct investments in UK commercial property and it is therefore exposed to movements and changes in that market.

·     Investment and strategic - poor investment processes and incorrect strategy, including sector and geographic allocations and use of gearing could lead to poor returns for shareholders.

·     Regulatory - breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.

·     Management and control - changes that cause the management and control of the Company to be exercised in the United Kingdom could lead to the Company becoming liable to United Kingdom taxation on income and capital gains.

·     Operational - failure of the Managers' accounting systems or disruption to its business, or that of other third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.

·     Financial - inadequate controls by the Managers or other third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to a qualified audit report, misreporting or breaches of regulations. Breaching Guernsey solvency test requirements or loan covenants could lead to a loss of shareholders' confidence and financial loss for shareholders.

The Board seeks to mitigate and manage these risks through continual review, policy-setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company's property portfolio. The Managers seek to mitigate these risks through active asset management initiatives and carrying out due diligence work on potential tenants before entering into any new lease agreements. All of the properties in the portfolio are insured.

F&C Commercial Property Trust Limited

Statement of Directors' Responsibilities in Respect of the Annual Financial Report

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge:

·      The financial statements contained within the Annual Report for the year ended 31 December 2013, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Chairman's Statement and Managers' Review include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      'Principal Risks and Risk Management' includes a description of the Company's principal risks and uncertainties; and

·      The Annual Report includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

Chris Russell                                                  

Director                                                           

F&C Commercial Property Trust Limited

Notes to the audited Consolidated Financial Statements

for the year ended 31 December 2013

1.         The Board has declared a twelfth, and last, interim dividend for the year of 0.50p per share to be paid on 30 April 2014 to shareholders on the register on 11 April 2014.

It is the Directors' intention that the Company will continue to pay dividends monthly.

2.         Financial Instruments

The Company's investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for capital and income growth from investing in a diversified UK commercial property portfolio.

Consistent with that objective, the Group holds UK commercial property investments. In addition, the Group's financial instruments comprise interest-bearing bonds, an interest-bearing bank loan, cash and receivables and payables that arise directly from its operations. The Group does not have exposure to any derivative instruments other than the interest rate swaps entered into to hedge the interest paid on the interest-bearing bank loan and facility.

The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.

The Board reviews and agrees policies for managing the Group's risk exposure. These policies are summarised below and have remained unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group's investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group's overall risk exposure.

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.

In the event of default by an occupational tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Managers monitor such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.

All of the Group's cash is placed with financial institutions with a long term credit rating of A or better. Bankruptcy or insolvency of such financial institutions may cause the Group's ability to access cash placed on deposit to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank.

During the year and the prior year, due to the quantum of cash balances held, counterparty risk was spread by placing cash across a number of different financial institutions.

Liquidity risk

Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise UK commercial property. Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.

The Group's liquidity risk is managed on an ongoing basis by the Managers and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to meet its obligations for a period of at least twelve months.

The Group's investments may, from time to time, include investments in indirect property funds which are not traded in an organised public market and which generally may be illiquid. As a result, similar to the directly-held properties, the Group may not be able to liquidate quickly some of its investments in those instruments in order to meet its liquidity requirements. As at 31 December 2013 the Group did not hold any investments in indirect property funds (2012: £nil).

Interest rate risk

Some of the Group's financial instruments are interest bearing. They are a mix of both fixed and variable rate instruments with differing maturities. As a consequence, the Group is exposed to interest rate risk due to fluctuations in the prevailing market rate.

The Group's exposure to interest rate risk relates primarily to its long-term debt obligations. Interest rate risk on long-term debt obligations is managed by fixing the interest rate on such borrowings, either directly or through interest rate swaps for the same notional value and duration. Long-term debt obligations and the interest rate risk they confer to the Group is considered by the Board on a quarterly basis. Long term debt obligations consist of £230 million Secured Bonds due 2017 on which the rate has been fixed at 5.23 per cent until the expected maturity date of 30 June 2015. If the bonds are not redeemed at this date they will carry interest at 0.6 per cent over LIBOR until the final maturity date of 30 June 2017. The Group also has a £50 million interest-bearing bank loan on which the rate has been fixed through an interest rate swap at 4.88 per cent per annum until the maturity date of 28 June 2017.

The Group has entered into a forward interest rate window swap, commencing between 31 December 2013 and 31 July 2014, at the option of the Group, with a nominal value of £30 million and a maturity date of 30 June 2015. This swap will be used to fix the interest rate on the £30 million interest-bearing bank loan facility which is expected to be used to partially fund a property purchase at Prime Four Business Park, Kingswell, Aberdeen (see note 6). The forward interest rate swap would fix the interest rate on the loan at 3.71 per cent per annum until the maturity date of 30 June 2015.

When the Group retains cash balances, they are ordinarily held on interest-bearing deposit accounts. The benchmark which determines the interest income received on interest bearing cash balances is the bank base rate which was 0.5 per cent as at 31 December 2013 (2012: 0.5 per cent). The Company's policy is to hold cash in variable rate or short-term fixed rate bank accounts and not usually in fixed rate securities with a term greater than three months.

Market price risk

The Group's strategy for the management of market price risk is driven by the investment policy. The management of market price risk is part of the investment management process and is typical of commercial property investment. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.

The Group may also hold investments in indirect property funds (including listed property companies) which in turn invest directly in commercial property. In addition to the price risk attaching to the underlying assets, such funds also carry the risk that the investment cannot be disposed of at its net asset value due to a lack of liquidity. The Company did not hold any investments in indirect property funds at 31 December 2013 or 31 December 2012.

3.         There were 758,715,702 Ordinary Shares in issue at 31 December 2013 (2012: 744,715,702).

The Company issued 14,000,000 Ordinary Shares during the year (2012: 64,178,699) raising net proceeds of £14,094,000 (2012: £65,254,000). The Company did not repurchase any Ordinary Shares during the year.

At 31 December 2013, the Company did not hold any Ordinary Shares in treasury (2012: nil).

4.         The basic and diluted earnings per Ordinary Share are based on the profit for the year of £91,985,000 (2012: £30,134,000) and on 756,792,414 (2012: 714,924,384) Ordinary Shares, being the weighted average number of shares in issue during the year.

5.         The Company owns 100 per cent of the issued ordinary share capital of FCPT Holdings Limited, a company registered in Guernsey which was, until the group reconstruction in 2009, the top company in the group structure. The principal activity of FCPT Holdings Limited is now to act as a holding company and it owns 100 per cent of the ordinary share capital of F&C Commercial Property Holdings Limited, a company registered in Guernsey whose principal business is that of an investment and property company.

The Company owns 100 per cent of the issued ordinary share capital of SCP Estate Holdings Limited, a company registered in Guernsey. The principal activity of SCP Estate Holdings Limited is to act as a holding company and it owns 100 per cent of the ordinary share capital of SCP Estate Limited, a company registered in Guernsey whose principal business is that of an investment and property company, and 100 per cent of the ordinary share capital of Prime Four Limited, a company registered in Guernsey whose principal business is that of an investment and property company.

The Company owns 100 per cent of the issued ordinary share capital of Winchester Burma Limited, a company registered in Guernsey whose principal business is that of an investment and property company.

The Company owns 100 per cent of the issued ordinary share capital of Accede Limited, a company incorporated in England and Wales. At 31 December 2013 this Company was dormant, having previously acted as an investment and property company.

The Group also consolidates the results of F&C Commercial Property Finance Limited, a special purpose vehicle incorporated in Guernsey to issue the interest-bearing bonds. F&C Commercial Property Finance Limited has the same board of directors as the Company and the Company has the majority of the risks and rewards associated with the vehicle. F&C Commercial Property Finance Limited is therefore consolidated as a subsidiary.

6.         The Group had capital commitments totalling £17,901,000 as at 31 December 2013 (2012: £11,379,000). These commitments related mainly to expected property purchases at Oakenshaw Road, Solihull (£4,500,000) and 1 Barrett Street, London W1 (£6,275,000) along with other development work relating to the existing property portfolio, mainly at Solihull, Sears Retail Park. Deposits relating to expected purchases totalling £5,128,000 were paid into escrow accounts prior to 31 December 2013 and are included in 'trade and other receivables'. The purchase at Oakenshaw Road, Solihull subsequently completed on 8 January 2014.

In addition to the capital commitments above, the Group had agreed a forward commitment to purchase four pre-let office blocks situated in Prime Four Business Park, Kingswells, Aberdeen for approximately £95 million, plus costs. These office blocks remained under development at 31 December 2013. The purchases of Blocks 1 and 2 subsequently completed during March 2014 for a combined cost of £65.0 million, with the consideration falling payable on completion of the development of each block. The Group's £30 million loan facility was drawn down on 20 March 2014 and used to partially finance the latter purchase. Blocks 3 and 4 are expected to be purchased later in April 2014 for a cost of around £30.4 million. The overall net initial yield for all four Blocks is 6.8 per cent.

7.         These are not full statutory accounts. The full audited accounts for the year to 31 December 2013 will be sent to shareholders and will be available for inspection at Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3QL, the registered office of the Company, and from the Company's website: www.fccpt.co.uk

All enquiries to:

The Company Secretary

Northern Trust International Fund Administration (Guernsey) Limited

Trafalgar Court

Les Banques

St Peter Port

Guernsey GY1 3QL

Tel:      [phone]

Fax:     [phone]

Richard Kirby

F&C REIT Property Asset Management plc

Tel:      [phone]

Graeme Caton

Winterflood Securities Limited

Tel:      [phone]

 

END

 

 

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