Final Results
City North Group PLC
14 March 2003
City North Group plc
14 March 2003
Preliminary announcement of audited results for the year ended 31 December 2002
Highlights:
- Turnover up 10% to £5.244 million (2001 - £4.750 million)
- Operating profit up 10% to £3.076 million (2001 - £2.794 million)
- Tenant occupancy averaged 97%
- Fixed assets up to £103.630 million (2001 - £100.018 million)
- Net asset value per share totalled 290p (2001 - 289p)
- Proposed final dividend of 1.65p (2001 - 1.55p) taking growth for the year
to 4%
- The Company bought in 625,000 shares for cancellation
- The shares continued to outperform the FTSE All Share Index by a
comfortable margin
Commenting on the results, John Cobb, Chairman, said:
'2002 was a year of strong operating performance by City North, in testing
market conditions. Against a background of increased competition and economic
slowdown, the Company achieved high occupancy and underlying rental growth.
Profit margins were maintained and expansion continued in Group turnover and
development.'
Enquiries
Michael Sherley-Dale 020 7932 0403
Managing Director msd@citynorth.com
Chairman's statement
The past year has seen strong operating performance by City North Group in
testing market conditions. While the UK residential letting market suffered
falls in rental levels in the region of 10%, City North achieved underlying
growth while maintaining profit margins. Operating profits rose by 10% and
continued to provide comfortable interest cover.
The residential portfolio once again grew in value by an average of 8%. This was
less than the national average, but consistent with a London market which
suffered from contraction in the financial sector. Total assets consolidated
above £100 million, despite significant markdowns in the value of several
development sites. Caution over office rentals has undermined site values in
Central London generally, but we remain confident that the Group's supply of
development properties provides an exciting platform for future growth.
2002 saw further share price outperformance against a miserable stock market
background. The real estate sector continued to leave equities well behind, but
did not manage to reduce its substantial discount to asset value. City North is
typical in trading recently at a 35-40% discount to net asset value, and our
objective will be to reduce this disparity. I am confident that the team at City
North will achieve this goal through its commitment to growth and proven track
record.
As previously announced, the Board has been reduced in size by the resignation
of Jonathan Sherley-Dale as Development Director on 25 October 2002, and Mark
Horrocks who resigned as a Non-Executive Director on 25 April 2002. I would like
to thank both colleagues for their contribution over recent years. The Board
remains balanced between four Executive and four Non-Executive Directors, and I
extend my thanks for their continued commitment and support.
J M Cobb
Chairman
Operational and financial review
SUMMARY
2002 has been a successful year for City North Group in a climate of increased
competition and economic slowdown. The Group continued to derive its income
predominantly from residential property in Central London, where capital values
and rents have both come under downward pressure. Despite this background, the
business has produced a 10% rise in turnover and a corresponding rise in
operating profits.
Average tenant occupancy remained high at 97%, compared to national rates in the
region of 90%. The Group benefited from having over 40% of its income in fixed
corporate leases, and from its policy of continuously upgrading stock where
units were vacated. Underlying rental growth was achieved at around the rate of
inflation, and three of the larger sites increased income by over 10%.
Capital growth in the residential portfolio was generally in the 7-9% range.
This was less than the heady growth of UK national house prices, but typical of
Inner London, where contraction in the City was felt the most keenly. Gains in
residential assets were offset by reductions in several development site values,
and this had the effect of undermining shareholders funds. Overall, net asset
value per share rose slightly to 290p (2001 - 289p), and this reflected the
resilience of the core residential portfolio. Some 3p of net asset value per
share was also added through the Company's first purchases of shares for
cancellation.
The year saw a continuation of share price outperformance against the FTSE All
Share Index, but an erosion of value in real terms. The Directors are keenly
aware of the need to produce positive returns to shareholders and will pursue a
narrowing of share price discount to asset value. This may be achieved through
disposals which finance further share purchases, but most of all it will come
from success in creating further income and capital growth.
OPERATIONS
Group income grew by 10% in 2002 to £5.244 million (2001- £4.750 million), and
is currently over £5.5 million annualised. The past year benefited from a full
year contribution from 20 Bakers Row and from a successful renovation and
re-letting at Caslon House, both properties being in London EC1. In the case of
the latter commercial site, a four month programme of works resulted in an
exceptional rise in income from £63,000 to £150,000 per annum. In addition,
Bloomberg Arch came on stream in Spring 2002, as a small but prestigious
addition to Vincent Square/Udall Street, London SWI. This added a further
£80,000 to the rent roll.
Development activity was reduced in the second half of the year as the economic
outlook deteriorated, with particular weakness in the office rental market.
Spending on construction was cut from £5 million to £3 million annualised, and
staff overheads in design and development were reduced by 35%. Much work was
carried out on City Road, London EC1 and Prescot Street, London E1, to prepare
and enhance planning applications, and these resulted in a material increase in
potential space. However, the Directors do not intend starting work on either
site without established prelets. It is likely that permissions will be
formalised on both the latter in the Spring, after which marketing can take
place with a view to selling or developing the properties.
The marketing of residential rental accommodation has become more competitive.
2002 saw a doubling of expenditure on advertising and more evidence of tenants
shopping around for product. Fortunately for City North, a large percentage of
tenants continue to come by way of recommendation, but there is an ever greater
need to be responsive to tenant needs. Standards in rental property have
improved dramatically over the past decade, placing ever greater emphasis on
quality and service.
Average tenant occupancy was 97% in 2002, and the Company was fortunate in its
concentration on middle market rentals, where demand was the most stable. The
area of greatest weakness was prime Central London, which tends to be the most
sensitive to corporate and overseas demand. At current rental levels it has
become cheaper for tenants to rent rather than buy, and we believe that buyers
are becoming more likely to defer purchase in favour of renting. Bad debts
remained low throughout the year at less than 0.25% of revenues.
Administrative expenses rose by much the same rate as turnover and totalled
£2.168 million (2001 - £1.956 million). Staff costs were inflated by over
£100,000 of redundancy and severance costs, given the reduction in development
activity in the Autumn. Other features included higher tenant marketing and
public company expenses. Excluding depreciation, costs represented 34% of
turnover, virtually the same as in 2001, and the objective will be to reduce
this in 2003.
Interest costs rose by 18% to £2.153 million (2001 - £1.820 million) as
development spending continued, and borrowings were also increased by share
purchases for cancellation. Debt at the year end totalled £37.6 million,
representing 59% of shareholders funds. Interest expenses were covered by
operating profits 1.4 times, and this level of cover is likely to exceed 1.3
times in 2003.
Pre-tax profits of £1.006 million included an £83,000 profit on a minor
disposal, and were little changed from the £0.974 million reported in 2001.
Interest charges reduced taxable profits, leaving earnings to cover the annual
dividend 1.27 times (2001 - 1.36 times). The Directors' recommendation of a
1.65p final dividend takes the total payment for the year to 2.65p per share,
representing an increase of 3.9%. Future dividends will continue to reflect the
progression of operating profits, subject to available resources after interest
costs. The dividend record date will be 25 April 2003 and, if approved, the
payment date will be 23 May 2003.
ASSET VALUE
Allsop & Co carried out a valuation of City North's portfolio at the year-end,
showing the Group's properties to be worth £102.563 million (2001 - £99.085
million), valued on a Market Value Basis. Net assets totalled £63.399 million
(2001 - £65.122 million) which, after the re-purchase of 625,000 shares for
cancellation, resulted in a net asset value per share of 290p (2001 -289p).
Allsop & Co's valuation provides a discount to reflect existing tenancies,
mostly ranging from 5-8% for residential properties let on assured shortholds.
The lettable stock comprises approximately 340 units, ranging from studios to
houses, as well as a small number of commercial premises and live-work units.
The rental portfolio totals around 260,000 square feet of net lettable space,
with a value of £80 million. The value of the residential stock averages £340 on
a net per square foot basis.
During the year, there were no major acquisitions and just one small disposal in
North London. 53 Crouch Hall Road, London N8 was sold with vacant possession in
July 2002 for £700,000 before expenses, representing a 21% premium to book value
at 31 December 2001.
Following this disposal, the decision was made to use the proceeds to buy in
City North shares for cancellation. 375,000 shares were purchased at a 36%
discount to historic asset value, and this was followed in November by a further
250,000 shares at a similar discount. The rationale for taking this action was
based on a combination of opportunity and available finance. Clearly there is no
desire to contract the size of the business, and funds will not be employed in
this way where they can produce better returns elsewhere. However, within the
confines of comfortable interest cover, the Directors will consider further
purchases where asset value and/or earnings per share can be enhanced. Indeed,
since the year end, we have purchased a further 200,000 shares for cancellation.
In addition to the rented property, the Group's prospective development space
totals over 325,000 square feet on four sites. This property is valued at around
£22 million, representing a £5 million reduction from last year to reflect
current market conditions. In valuing the development stock, consideration is
given to prospective rental income, as well as building and interest costs,
prior to producing a residual site valuation. This had the effect of offsetting
the growth achieved elsewhere in the residential portfolio.
THE FUTURE
2002 was a year of strong operating performance by City North, offset by some
disappointment on asset growth. The Directors are confident that, long term, the
outlook for income and capital growth remains strong, and that share price
outperformance of the equity market will continue. Optimism on rentals is based
on a belief that income will keep pace with wage inflation, while reversions and
renovations will provide more uplift. Confidence on asset growth is based on the
view that inner London will outperform the UK market in the long term. The
Directors also believe that development sites offer great potential for future
growth as planning permissions and construction strategies are realised.
As in previous years, we have provided an analysis of growth in turnover,
operating profits and shareholder funds for the Group since its inception, and
we are confident of maintaining progress in each category.
M B Sherley-Dale
Managing Director
Consolidated profit and loss account for the year ended 31 December 2002
2002 2001
£'000 £'000 £'000 £'000
Turnover 5,244 4,750
Administrative expenses
Repairs and maintenance 353 456
Salaries, wages and social security 772 577
Professional fees 249 232
Depreciation 391 350
Property expenses 183 174
Office expenses 189 134
Bank charges 31 33
----------- -----------
(2,168) (1,956)
---------- -----------
Operating profit 3,076 2,794
Profit on sale of investment properties 83 -
Interest payable and similar charges (2,153) (1,820)
--------- -----------
Profit on ordinary activities before taxation 1,006 974
Taxation on profit on ordinary activities (290) (209)
---------- -----------
Profit on ordinary activities after taxation 716 765
Dividends (566) (562)
---------- -----------
Retained profit for the year 150 203
====== =======
Earnings per ordinary share - Basic 3.27p 3.47p
- Diluted 3.25p 3.45p
All amounts shown above relate to continuing operations.
Consolidated statement of total recognised gains and losses and note of
historical cost profits and losses for the year ended 31 December 2002
Group
2002 2001
£'000 £'000
Profit on ordinary activities for the year after 716 765
taxation
Taxation on previously revalued
properties sold in the year (57) -
Unrealised (deficit)/surplus on revaluation of (646) 2,482
properties
----------- ----------
Total recognised gains and losses for the year 13 3,247
======= =======
2002 2001
£'000 £'000
Note of historical cost profits and losses
Reported profit on ordinary activities before 1,006
taxation 974
Realisation of property revaluation gains of 353
previous years
--------- ------------
Historical cost profit on ordinary activities before 1,359 974
taxation
====== ======
Historical cost profit for the year retained after 503 203
taxation and dividends
====== ======
Consolidated balance sheet at 31 December 2002
2002 2001
£'000 £'000 £'000 £'000
Fixed assets
Tangible assets 103,630 100,018
Current assets
Debtors 96 93
Creditors: amounts falling due within one year (2,256) (2,038)
----------- ----------
Net current liabilities (2,160) (1,945)
-------- ----------
Total assets less current liabilities 101,470 98,073
Creditors: amounts falling (37,200) (32,200)
Provision for liabilities and charges (871) (751)
----------- -----------
Net assets 63,399 65,122
======= =======
Capital and reserves
Called up share capital 10,701 11,013
Share premium account 8,329 8,329
Revaluation reserve 35,139 36,138
Merger reserve 5,081 5,081
Capital redemption reserve 312 -
Profit and loss account 3,837 4,561
---------- ----------
Equity shareholders' funds 63,399 65,122
====== ======
Diluted net assets per share 290p 289p
Consolidated cash flow statement for the year ended 31 December 2002
2002 2001
£'000 £'000
Net cash inflow from operating activities 3,581 3,382
Returns on investments and servicing of finance (2,260) (1,660)
Taxation (132) (172)
Capital expenditure (4,566) (11,570)
Equity dividends paid (558) (539)
--------- --------
Cash outflow before financing (3,935) (10,559)
Financing 3,830 10,200
--------- ---------
Decrease in cash during the year (105) (359)
====== ======
The financial statements were approved by the Board on 14 March 2003.
Notes
1. Earnings per ordinary share have been calculated using the weighted
average number of shares in issue during the relevant financial periods. The
weighted average number of equity shares in issue is 21,899,801 (2001 -
22,026,170) and the earnings, being profit after tax, are £716,000 (2001 -
£765,000).
The diluted earnings per share is calculated allowing for the full exercise
of outstanding share options at the beginning of the period where those
share options are dilutive. The adjusted weighted average number of shares
is 22,041,610 (2001 - 22,165,074). The earnings are as above.
2. The calculation of diluted net assets per share at 31 December 2002 and
31 December 2001 is based on 21,401,170 (2001 - 22,026,170) shares in issue,
plus 973,080 (2001 - 973,080) shares held under option at an exercise price
of £1.45, and net assets of £63,399,000 (2001 - £65,123,000) plus the
proceeds receivable on the exercise of all outstanding share options.
3. The Group's investment property portfolio was revalued at 31 December
2002 to £102,563,000 by Allsop & Co., a firm of professional external
valuers, at Market Value. The deficit arising of £646,000 has been debited
to the revaluation reserve. All other tangible assets are stated at
historical cost.
4. Reconciliation of operating profit to operating cash flows
2002 2001
£'000 £'000
Operating profit 3,076 2,794
Depreciation 391 350
(Increase)/decrease in debtors (3) 5
Increase in creditors 117 233
-------- --------
Net cash inflow from operating activities 3,581 3,382
====== ======
5. The financial information in this statement does not constitute statutory
accounts within the meaning of Section 240 of the Companies Act 1985. The
statutory accounts for 2001 have been filed with the Registrar of Companies
and received an unqualified auditors report. The 2002 accounts also received
an unqualified audit report, and will be sent to shareholders and the
Registrar of Companies shortly. Copies will be available from Mrs Sue Wavell
at Shillington Old School, 181 Este Road, London SW11 2TB.
END
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