Annual Financial Report

RNS Number : 8296N

IRP Property Investments Ltd

08 September 2011

 



To:                   RNS

Date:               8 September 2011

From:              IRP Property Investments Limited

·     Portfolio ungeared total return of 6.4 per cent for the year

·     Share price total return of 16.4 per cent for the year

·     Net asset value per share total return of 5.4 per cent for the year

·     Net asset value per share total return since launch of 36.6 per cent

·     Dividend yield of 8.0 per cent based on year-end share price

·     Dividend of 7.2 pence per share for the year

Chairman's Statement

The Chairman, Quentin Spicer, stated:

The past year has seen significantly lower volatility in the UK commercial property market, with quarterly total returns moving in a narrow range of 2-3 per cent to deliver an annual total return of 9.9 per cent, as measured by the Investment Property Databank ('IPD') All Quarterly and Monthly Funds Index. 

The Company's portfolio recorded a total return of 6.4 per cent for the year, which rather reflected the lack of exposure to Central London and shopping centres. The net asset value total return for the year was 5.4 per cent with a net asset value as at 30 June 2011 of 82.8 pence per share. The movement in the interest rate swap valuation had a positive impact on the net asset value, with the liability decreasing by £1.4 million during the year, increasing the net asset value per share by 1.3 pence. These gains were offset by the accounting treatment of lease incentives which reduced the net asset value by 1.3 pence per share.

The share price remained strong, trading close to net asset value per share throughout the year, with the price as at 30 June 2011 of 90.0 pence at an 8.7 per cent premium to the year-end net asset value per share. The share price has since returned to a discount to net asset value and at the time of writing was trading around 80.0 pence per share.

Property Market and Portfolio

Capital values have risen consistently over the past year but the pace has slackened from the previous period as the recovery has matured, to show a 3.8 per cent advance in the 12 months to 30 June 2011, as measured by IPD. This primarily reflects a slower rate of yield compression during the year but the all property initial yield remains attractive at 6 per cent at 30 June 2011, when compared with gilts, equities and cash.

The weak economic recovery and fiscal austerity measures have kept the occupational markets subdued. Rental growth totalled 0.4 per cent in the year to 30 June 2011, following two years of decline. Much of the rental uplift was seen in London and most other parts of the market continued to see rental decline, albeit at a slower pace.

The Company's portfolio was valued at £161.5 million at the year-end following a number of transactions during the year. The Company increased its exposure to out-of-town retail with the purchase of two properties for £8.8 million. The first was a property at Northallerton for £6.6 million, reflecting a yield of 6.2 per cent. As part of the same deal the Company purchased a unit in Gateshead for £2.2 million at a yield of 7.2 per cent. All the leases at both properties are let to tenants with sound covenants with expiries ranging between 2024 and 2027.

Three sales were completed during the year, for proceeds of £6.2 million, realising gains of £720,000. In order to reduce the portfolio's exposure to the town, 88-90 The Parade, Leamington Spa was sold for £3.6 million. Sales were also achieved in the secondary towns of Nuneaton and Rochdale, amid concerns of falling rental values and increasing voids. 

The Manager has completed some successful lease renewals over the period, in particular the entire property at Chippenham Drive, Milton Keynes where the lease was due to expire in September 2011; this unit was re-let to the existing tenant for five and a half years. Another renewal of note was at 24 Haymarket, London where a new lease has been agreed extending out to 2026. There has also been a lease extension at 100a Princes Street, Edinburgh with the new lease expiring in 2026 rather than 2016 as originally agreed.

The various rental negotiations have helped to keep the void rate in the portfolio to a very low 2.3 per cent, significantly ahead of the IPD average of 9.5 per cent. These negotiations, combined with the new properties which have been added to the portfolio, have helped protect the income stream and, importantly, have ensured that the average lease length within the portfolio has increased to 8.1 years as at 30 June 2011, compared  to  7.7 years at the previous year-end.

Dividends

Three interim dividends of 1.80 pence per share were paid during the year and a fourth interim dividend of 1.80 pence per share will be paid on 30 September 2011. This gives a total dividend for the year ended 30 June 2011 of 7.20 pence per share, consistent with the amount proposed in last year's annual report; reflecting a yield of 8.0 per cent on the year- end share price.

In the absence of a material change in circumstances, it is the intention of the Board to maintain the dividend at this rate for the year ending 30 June 2012.

Borrowings

The net gearing level as at 30 June 2011 was 37.0 per cent, which compares with 33.6 per cent as at 30 June 2010 and 40.0 per cent at launch on 1 June 2004. This is a level of borrowings that the Board deems to be appropriate at the current time.

The Company has £1.9 million of cash available and is therefore effectively fully invested. The Company does, however, have an undrawn loan facility of £15 million which could be used to finance prospective purchases if they are sufficiently attractive, although this would be a short term strategy which would eventually be offset by sales.

Outlook

The lack of recovery in the UK economy and uncertainty in the global economy and credit markets have led to greater caution about the outlook for the property market in 2012 and 2013.

The Manager expects total returns to be broadly in line with the income return over the next 12 months and possibly into 2013, reflecting occupier and investor caution as the economy re-balances. In this environment, the protection of the income stream will be critical.

The stability of total returns at the all property level may disguise significant divergence in performance between different assets and sectors. Prime property in core locations experiencing tight supply is expected to outperform but secondary assets could be vulnerable to further correction.

The Company remains focussed on maintaining the high occupancy levels which exist in the portfolio and enhancing the rental income stream where possible. The Manager continues to look at both buying and selling opportunities to increase total returns and has sufficient liquidity to ensure that it can take advantage of these when they arise.

All enquiries to:

Ian McBryde

Scott Macrae

F&C Investment Business Limited

Tel: [phone]

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Limited

Trafalgar Court

Les Banques

St Peter Port

Guernsey GY1 3QL

Tel:      [phone]

IRP Property Investments Limited

Consolidated Statement of Comprehensive Income

	Year ended 30 June 2011	Year ended 30 June 2010
	£'000	£'000
Revenue
Rental income	11,241	11,651
Total revenue	11,241	11,651
(Losses)/gains on investment properties	(1,705)	20,218
	9,536	31,869
Expenditure
Investment management fee	(1,095)	(1,064)
Other expenses	(1,162)	(1,164)
Total expenditure	(2,257)	(2,228)
Net operating profit before finance costs	7,279	29,641
Net finance costs
Interest receivable	59	120
Finance costs	(3,409)	(3,436)
	(3,350)	(3,316)
Net profit from ordinary activities before taxation	3,929	26,325
Taxation on profit on ordinary activities	(245)	(241)
Profit for the year	3,684	26,084
Other comprehensive income
Net profit/(loss) on cash flow hedges, net of tax	1,429	(4,335)
Net comprehensive profit for the year, net of tax	5,113	21,749
Basic and diluted earnings per share	3.3p	23.6p

All items in the above statement derive from continuing operations.

All of the profit for the year is attributable to the owners of the Company.

IRP Property Investments Limited

Consolidated Balance Sheet

	30 June 2011 £'000	30 June 2010                  £'000
Non-current assets
Investment properties	159,274	157,609
Current assets
Trade and other receivables	3,470	2,478
Cash and cash equivalents	1,931	8,761
	5,401	11,239
Total assets	164,675	168,848
Non-current liabilities
Interest-bearing bank loan	(60,379)	(60,335)
Interest rate swap	(6,353)	(7,432)
	(66,732)	(67,767)
Current liabilities
Trade and other payables	(3,888)	(3,833)
Interest rate swap	(2,570)	(2,920)
	(6,458)	(6,753)
Total liabilities	(73,190)	(74,520)
Net assets	91,485	94,328
Represented by:
Share capital	1,105	1,105
Special distributable reserve	91,747	94,314
Capital reserve	7,556	9,261
Other reserve	(8,923)	(10,352)
Equity shareholders' funds	91,485	94,328
Net asset value per share	82.8p	85.4p

IRP Property Investments Limited

Consolidated Statement of Changes in Equity

For the year ended 30 June 2011

	Share Capital £'000	Special Distributable Reserve £'000	Capital Reserve £'000	Other Reserve £'000	Revenue Reserve £'000	Total £'000
At 1 July 2010	1,105	94,314	9,261	(10,352)	-	94,328
Profit for the year	-	-	-	-	3,684	3,684
Other comprehensive gains	-	-	-	1,429	-	1,429
Total comprehensive income for the year	-	-	-	1,429	3,684	5,113
Dividends paid	-	-	-	-	(7,956)	(7,956)
Transfer in respect of losses on investment properties	-	-	(1,705)	-	1,705	-
Transfer of net deficit for the year	-	(2,567)	-	-	2,567	-
At 30 June 2011	1,105	91,747	7,556	(8,923)	-	91,485

For the year ended 30 June 2010

	Share Capital £'000	Special Distributable Reserve £'000	Capital Reserve £'000	Other Reserve £'000	Revenue Reserve £'000	Total £'000
At 1 July 2009	1,105	96,404	(10,957)	(6,017)	-	80,535
Profit for the year	-	-	-	-	26,084	26,084
Other comprehensive losses	-	-	-	(4,335)	-	(4,335)
Total comprehensive income for the year	-	-	-	(4,335)	26,084	21,749
Dividends paid	-	-	-	-	(7,956)	(7,956)
Transfer in respect of gains on investment properties	-	-	20,218	-	(20,218)	-
Transfer of net deficit for the year	-	(2,090)	-	-	2,090	-
At 30 June 2010	1,105	94,314	9,261	(10,352)	-	94,328

IRP Property Investments Limited

Consolidated Statement of Cash Flow

	Year ended 30 June 2011	Year ended 30 June 2010
	£'000	£'000
Cash flows from operating activities
Net operating profit for the year before taxation	3,929	26,325
Adjustments for:
Losses/(gains)on investment properties	1,705	(20,218)
Increase in operating trade and other receivables	(992)	(240)
Increase/(decrease) in operating trade and other payables	280	(120)
Net finance costs	3,350	3,316
	8,272	9,063
Taxation	(426)	-
Net cash inflow from operating activities	7,846	9,063
Cash flows from investing activities
Purchase of investment properties	(9,154)	(5,537)
Capital expenditure	(371)	(180)
Sales of investment properties	6,155	212
Interest received	59	120
Net cash outflow from investing activities	(3,311)	(5,385)
Cash flows from financing activities
Dividends paid	(7,956)	(7,956)
Bank loan interest paid	(643)	(706)
Payments under interest rate swap arrangement	(2,766)	(2,729)
Net cash outflow from financing activities	(11,365)	(11,391)
Net decrease in cash and cash equivalents	(6,830)	(7,713)
Opening cash and cash equivalents	8,761	16,474
Closing cash and cash equivalents	1,931	8,761

IRP Property Investments Limited

Principal Risks and Risk Uncertainties

The Company's assets consist of direct investments in UK commercial property.  Its principal risks are therefore related to the commercial property market in general, but also the particular circumstances of the properties in which it is invested and their tenants.  More detailed explanations of these risks and the way in which they are managed are contained under the headings of Credit Risk, Liquidity Risk and Interest Rate Exposure and Market Price Risk.  The Manager also seeks 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.

Other risks faced by the Company include the following:

·     Economic - inflation or deflation, economic recessions and movements in interest rates could affect property valuations.

·     Strategic - incorrect strategy, including sector and property allocation and use of gearing, could all 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.

·     Financial - inadequate controls by the Manager or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to misreporting or breaches of regulations.

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

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, and applies the principles detailed in the internal control guidance issued by the Financial Reporting Council. 

The Board and the Manager recognise the importance of the share price relative to net asset value in maintaining shareholder value. The Manager meets with current and potential new shareholders, and with stockbroking analysts who cover the investment trust sector, on a regular basis. In addition, communication of quarterly portfolio information is provided through the Company's website.

Financial Instruments

The Group's investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital 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 cash, receivables, a bank loan, an interest rate swap and payables.

The Group is exposed to various types of risk that are associated with financial instruments.  The most important types are credit risk, liquidity risk and market risk (those relating to interest rate changes and pricing movements).

There was no foreign currency risk as at 30 June 2011 or 30 June 2010 as assets and liabilities are maintained in Sterling.

The nature and extent of the financial instruments outstanding at the balance sheet date and the risk management policies employed by the Group are detailed below.

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.

Included within other debtors and prepayments is the prepayment for rent-free periods recognised over the life of the lease. As at 30 June 2011 this amounted to £1,373,000 (2010: £847,000)

Also included within other debtors and prepayments at 30 June 2011 is £843,000 (2010: £901,000) relating to the reverse lease surrender premium paid to the tenants of Echo Park, Banbury. 

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 until it is re-let. The Board receives regular reports on concentrations of risk and any tenants in arrears.  The Manager monitors such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.

The Group has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 30 June 2011 is £983,000 (2010: £361,000). Rental deposits from tenants at 30 June 2011 were £251,000 (2010: £242,000). As at 30 June 2011, £324,000 of rent receivable was greater than three months overdue.  It is the practice of the Group to provide for rental debtors greater than three months overdue unless there is certainty of recovery. As at 30 June 2011 the provision was £95,000 (2010: £160,000). Of this amount £nil was subsequently written off and £51,000 has been recovered.

All of the cash is placed with financial institutions with a long term credit rating of AA or above.  Bankruptcy or insolvency 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, the Manager would move the cash holdings to another financial institution.

The Group can also spread counterparty risk by placing cash balances with more than one financial institution.

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 in which the Group invests is 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 Manager and monitored on a quarterly basis by the Board.

In certain circumstances, the terms of the Group's bank loan entitles the lender to require early repayment, and in such circumstances the Group's ability to maintain dividend levels and the net asset value attributable to the ordinary shares could be adversely affected.  As at 30 June 2011 the cash balance was £1,931,000 (2010: £8,761,000).

Interest rate exposure

Some of the Group's financial instruments are interest-bearing.  These 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.

Interest is receivable on cash at a variable rate.  At the year-end, rates receivable ranged from 0.375 per cent on current account balances to 0.53 per cent for deposit account balances.  Interest is payable on the bank loan at a variable rate of LIBOR plus a margin of 0.45 per cent.  The effect of the interest rate swap is to fix interest payable at 5.60 per cent per annum for the first three years and 5.55 per cent per annum thereafter.  The effective rate of interest on the loan is 0.98 per cent.  Interest on financial instruments classified as floating rate is repriced at intervals of less than one year.

Exposure varies throughout the year as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies.

In addition, tenant deposits are held in interest-bearing bank accounts.  These accounts earn interest at base rate less 0.75 per cent and receive no interest at this time as the base rate is too low.  Interest accrued on these accounts is paid to the tenant.

The Group's exposure to interest rate risk relates primarily to the Group's long-term debt obligations.  The Group's policy is to manage its interest rate risk using an interest rate swap, in which the Group has agreed to exchange the difference between fixed and variable interest amounts, calculated by reference to an agreed upon notional principal amount.  The swap is designed to fix the interest payable on the loan.  The interest rate swap covers the exact amount of the loan and has the same duration.  Interest fixing periods are identical and on this basis the swap contract complies with IAS 39's criteria for hedge accounting.

Market price risk

As at 30 June 2011, all of the Company's financial instruments were included in the balance sheet at fair value, which in the opinion of the Directors is not materially different from their book value.

Fair values of financial assets and liabilities

The assets and liabilities of the Group are, in the opinion of the Directors, reflected in the Balance Sheet at fair value. Borrowings under loan facilities do not have a value materially different from their capital repayment amount. The fair value of the interest rate swap is based on the marked to market value. In the Directors' opinion, the fair value of the Group's assets and liabilities are not materially different from their book value.

The Directors and Manager regularly review the principles applied by the property valuers to ensure that they comply with the Group's accounting policies and with fair value principles.

Fair value hierarchy

The interest rate swap, valued at a liability of £8,923,000 (2010: £10,352,000) is considered to be Level 2 in the hierarchy.

Explanation of fair value hierarchy:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

Level 2 - The use of a model with inputs (other than quoted prices included in Level 1) that are directly or indirectly observable market data.

Level 3 - The use of a model with inputs that are not based on observable market data.

 Directors' Responsibility Statement 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 30 June 2011, 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 includes 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 Chairman's Statement includes details of related party transactions that have taken place during the financial year.

On behalf of the Board

Q Spicer

Director

7 September 2011

IRP Property Investments Limited

Notes to the Consolidated Financial Statements

for the year ended 30 June 2011

1.         The audited results of the Group which were approved by the Board on 7 September 2011 have been prepared on the basis of International Financial Reporting Standards and the accounting policies set out in the statutory accounts of the Group for the year ended 30 June 2011.

2.         The fourth interim dividend of 1.80p was declared on 24 August 2011 and will be paid on 30 September 2011 to shareholders on the register on 9 September 2011. The ex-dividend date was 7 September 2011.

3.         There were 110,500,000 Ordinary Shares in issue at 30 June 2011. The earnings per Ordinary Share are based on the net profit for the year of £3,684,000 and on 110,500,000 Ordinary Shares, being the weighted average number of shares in issue during the year.

4.         Two properties were purchased during the year for £8.8 million.  Three properties were sold in the year for £6.2 million.

5.         The Group results consolidate those of IRP Holdings Limited, a wholly owned subsidiary which invests in properties.

6.         These are not full statutory accounts. The full audited accounts for the year ended 30 June 2011 will be sent to shareholders in September 2011, and will be available for inspection at Trafalgar Court, Les Banques, St Peter Port, Guernsey, the registered office of the Company.  The full annual report and accounts will be available on the Company's website: www.irppropertyinvestments.com

7.         The Annual General Meeting will be held on 15 November 2011.

 

END

 

 

FR UGUAPBUPGGAM