Interim Results

RNS Number : 3104C
Close High Income Properties PLC
29 August 2008
 

Close High Income Properties PLC

INTERIM REPORT

AND FINANCIAL STATEMENTS

For the six month period ended 30 June 2008



Highlights


Three disposals during Period with two further sales completing in July. Total proceeds of £6.29 million.


Debt refixed at 5.56% for two year Period. Loan funding in place until May 2013.


Rent weighted void level for Ordinary Share portfolio reduced over Period from 9.8% to 7.14%.


Rent weighted void for D Ordinary Share maintained at 16% despite high office weighting.




Chairman's Statement


Introduction


The first six months of 2008 continued to be a difficult period for the UK Commercial Property Market and this has negatively affected the performance of the Group. The global financial crisis, which started in 2007, has continued to have a major effect on investor sentiment and the consequential lack of liquidity has affected the transaction activity. A more recent concern has been the health of the UK economy and, in particular, whether or not it will slip into recession.


During this Period the Company's Ordinary Share Net Asset Value ('NAV') total return was negative 15.7% (including dividends paid). The 'D' Ordinary Shares total return was negative 17.5% (including dividends paid). Whilst we are disappointed with this result, it is in line with our peers and has been caused largely by events outside of our control. In order to put returns into perspective for long-term shareholders, the table below demonstrates the total returns based on dividends and movements in NAV over the life of each share class.



Total Returns

Years

Ordinary Share

'D' Ordinary Share


2003

12.5%

-

2004

24.4%

-

2005

17.3%

-

2006

16.4%

10.6%

2007

(9.4%)

(20.0%)

January - June 2008

(15.7%)

(17.5%)




Since launch

51.4%

(23.9%)


* Total return assumes dividends are reinvested and excludes the initial charge paid on issue of shares


It is disappointing to see that the Company share price continues to trade at an unacceptably high discount to NAV. The current discount is 47.4% for the Ordinary Shares and 50.5% for the 'D' Ordinary Shares, although both share classes have been at over a 50% discount for much of the Period. Once again, this is broadly in line with our peers and reflects the core sentiment towards property investment companies as well as in our case a relatively thin trading of the stock. We believe this discount will certainly reduce in the period running up to the shareholder vote in 2010 where it will be decided whether or not the Company will continue.


In line with the measures announced in the Annual Report and Consolidated Financial Statements for the year to December 2007, the dividends paid for both Ordinary and 'D' Ordinary Shares were reduced to a more sustainable level with effect from the dividends paid in April 2008.


It is the opinion of the Board that UK commercial property capital values are likely to decline further to reflect the worsening expectations for the occupier market following the slowdown in the economy, as well as the prevailing difficulties investors are experiencing in securing debt finance.  


However, the Board further believes that the yield profile of the Group's underlying assets is approaching a level which is sustainable given the context of this more difficult operating environment. Performance over the medium term is likely to be driven by active management of the Group's assets. 


Investment Progress


As stated in previous reports, the Board continues to identify and attempt to dispose of assets where the opportunities for active management have been exhausted or which are considered to be overvalued. However, it has become increasingly difficult given the current state of the investment market, to complete such sales


Over the Period the Group completed three successful disposals from the Ordinary Share Portfolio. Two further sales from the Ordinary Share Portfolio completed after the end of the Period. The total amount realised for all five sales was £6.29 million. Additional properties are presently being marketed to potential investors, including two properties from the 'D' Ordinary share portfolio.


In addition, the Group has recently agreed terms and exchanged contracts on the sale of a portfolio of 7 industrial estates for £17.25 million. Completion is expected in late September and is only conditional on receiving the appropriate landlord consents for the sale. This sale will generate significant working capital for the Group which will be used, in part, to reduce outstanding debt.


In conjunction with the sales process, the Board continues to focus on generating performance and protecting the Group's income stream through actively managing the Group's assets. Good progress continues to be made in this regard. Further details are again provided by the Property Investment Adviser's Report


Debt


Gearing in the Ordinary Share Portfolio and 'D' Ordinary Share Portfolio increased over the Period from 53.9% and 50.6% to 58.4% and 56.4% respectively. This is attributable to the fall in the capital values of the underlying assets. Proceeds from realised sales will be primarily used to reduce the level of the Group's gearing.


The Group's debt facilities had various interest rate swaps which effectively fixed interest rates until 27 June 2008.  Upon expiry of these swaps the Board decided to refix the Company's debt at a rate of 5.56%, which runs until 29 December 2010. With inflation forecast to remain stubbornly high and above the Bank of the England's target, the Board was of the opinion that the chance of interest rate cuts were much reduced and that it was prudent to lock in at a level which is serviceable. The proportion of debt which is unfixed is associated with properties which are expected to be sold in the near future. 


Results and Dividends


The consolidated loss of the Group for the Period was £14,952,729 (30 June 2007: profit of £2,874,595)


The NAV of the Ordinary Share Portfolio fell 17.2% over the Period from 101.01 pence per share to 83.67 pence per share. The NAV of the 'D' Ordinary Share Portfolio fell 18.4% over the Period from 71.82 pence per share to 58.60 pence per share. These figures do not take into account the distributions that were paid over the Period.


In January 2008, the Company paid dividends of 2.125p for Ordinary Shares and 1.625p for 'D' Ordinary Shares. These dividends were approved by the Board in December 2007. The Company also paid quarterly dividends of 1.625p for Ordinary Shares and 1.25p for 'D' Ordinary Shares in April 2008. This is consistent with the announcement made in the Audited Annual Report and Consolidated Financial Statements for the year ended December 2007 in which the Board stated that dividend payments would be reduced to what the Board believe is a sustainable level. In the absence of unforeseen circumstances it is the intention of the Board to maintain quarterly dividends at this level giving future gross annual dividends totalling 6.5 pence per Ordinary Share and 5.0p per 'D' Ordinary Share. It is probable that future dividends will continue to be paid out of distributable capital reserves rather than revenue reserves.


Cancellation of Shares


The Company has not undertaken any share buy backs over the Period. However this is not as a result of the Directors believing that the shares are overvalued, but that the Board believes that the Group's resources are best directed to maintaining the dividend and ensuring that the Group complies with its banking obligations. Indeed, the Directors and members of the Property Investment Adviser's team purchased a total of 423,700 Ordinary shares in the Company in May 2008 at a price of 54.375 pence per share


The Board will continue monitoring the discount to NAV and, where appropriate, buy back shares in the market. However, its primary aim is to ensure that the Company has sufficient liquidity to meet its needs until the shareholder vote in 2010.


Board of Directors


The Board wishes to announce the resignation of Mark Shaw from the Board with effect from 31 July 2008. The Directors would like to thank Mark for his services over the years.


Future Prospects


The Board remains of the opinion that UK commercial property will continue to be detrimentally affected by the global financial crisis and the worsening prognosis for the UK economy. While the investment market will continue to be severely affected by the marked reduction in the availability of bank debt, the occupier market is likely to suffer from a slowdown in demand for commercial property and weaker prospects for rental growth. In this context, it is likely that UK commercial values will continue to fall. 


The Board however, still of the opinion that the underlying assets held by the Group will prove to be more resilient than those of our peers. The multi let nature of the Group's assets ensures that income generation is diversified with circa 700 tenants. In addition, the Group has no exposure to Central London or the Retail Warehouse sectors which have so far been disproportionately affected by the ongoing correction in capital values.


The Board will continue to review the Group's assets on an ongoing
 basis with the intention of making further disposals where appropriate. Proceeds from such sales are likely to be used to reduce further the level of the Company's gearing.




DIRECTORS' REPORT


The directors present herewith the Report and Financial Statements othe Company and its subsidiaries (together 'the Group') for the six months ended 30 June 2008.


The Company


The Company is aIsle of Man closed-ended investment company. The Company was incorporated on 10 June 2002 and its principal activity is that of investment in commercial property.


The directors confirm that:


  • no one property represents more than 15% of the gross assets of the Group;

  • income receivable from any one tenant, or tenants within the same group, in any one financial year does not exceed 20% of the total rental income of the Group;

  • at least 90% by value of properties are held in the form of freehold or long leasehold; and

  • the proportion of the Group's property portfolio which is unoccupied or not producing income or which is in the course of substantial redevelopment or refurbishment does not exceed 25% of the value of the portfolio.


Results and dividends


The consolidateloss after taxation of the Group for the six months ended 30 June 2008 amounted to £14,952,729 (30 June 2007: Profit of £2,874,595).


On 31 January 2008 a dividend of 2.125 pence per Ordinary Share and 1.625 pence per 'D' Ordinary Share was paid. This dividend was resolved by the Board in December 2007. In addition, a quarterly capital distribution of 1.625 pence per Ordinary Share and 1.25 pence per 'D' Ordinary Share were declared and paid in April 2008. This level of capital distribution was also declared and paid in July 2008.


Company Secretary


Martin Katz served as Secretary throughout the period.


Going concern


The directors confirm that the Group continues to be a going concern.


Auditors


In accordance with section 12(2) of the Companies Act 1982, Ernst & Young LLC have indicated their willingness to continue in office.





Jonathan Clague                                   

Chairman

29 August 2008




STATEMENT OF DIRECTORS' RESPONSIBILITIES


Company law requires the directors to prepare financial statements for each financial period which give a true and fair view of the state of affairs of the Company and of the Group and of the profit or loss of the Group for that year. In preparing those financial statements, the directors are required to:


  • select suitable accounting policies and then apply them consistently;


  • make judgements and estimates that are reasonable and prudent; 


  • state whether all applicable accounting standards have been followed; and


  • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.


The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the financial statements comply with the Companies Acts 1931 to 2004. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.




CORPORATE GOVERNANCE STATEMENT


In December 1992, the Committee on the Financial Aspects of Corporate Governance ('the Cadbury Committee') published a Code of Best Practice. This was updated by the issue of The Combined Code: Principles of Good Governance and Code of Best Practice ('the Combined Code'). The Combined Code contains recommendations as to best practice, focusing on the control and reporting functions of boards of directors.


The Board of Close High Income Properties PLC, whilst not being under a formal obligation to report to the shareholders regarding the extent to which the Company complies with the Combined Code, monitors the Company's established procedures. The Board believes that the Company complies with the provisions of the Code to the extent which is appropriate to the Company's nature and scale of operations.  


A revised version of the Combined Code has been adopted by the Financial Reporting Council ('The New Code') with effect from the Company's financial year commencing 1 January 2005. The Board is taking steps to ensure compliance with The New Code to the extent which it is appropriate and will report on this in its next annual report.




PROPERTY INVESTMENT ADVISER'S REPORT


Introduction


The UK commercial property market has continued to suffer from the most challenging economic environment since the early 1990s. The reduction in availability of debt finance combined with an increase in its cost has seen the investment property market stall, whilst the slowdown in the UK economy has reduced demand for commercial property across all sectors and consequently expectations for future rental growth. This has resulted in sustained falls in capital values over the last twelve months. Further falls in capital values are expected as the economic downturn continues although the prospect of reduced interest rates in 2009 may offset future yield shifts. 


In common with most commercial property funds, the Ordinary and 'D' Ordinary Share Portfolios have been affected with falls in the value of their underlying assets of 7.51% and 8.23% respectively over the Period.


In April 2008, the UK Government's legislative reforms to empty rates liabilities came into effect. The new law introduced an obligation for owners of commercial property to pay full business rates for vacant industrial property and reduced the exemption period for empty office property. This has had a material impact on the Company's performance as a level of void property is inevitable across a multi-tenanted portfolio. We estimate that in a full year our rates expense may now have increased by circa £300,000. This figure does not take into account any resultant impact on the valuation of the Company's properties caused by additional and unjustifiable tax. 


I am pleased to report that a number of disposals were completed during the Period and thereafter. Further sales are expected over the remainder of the year in order to maintain loan to value covenants with the lending banks. Active asset management continues in parallel with this process and has yielded some success with a reduction in void levels in the Ordinary Portfolio over the Period, while the void rate has remained steady in the 'D' Ordinary Share Portfolio. 


The Property Portfolios


Ordinary Share Property Portfolio


The Ordinary Share property portfolio consists predominately of provincial industrial and office properties located throughout England.

During the Period the Company sold properties located at Chapel RoadWorthing and Fretherne Road, Welwyn Garden City. A unit was also sold at Chilton Industrial Estate, County Durham. Following the period end the sales of the final unit at Chilton Industrial Estate and Vicarage Court, Edgbaston also completed. The proceeds realised from these sales totalled £6.29m and were in line with prevailing valuations.


Active management of the Portfolio's underlying assets remains a priority and success was achieved with vacant space let, leases renegotiated and a reduction in the void rate. During the Period 24 lease renewals were agreed, which are expected to generate income of circa £1.8m over their duration. Rents on renewals were on average 12.0% higher than the previous passing rents and 47 lettings of vacant units were also completed during the Period. Of the 46 units which became vacant, 25 were re-let to new tenants and at rents on average 8% higher than previously paid by the outgoing tenant, generating at least £3.1 million in additional income for the Group over the duration of the leases.


The additional lettings, combined with our continuing success in retaining existing tenants resulted in a fall in the Portfolio's void rate. As at 30th June 2008 the rent weighted void level stood at 7.14%. This compares with 9.8% as at 31 December 2007. 


Gearing in the Portfolio increased as the value of underlying assets fell. The proceeds from sales completed during and after the Period will be used to reduce gearing levels as well as providing working capital for the Portfolio.


'D' Ordinary Share Property Portfolio


The 'D' Ordinary Share property portfolio consists of nine courtyard style multi tenanted office properties that were purchased in March 2006. 


Active asset management of the portfolio continues, with each estate and tenant being visited by the Portfolio's asset managers during the second quarter of 2008. The relationships developed during these face to face meetings forms the core of the Company's tenant retention strategy. Work has also begun on renovating common areas in a number of the Portfolio's properties. 


10 leases were renewed during the Period with rents on average 4.7% higher and 22 vacant units were let during the Period; 10 of which had become vacant during the Period. The cumulative effect of lease renewals and lettings from void space will add at least an additional £1.2m to the income of the Company over the duration of the leases. 


The Portfolio's void level remained broadly constant over the Period, rising only slightly from a rent weighted 16.29% to 16.36%. Void rates are expected to remain above the Ordinary Share Portfolio given the stronger weighting towards the office sector


Gearing has also increased in the Portfolio over the Period. As mentioned in the Chairman's statement, the intention is to dispose of one or two properties over the remainder of the year to ensure loan to value ratios stay within the banking covenants.










Property classification by sector as at 30 June 2008



Classification by Sector

Ordinary Share Portfolio (%)

'D' Ordinary Share Portfolio (%)

Total as a percentage of Market Value





Industrial

69

-

55

Offices

18

100

34

Mixed

12

-

10

Other

1

-

1

Total

100

100

100


Property classification by region as at 30 June 2008




Region

Ordinary Share Portfolio

(% of Market Value)

'D' Ordinary Share Portfolio

(% of Market Value)

Total as a percentage of Market Value

Midlands

27

38

30

East of England

18

22

19

North East

9

-

5

North West

11

27

17

South East

10

-

9

South West

14

-

8

Wales

1

-

1

Yorkshire & Humberside

10

13

11

Total

100

100

100


The table below summaries some of the property portfolio's key statistics as at 30 June 2008.



Ordinary Share Portfolio

'D' Ordinary Share Portfolio


2008

2008

Average annual rental per tenant

£20,666

£20,318

Average length of lease remaining

3.09 years

3.28 years

Average rental per square metre

£52.65

£127.46

Largest tenant by rental value

£345,000

Scotts Ltd

£206,250

Bedfordshire County Council

Average lease length

4.79 years

4.55 years

Longest unexpired lease term

16 years

13.9 years



Schedule of properties as at 30 June 2008


Property 

Square Feet

Location

Use

Value at 30 June 2008

* all freehold unless otherwise stated

 

 

 

 






Anglia WayMansfield

20,459

Midlands

Industrial

955,000

Appleton CourtWakefield (long leasehold)

26,100

Yorkshire & Humberside

Offices

4,560,000

Ascroft CourtOldham

14,000

North West

Offices

1,040,000

Ashmead Industrial Estate, Keynsham

38,301

South West

Industrial

2,190,000

Barbot Hall, Rotherham (long leasehold)

69,129

Yorkshire & Humberside

Industrial

2,750,000

Barshaw Business ParkLeicester

21,000

Midlands

Offices

2,600,000

Bartlett Park, Yeovil

23,465

South West

Industrial

1,420,000

Basset Court, Northampton

18,005

Midlands

Offices

3,320,000

Bellway Industrial Estate, Newcastle-upon-Tyne

75,499

North East

Industrial

4,000,000

Bumpers Way, Bumpers Farm, Chippenham

11,203

South West

Industrial

630,000

Chilton Industrial Estate, Chilton, County Durham

15,142

North East

Industrial

430,000

Churchfield CourtBarnsley

27,977

Yorkshire & Humberside

Offices

3,720,000

Clarendon CourtWarrington

36,526

North West

Industrial

2,850,000

Cleton Business Park, Tipton

38,318

Midlands

Industrial & Office

1,940,000

Connaught Business Centre, Mitcham

10,491

South East

Industrial

1,300,000

Dalton CourtBlackburn

25,780

North West

Offices

3,560,000

Elizabethan Way, Lutterworth

14,272

Midlands

Industrial

700,000

Falcon Business ParkBurton-upon-Trent

29,397

Midlands

Industrial

1,635,000

Faraday CourtBurton-upon-Trent

25,487

Midlands

Offices

3,710,000

Farrington PlaceBurnley

41,511

North West

Industrial

1,880,000

Farthing Road Industrial Estate, Ipswich

131,506

East of England 

Industrial

5,750,000

Gainsford Drive, Halesowen

14,546

Midlands

Industrial

725,000

Goodridge AvenueGloucester

11,614

South West

Industrial

500,000

Greenfield Business Centre, Royston

34,451

South East

Industrial

2,175,000

Groundwell Farm Industrial Estate, Swindon

92,599

South West

Industrial

5,200,000

Haines ParkGreat AvenueLeeds (long leasehold)

13,143

Yorkshire & Humberside

Industrial

1,050,000

Henwood Business Park, Ashford

29,423

South East

Industrial

2,350,000

Ikon Trading Estate, Hartlebury

160,168

Midlands

Industrial

6,550,000

Kendall House, Burgess Hill

27,285

South East

Offices

2,300,000

Kirkleatham Industrial Estate, Redcar (long leasehold) 

70,493

North East

Industrial

2,740,000

Links Estate, Weymouth

31,304

South West

Industrial

1,530,000

Lowmoor Industrial Estate, Bradford

24,858

Yorkshire & Humberside

Industrial

1,050,000

Marlborough House, Swindon

8,921

South West

Offices

750,000

Minerva Business ParkPeterborough (long leasehold)

33,030

East of England

Offices

3,850,000

New England Industrial Estate, Hoddesdon

22,479

South East

Industrial

1,230,000

Newton CourtWolverhampton (long leasehold)

23,781

Midlands

Offices

3,300,000

Nightingale Road, Horsham

23,182

South East

Industrial

1,550,000

North Seaton Industrial Estate, Ashington

21,272

North East

Industrial

1,000,000

Oak Tree ParkRedditch

15,086

Midlands

Offices

1,400,000

Oakhill Trading Estate, Leicester (long leasehold)

57,299

Midlands

Industrial

2,000,000

Peartree Lane, Dudley

20,678

Midlands

Industrial

900,000

Portland Business Park, Handsworth, Sheffield (long leasehold)

77,597

Yorkshire & Humberside

Industrial

3,250,000

Preston Technology Centre, Preston

60,010

North West

Industrial & Office

4,660,000

Priestly CourtStafford (long leasehold)

10,070

Midlands

Offices

1,370,000

Quays Reach, Salford

13,116

North West

Offices

2,200,000

Roseville Business ParkRoseville RoadLeeds (long leasehold)

29,801

Yorkshire & Humberside

Industrial

1,825,000

Rossendale Road Industrial Estate, Burnley

44,973

North West

Industrial & Office

1,480,000

Rutherford CourtStafford (long leasehold)

17,734

Midlands

Offices

2,770,000

Ryan and Leanne Business ParkWareham (long leasehold)

43,383

South West

Industrial & Office

2,820,000

Shadsworth Business ParkBlackburn

34,060

North West

Industrial

2,000,000

Sheiling CourtCorby

22,834

Midlands

Industrial

1,400,000

Smead Dean Centre, Sittingbourne

33,857

South East

Industrial

2,350,000

Spire Road, Washington (long leasehold)

18,772

North East

Industrial

1,020,000

St. James Mill, Millbrook, Northampton

42,529

Midlands

Industrial

3,730,000

St Margarets Way, Huntingdon

27,910

East of England 

Industrial

2,100,000

Stadium Court, Cradock RoadLuton

66,223

East of England 

Industrial

4,050,000

Stephenson CourtBedford (long leasehold)

42,260

East of England

Offices

7,380,000

Terminus Road, Eastbourne

2,508

South East

Retail

625,000

Tewkesbury Business ParkDelta DriveTewkesbury (long leasehold)

59,580

South West

Industrial

3,890,000

Trinity CourtWarrington

29,607

North West

Industrial

1,925,000

Units 13-15, Malmesbury RoadCheltenham

14,935

South West

Industrial

925,000

Units 16-25, Malmesbury RoadCheltenham

17,639

South West

Industrial

1,170,000

Units 5-7, Maxwell Road Industrial Estate, Peterborough

61,339

East of England

Industrial

2,700,000

Units 20-25, Maxwell Road Industrial Estate, Peterborough

60,051

East of England

Industrial

2,450,000

Vicarage Court, Edgbaston (long leasehold)

16,015

Midlands

Offices

2,140,000

Walker Riverside, Newcastle

66,628

North East

Industrial

3,420,000

Warwick House, Solihull

15,470

Midlands

Offices

3,760,000

Watermark Way, Hertford

26,030

East of England

Offices

3,580,000

Webb Ellis Business ParkRugby

82,948

Midlands

Industrial & Office

7,280,000

Wern Industrial Estate, Newport

22,980

Wales

Industrial

1,050,000

Whitworth Court, Runcorn, Cheshire

25,773

North West

Offices

3,400,000

Wren Industrial Estate, Maidstone (long leasehold)

19,910

South East

Industrial

1,350,000

Wyther LaneLeeds

16,259

Yorkshire & Humberside

Industrial

950,000

Yale Business ParkIpswich

30,911

East of England

Industrial

1,680,000






Total

2,602,892

 

 

179,790,000



Outlook


The correction in the UK commercial property market, which began in summer 2007, has continued. Estimates suggest that UK commercial property has fallen by 20-30% from its peak of summer 2007. 


As previously stated, it had been our opinion that UK commercial property yields fell to unsustainably low levels during the first half of 2007, leaving asset values over inflated. Whilst we anticipated a correction in capital values, the speed at which the correction occurred and its depth were unexpected. 


It remains our belief that capital values have further to fall in order to compensate for the now weakening occupier demand and expectations for negative rental growth resulting from a slowing UK economy (and structural changes in the property market). Consequently we expect capital values to fall for the remainder of 2008 and into 2009, while rental levels will decline in absolute terms over this period. 


Economy


The debate as to whether the UK will experience a technical recession over the next 18 months - which now seems likely - is secondary to the fact that the UK economy is slowing sharply and is having a detrimental affect on commercial property. 


Consumer spending, the mainstay of the UK economy, is slowing as households come under strain from the rising cost of living and limited wage growth. With savings rates at record lows and access to credit significantly more limited, households will have little option but to cut back on spending. Flat or reduced consumer spending, combined with weaker global demand will result in companies scaling back and will likely lead to a rise in unemployment.


The UK Government has very limited scope to inject stimulus into the economy, with borrowing at the limit of the Government's fiscal rules and tax receipts forecasted to fall. 


Under normal circumstances the Bank of England would be actively cutting interest rates to cushion the economy's slowdown. However, above target inflation has left the Bank's Monetary Policy Committee hamstrung and with risks to inflation, interest rates look set to remain at or around 5% for sometime to come. 


Investment Market


Even if the Bank of England were to cut the base rate of interest, it would be unlikely to provide much assistance to the investment market. Instead, the indications are that we are entering a protracted period of restricted availability of debt finance, as well as an increase in its cost.


The large rises in lending witnessed in the year to summer 2007 were not funded directly by banks or building societies, which did not have sufficient retail deposits or balance sheet capacity to accommodate such an expansion. Instead the gap between lending and deposits was filled via the secondary wholesale market and in particular securitisation. This outlet has been effectively closed since summer 2007 and looks unlikely to reopen to any significant extent in the near future. As a result, the availability of finance will remain constrained for some time to come. If, and when, it does relax there is also no guarantee that it will reduce the cost of debt finance in the manner it did up until the summer of 2007. In the interim, the relative scarcity of credit will be reflected in its cost to borrowers. 


In the absence of debt backed purchasers, only buyers with strong relationships with lenders or buyers, paying entirely in cash will be active in the market. We believe that the reduced competition for assets will further impact capital values. There is no doubt however that during this period there will be interesting buying opportunities as the banks force borrowers to sell and those assets with active management opportunities to increase income will be in demand.


When combined with the deterioration in the occupier market (rising voids, lower rental levels and shorter lease lengths) and the erosion of comparative value, it is our opinion that capital values are likely to fall for at least the next 12 months. 


Occupier market


The slowdown in the economy, weakened business investment and a rise in unemployment - the fundamental driver of demand for commercial property - has already seen demand for commercial property weaken across all sectors and with it, expectations for rental growth. 

The latest Royal Institute of Chartered Surveyors (RICS) Commercial Property Occupier Survey registered some of the lowest balance readings in its history for new enquires, demand and rental growth. Investment Property Databank ('IPD') has also begun to record its first few months of negative month on month rental growth. 


At a sector level, the regional office market has been less reliant on the more exposed financial and business service sectors ('FBS') than the City and West End and therefore should be less affected by the widespread redundancies anticipated amongst FBS workers. In addition, rental growth expectations for the regional office market were lower and therefore yields, in percentage terms, have not moved out as much as they have in Central London. However, the regional office sector is already feeling the impact of the slowing economy, with demand sluggish and prospects for positive rental growth much reduced. 


In the industrial property market, manufacturers are facing large increases in their input costs which they have been unable to fully pass onto their customers. Distributors, who have become an increasingly important sub-sector of the industrial market, are also struggling with the marked increase in transportation costs. In addition, the sector has become increasingly exposed to changes in consumer spending through its links with the retailers. Countering this, the recent fall in the value of sterling will make exporters more competitive in world markets.


Weaker demand for space and the introduction of empty rates liability on industrial property - which is likely to result in some landlords accepting lower rents to ensure a property is occupied - will usually result in rents declining in absolute terms. However, the higher yield profile of the sector should see it recover more quickly than other sectors of commercial property, as its higher income return will help to counteract further capital value falls. 


Both the regional office and industrial sector should outperform the retail sector, which will come under pressure from higher costs, weaker consumer spending and a significant increase in the availability of second-hand space, as retailers look to rationalise their portfolios. 



Going forward


Our focus over the next period is to ensure that the Company maintains sufficient liquidity, whilst continuing rigorous active management of the existing property portfolio. Particular attention will be paid to the void level across the portfolio, while also ensuring vacant properties are redecorated and refurbished to expedite possible occupation. A high level of tenant retention has always been one of the hallmarks of the Company and this is expected to continue over the forthcoming year. Significant detail has been provided earlier in this report showing the success the Company's asset managers have achieved in reducing voids and increasing rents when renewing leases.


We believe the  composition of the Company's portfolio and its industrial focus should help to provide resilience. Our tenants are substantially diversified in terms of geographical spread and sector. In addition, the multi-let nature of the portfolio along with circa 700 tenants ensure that the Company is not overly exposed to any one tenant. We further believe that economical rent levels will make the Company's properties increasingly attractive as the economy slows and occupiers are forced to become more efficient.


Finally, the completion of the recent portfolio sale will reduce the Company's gearing level as well as providing general working capital. At the share price the Company is presently trading at, we believe it is attractive proposition for investors. 


Peter Roscrow

Close Investments Limited

Property Investment Adviser

29 August 2008





INDEPENDENT REVIEW REPORT

For the six month period from 1 January to the 30 June 2008


Introduction

We have been engaged by the Company to review the set of financial statements in the half-yearly report for the six months ended 30 June 2008 which comprises the consolidated income statement, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated statement of cash flow, the company balance sheet, the company statement of changes in equity, the company statement of cashflow, the Ordinary shares consolidated income statement, the Ordinary shares consolidated balance sheet, the 'D' Ordinary shares consolidated income statement, the 'D' Ordinary shares consolidated balance sheet and the related notes 1 to 15. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information in the condensed set of financial statements.


Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the London Stock Exchange and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms and engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.


Directors' responsibilities

The half-yearly financial report, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the rules of the London Stock Exchange which require that the half yearly report be presented and prepared in a form consistent with that which will be adopted in the company's annual accounts having regard to the accounting standards applicable to such annual accounts.


As disclosed in note 2, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards, as endorsed by the European Union. The financial statements are prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting'.


Our Responsibility

Our Responsibility is to express to the Company a conclusion on the financial statements in the half-yearly financial report based on our review.


Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review consists of making enquiries of persons responsible for financial reporting and accounting matters and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified during an audit. Accordingly we do not express an audit opinion.


Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the set of financial statements in the half-yearly financial report for the six months ended 30 June 2008 is not prepared, in all material respects, in accordance with International Accounting Standard 34.




Ernst & Young LLC

Chartered Accountants

Douglas

Isle of Man





CONSOLIDATED INCOME STATEMENT

For the six month period from 1 January to 30 June 2008








(Audited)




Notes

30 June
2008

30 June

 2007

31 December 

2007





£

£

INCOME





Rental income from investment properties


6,809,692

7,603,005

14,475,535

Other income


79,994

59,108

109,624





6,889,686

7,662,113

14,585,159

EXPENDITURE





Property Investment Adviser's management fee


(704,296)

(855,405)

(1,672,732)

Property Investment Adviser's incentive fee written back


-

142,582

2,642,122

Property expenses


(1,359,280)

(1,078,472)

(3,111,080)

Other expenses


(243,116)

(331,442)

(755,859)





(2,306,692)

(2,122,737)

(2,897,549)






Net operating profit for the period 

before finance costs


4,582,994

5,539,376

11,687,610








Interest receivable


585,315

350,338

930,445

Interest payable and similar charges


(3,750,522)

(3,226,891)

(7,000,192)

Gain on realised SWAP


-

20,245

-





(3,165,207)

(2,856,308)

(6,069,747)






Gains / (losses) from investments





Realised gain /(loss) on disposal of investment properties


781,778

(72,023)

979,344

Unrealised (loss) / gain on revaluation of investment properties


(17,152,294)

263,550

(22,923,311)



(16,370,516)

191,527

(21,943,967)






Net (loss) / profit from ordinary activities before taxation


(14,952,729)

2,874,595

(16,326,104)








Taxation on net (loss) / profit of ordinary activities

3

-

-

-





-

-

-








Net (loss) / profit from ordinary activities after taxation attributable to members


(14,952,729)

2,874,595

(16,326,104)











Dividends - paid

Ordinary

4

-

(9,714,227)

(14,573,637)



'D' Ordinary

4

-

(853,729)

(2,126,141)





-

(10,567,956)

(16,699,778)















CONSOLIDATED BALANCE SHEET

As at 30 June 2008








(Audited)




Notes


30 June

2008

30 June

 2007

31 December 2007





£

£

£

NON-CURRENT ASSETS





Fixed Investment properties

5

179,790,000

225,350,000

198,600,000



179,790,000

225,350,000

198,600,000






CURRENT ASSETS






Trade and other receivables

6

4,395,086

4,595,784

4,665,166

Cash and cash equivalents


4,822,092

4,326,095

4,716,322





9,217,178

8,921,879

9,381,488








Total assets



189,007,178

234,271,879

207,981,488








NON-CURRENT LIABILITIES





Provision for Incentive fee


7

-

2,499,543

-

Bank loans


8

107,121,164

104,944,044

108,270,769





107,121,164

107,443,587

108,270,769








CURRENT LIABILITIES






Trade and other payables


9

4,262,765

3,052,393

6,152,119





4,262,765

3,052,393

6,152,119








Total liabilities



111,383,929

110,495,980

114,422,888















CAPITAL AND RESERVES







Share capital

- Ordinary

10

747,259

780,759

747,259


- 'D' Ordinary

10

257,651

262,686

257,651


-  Deferred shares

10

50,136

50,136

50,136

Distributable capital reserve

- Ordinary


72,640,967

77,428,597

73,831,134


- 'D' Ordinary 


23,756,361

-

24,078,425

Capital redemption reserve

- Ordinary


39,925

1,390

39,925

Share premium

- 'D' Ordinary


-

24,475,852

-

Revenue reserves



(20,820,437)

19,464,813

(5,867,708)

Hedge reserves


12

951,387

1,311,666

421,778











77,623,249

123,775,899

93,558,600










189,007,178

234,271,879

207,981,488



These financial statements were approved by the Board of Directors on 29 August 2008 and signed on its behalf by:



J D Clague




P P Scales

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY 

For the six month period from 1 January to 30 June 2008



Share Capital

Share Premium

Capital 

Reserve

Capital Redemption Reserve

Hedge Reserve

Retained profit

Total

As at 1 January 2007

1,094,971

24,475,852

77,610,638

-

851,001

27,158,174

131,190,636

Net loss for the year

-

-

-

-

-

(16,326,104)

(16,326,104)

Dividends declared and paid

-

-

-

-

-

(16,699,778)

(16,699,778)

Movement in unrealised gains on revaluation of interest rate swaps

-

-

-

-

(429,223)

-

(429,223)

Cancellation of 'C' Ordinary Shares on merge

(501,357)

-

-

50,136

-

-

(451,221)

Issue of new Ordinary Shares arising from merge

451,221

-

-

-

-

-

451,221

Issue of deferred shares arising from merge 

50,136

-

-

(50,136)

-

-

-

Buyback of Ordinary shares

(34,890)

-

(3,779,504)

34,890

-

-

(3,779,504)

Buyback of 'D' Ordinary shares

(5,035)

-

(397,427)

5,035



(397,427)

Cancellation of share premium account


(24,475,852)

24,475,852













As at 1 January 2008

1,055,046

-

97,909,559

39,925

421,778

(5,867,708)

93,558,600

Net loss for the year

-

-

-

-

-

(14,952,729)

(14,952,729)

Capital distribution

-


(1,512,231)

-

-

-

(1,512,231)

Movement in unrealised gains on revaluation of interest rate swaps

-

-

-

-

529,609

-

529,609









As at 30 June 2008

1,055,046

-

96,397,328

39,925

951,387

(20,820,437)

77,623,249




CONSOLIDATED STATEMENT OF CASHFLOW 

For the six month period from 1 January to 30 June 2008






(Audited)



30 June

2008

30 June

2007

31 December 2007



£

£

£

Cash flows from operating activities





Net operating profit before financing


4,582,994

5,539,376

11,687,610

Amortised borrowing costs


42,895

61,694

80,374

Decrease in debtors


723,789

1,046,865

120,193

Decrease in creditors


(1,869,702)

(1,145,694)

(2,641,823)






Cash generated from operating activities


3,479,976

5,502,241

9,246,354






Interest received


585,315

350,338

1,008,349

Interest paid


(3,774,881)

(3,266,608)

(7,096,329)

Taxation received/(paid)


77,706

-

(29,224)






Net Cash inflow from operations


368,116

2,585,971

3,129,150






Cash flow from investing activities





Payment for the purchase of properties and subsequent costs


(1,206,755)

(2,871,450)

(4,656,540)

Proceeds from the sale of properties


3,646,239

3,775,603

10,235,771

Net deposits received


2,901

-

1,563






Net cash inflow from investing activities


2,442,385

904,153

5,580,794






Cash flow from financing 





Payment for share buyback


-

(182,041)

(4,176,931)

Equity dividends paid


(1,512,231)

(10,567,956)

(14,693,236)

Proceeds from long term borrowing


-

3,666,398

10,763,000

Issue costs of long term borrowing


(7,500)

(5,500)

(5,500)

Proceeds on break of SWAP


-

20,245

-

Repayment of long-term borrowing


(1,185,000)

-

(3,785,780)

Net cash outflow from financing activities


(2,704,731)

(7,068,854)

(11,898,447)






Net increase / (decrease) in cash


105,770

(3,578,730)

(3,188,503)






Cash at 1 January


4,716,322

7,904,825

7,904,825






Cash at 30 June/31 December


4,822,092

4,326,095

4,716,322

 


 


COMPANY BALANCE SHEET

 As at 30 June 2008

 

 
 
 
 
30 June
(Audited)
 
 
Notes
30 June
2008
2007 
restated
31 December 2007
 
 
 
 
£
£
£
NON CURRENT ASSETS
 
 
 
 
 
Fixed asset investments
11
771,942
29,111,418
8,506,201
 
 
 
771,942
29,111,418
8,506,201
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
 
 
 
 
Trade and other receivables
6
75,972,700
90,612,957
91,670,979
Cash at bank
 
 
1,775,734
4,786,273
788,027
 
 
 
77,748,434
95,399,230
92,459,006
 
 
 
 
 
 
Total assets
 
 
78,520,376
124,510,648
100,965,207
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
Trade and other payables
9
897,127
131,728
4,294,495
 
 
 
897,127
131,728
4,294,495
 
 
 
 
 
 
CAPITAL AND RESERVES
 
 
 
 
Share capital
- Ordinary
10
747,259
780,759
747,259
 
- “D” Ordinary
10
257,651
262,686
257,651
 
- Deferred shares
10
50,136
50,136
50,136
Distributable capital reserve
- Ordinary
 
72,635,932
77,428,597
73,831,134
 
- “D” Ordinary
 
23,761,396
-
24,078,425
Capital redemption reserve
- Ordinary
 
39,925
1,390
39,925
Share premium
- “D” Ordinary
 
-
24,475,852
-
Revenue reserves
 
(19,869,050)
21,379,500
(2,333,818)
 
 
 
 
 
 
 
 
 
77,623,249
124,378,920
96,670,712
 
 
 
 
 
 
 
 
 
78,520,376
124,510,648
100,965,207

 



This financial statement was approved by the Board of Directors on 29 August 2008 and signed on its behalf by:


J D Clague



P P Scales




COMPANY STATEMENT OF CHANGES IN EQUITY 

For the six month period from 1 January to 30 June 2008



Share Capital

Share Premium

Capital 

Reserve

Capital Redemption Reserve

Retained profit

Total


£

£

£

£

£

£

As at 1 January 2007 (previously reports)

1,094,971

24,475,852

77,610,638

-

17,340,844

120,522,305

Prior year adjustment





10,668,331

10,668,331















As at 1 January 2007 (restated)

1,094,971

24,475,852

77,610,638

-

28,009,175

131,190,636

Net loss for the year

-

-

-

-

(13,643,215)

(13,643,215)

Dividends

-

-

-

-

(16,699,778)

(16,699,778)

Cancellation of 'C' Ordinary shares on merge

(501,357)

-

-

50,136

-

(451,221)

Issue of new Ordinary shares arising from merge

451,221

-

-

-

-

451,221

Issue of deferred shares arising from merge

50,136

-

-

(50,136)

-

-

Buyback of Ordinary shares

(34,890)

-

(3,779,504)

34,890

-

(3,779,504)

Buyback of 'D' Ordinary shares

(5,035)

-

(397,427)

5,035

-

(397,427)

Cancellation of share premium account

-

(24,475,852)

24,475,852

-

-

-








As at 1 January 2008

1,055,046

-

97,909,559

39,925

(2,333,818)

96,670,712








Net loss for the year

-

-

-

-

(17,535,232)

(17,535,232)

Capital distribution

-

-

(1,512,231)

-

-

(1,512,231)








As at 30 June 2008

1,055,046

-

96,397,328

39,925

(19,869,050)

77,623,249




COMPANY STATEMENT OF CASHFLOW

For the six month period from 1 January to 30 June 2008






(Audited)



30 June

2008

30 June

2007

31 December 2007



£

£

£

Cash flows from operating activities





Net operating (loss) / profit before financing


(73,606)

798,812

(284,784)

Decrease/(increase) in debtors


10,563

(5,359)

(9,144)

(Decrease)/increase in creditors


(2,075,402)

40,471

2,985






Cash generated from operating activities


(2,138,445)

833,924

(290,943)






Interest received


2,381,056

2,954,836

6,227,074

Interest paid


(704)

-

(1,191)






Net Cash inflow from operating activities


241,907

3,788,760

5,934,940






Cash flow from investing activities





Dividends received


-

-

800,799






Net cash inflow from investing activities


-

-

800,799






Cash flow from financing 





Payment for share buyback


-

(182,041)

(4,176,931)

Equity dividends paid


(1,512,231)

(10,567,956)

(14,693,236)

Loans made to Group companies


(5,546,968)

(1,306,671)

(3,056,708)

Loans repaid from Group companies


7,804,999

8,028,728

10,953,710

Net cash inflow  / (outflow) from financing activities


745,800

(4,027,940)

(10,973,165)






Net increase / (decrease) in cash


987,707

(239,180)

(4,237,426)






Cash at 1 January


788,027

5,025,453

5,025,453






Cash at 30 June/31 December


1,775,734

4,786,273

788,027


  ORDINARY SHARES

CONSOLIDATED INCOME STATEMENT 

For the sixth month period from 1 January to 30 June 2008















(Audited )





30 June

2008

30 June

2007

31 December 2007




£

£

£

INCOME





Rental Income from investment properties


5,594,243

6,028,653

11,924,550

Other income


74,112

59,108

109,624



5,668,355

6,087,761

12,034,174

EXPENDITURE





Property investment adviser's management fee


(595,720)

(715,997)

(1,404,837)

Property investment adviser's incentive fee


-

142,582

2,642,122

Property expenses


(941,714)

(757,140)

(2,296,214)

Other expenses


(187,411)

(303,267)

(538,718)





(1,724,845)

(1,633,822)

(1,597,647)






Net operating profit for the period before finance costs


3,943,510

4,453,939

10,436,527








Interest receivable


563,803

329,863

890,003

Interest payable and similar charges


(3,194,145)

(2,759,235)

(6,023,387)





(2,630,342)

(2,429,372)

(5,133,384)






Gains from investments





Realised gain /(loss) on disposal of investment properties


781,778

(72,023)

979,344

Unrealised gain on revaluation of investment properties


(13,923,526)

282,662

(17,193,058)



(13,141,748)

210,639

(16,213,714)






Net (loss) / profit from ordinary activities before taxation


(11,828,580)

2,235,206

(10,910,571)








Taxation on profit from ordinary activities


-

-

-





-

-

-








Net profit from ordinary activities after taxation attributable to members



(11,828,580)

2,235,206

(10,910,571)










Dividends - paid



-

(9,714,227)

(14,573,637)















Basic and diluted earnings per Ordinary Share (pence)


(15.83)

2.71

(14.15)


  ORDINARY SHARES

CONSOLIDATED BALANCE SHEET

As at 30 June 2008















(Audited)





30 June

2008

30 June

 2007

31 December 2007






£

£

£

NON-CURRENT ASSETS





Fixed investment properties 


145,590,000

182,550,000

161,330,000





145,590,000

182,550,000

161,330,000






CURRENT ASSETS






Trade and other receivables


3,468,067

3,782,161

3,892,743

Cash and cash equivalents


4,072,490

3,341,819

3,139,628





7,540,557

7,123,980

7,032,371








Total assets



153,130,557

189,673,980

168,362,371








NON-CURRENT LIABILITIES





Provision for incentive fee



-

2,499,543

-

Bank loans



87,404,086

87,161,541

88,576,251





87,404,086

89,661,084

88,576,251








CURRENT LIABILITIES






Trade and other payables



3,202,513

2,765,824

4,730,987





3,202,513

2,765,824

4,730,987








Total liabilities



90,606,599

92,426,908

93,307,238








CAPITAL AND RESERVES







Share capital



747,259

780,759

747,259

Deferred shares



50,136

50,136

50,136

Capital reserve



72,640,967

77,428,597

73,831,134

Revenue reserves



(11,743,403)

18,090,364

85,177

Capital redemption reserve



34,890

1,390

34,890

Hedge reserves



794,109

895,826

306,537











62,523,958

97,247,072

75,055,133










153,130,557

189,673,980

168,362,371



  'D' ORDINARY SHARES

CONSOLIDATED INCOME STATEMENT 

For the sixth month period from 1 January to 30 June 2008









(Audited)





30 June

2008

30 June

2007

31 December 2007

INCOME



£


£


£






Rental Income from investment properties


1,215,449

1,574,352

2,550,985

Other income


5,882

-

-





1,221,331

1,574,352

2,550,985

EXPENDITURE





Property investment adviser's fee


(108,576)

(139,408)

(267,895)

Property expenses


(418,263)

(321,332)

(814,866)

Other expenses


(55,008)

(28,175)

(217,141)





(581,847)

(488,915)

(1,299,902)






Net operating profit for the period before finance costs


639,484

1,085,437

1,251,083








Interest receivable


21,512

20,475

40,442

Interest payable and similar charges


(556,377)

(467,656)

(976,805)

Realised gain on SWAP


-

20,245

-





(534,865)

(426,936)

(936,363)






Losses from investments





Unrealised loss on revaluation of investment properties


(3,228,768)

(19,112)

(5,730,253)



(3,228,768)

(19,112)

(5,730,253)






Net (loss) profit from ordinary activities before taxation


(3,124,149)

639,389

(5,415,533)








Taxation on profit of ordinary activities


-

-

-





-

-

-








Net (loss) profit from ordinary activities after taxation attributable to members


(3,124,149)

639,389

(5,415,533)










Dividends - paid



-

(853,729)

(2,126,141)















Basic and diluted earnings per 'D' Ordinary Share (pence)


(12.13)


2.43

(20.70)



  'D' ORDINARY SHARES

CONSOLIDATED BALANCE SHEET 

As at 30 June 2008









(Audited)






30 June
2008


30 June 2007

31 December 2007





£

£

£

NON-CURRENT ASSETS





Fixed Investment properties


34,200,000

42,800,000

37,270,000





34,200,000

42,800,000

37,270,000






CURRENT ASSETS





Trade and other receivables



921,839

820,331

772,423

Cash and cash equivalents


749,602

984,276

1,576,694



1,671,441

1,804,607

2,349,117








Total assets




35,871,441

44,604,607

39,619,117














NON-CURRENT LIABILITIES







Bank loans


19,717,078

17,782,503

19,694,518




19,717,078

17,782,503

19,694,518








CURRENT LIABILITIES







Trade and other payables



1,055,072

293,277

1,421,132




1,055,072

293,277

1,421,132








Total liabilities




20,772,150

18,075,780

21,115,650













CAPITAL AND RESERVES







Share capital 




257,651

262,686

257,651

Capital reserve



23,756,361

-

24,078,425

Share premium



-

24,475,852

-

Revenue reserves



(9,077,034)

1,374,449

(5,952,885)

Capital redemption reserve



5,035

-

5,035

Hedge reserves



157,278

415,840

115,241










15,099,291

26,528,827

18,503,467










35,871,441

44,604,607

39,619,117







This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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