Half Yearly Report

RNS Number : 9193X

ING UK Real Estate Income Trust Ltd

25 August 2009

 

ING UK Real Estate Income Trust Limited ('IRET')

25 August 2009

ING UK Real Estate Income Trust Limited

GROUP SUMMARY

ING UK Real Estate Income Trust Limited is a closed-ended, Guernsey registered investment Company, launched on the London and Channel Islands' Stock Exchanges on 25 October 2005. With approximately 900 investors, the Company, together with several subsidiaries including a Guernsey unit trust and four Jersey unit trusts which beneficially hold title to the properties, comprise 'the Group'. 

GROUP OBJECTIVE 

The Group aims to provide shareholders with an attractive level of income together with the potential for capital growth. It can invest both directly and indirectly in an investment portfolio comprising UK, Isle of Man and Channel Islands properties. The Group's focus is on five principal commercial property sectors: office, retail, retail warehouse, industrial and leisure. Maximum borrowings are limited to 65% of gross assets. The investment portfolio is managed by ING Real Estate Investment Management (UK) Limited.

FINANCIAL HIGHLIGHTS

>            Income profit for the period, prior to payment of dividends and excluding revaluation, of £4.7 million.

>                Dividends totalling £3.3 million paid, equivalent to 1 pence per ordinary share.

>            Ongoing success in strategy to reduce debt with a total of £35 million being repaid following the period end.

>      Corresponding reduction in overall cost of debt of £1.7 million per annum.

OPERATIONAL HIGHLIGHTS

>    Successful restructure of underlying loan with increased loan to value covenant providing further operational flexibility.

>            Six disposals completed during the period for a total consideration of £28.1 million.

>                 Change in Investment Manager remuneration to Net Asset Value basis with effect from 1 July 2009.

>     Outperformance of underlying property portfolio generating a total return for the period of -8.35% compared to the IPD Quarterly Benchmark figure of -9.33%.

	Six months to 30 June 2009	Six months to 30 June 2008
Share price at the end of the period	30.5 pence	47.5 pence
Net asset value	£162.0 million	£319.4 million
Net asset value per share	49 pence	97 pence
Net income for the period	£4.7 million	£9.1 million
Pre-tax loss (including unrealised losses)	£(45.0) million	£(39.8) million
Loss per share	(13.6) pence	(12.0) pence
Gain on interest rate swaps	£2.8 million	£8.4 million
Loss on revaluation of portfolio	£(48.1) million	£(60.2) million
Gearing*	48.7%	46.9%

* Calculated as net debt less cash as a proportion of property valuations

  Chairman's Statement 

The beginning of 2009 saw a general worsening of the UK's economic position with the country officially entering recession in January. The effect of this has been seen through rising unemployment, the recording of some of the largest annual corporate losses in UK history and further capital injections having been made into the UK banking system. Set against this, we have seen a dramatic reduction in the base rate, now at the lowest level in the Bank of England's 315 year history, and a quantitative easing programme put in place in order to stimulate the financial markets into operating more effectively.  

As a result of such extreme capital market conditions, and in order to protect shareholder interests through this volatile period, the key focus at the Company level has been to manage the debt position effectively and at the portfolio level, to ensure that revenues are rigorously maintained and enhanced wherever possible through effective asset and property management.  

In May the Company achieved a relaxation of its loan to value covenants without any upfront arrangement fee or change to the overall margin on the loan. In parallel with this the Company has repaid £35 million of debt, which will reduce annual interest charges by £1.7 million. This repayment was made in full ahead of the agreed timetable. This was a complicated and difficult transaction to achieve, but the result obtained on behalf of shareholders will position the Company well for the future. This was one of only a few UK securitised loans to be restructured since their inception in the UK.

Your Company has continued its strategy to de-risk the capital structure through a continuation of the sales programme, which was first initiated in 2007. This has been achieved in a particularly illiquid market and at a time when compliance with banking covenants was critical. Particularly pleasing, albeit following the quarter end, is the disposal of the largest void within the portfolio in one of the most significant occupier led transactions in the M25 market in 2009. This significantly reduces the Company's void exposure. Whilst the Company's sales programme is now substantially complete, it will selectively take advantage of opportunities to dispose of assets where the capital raised can be employed more effectively on behalf of the shareholders.  

The decision to withhold the May dividend payment was taken very seriously.  It reflected the extreme economic conditions prevailing at the time. I am pleased to confirm the August dividend will be paid in the usual manner consistent with the basis announced by the Board at the end of 2008 on a fully covered basis.

Mindful of the conditions in which we are operating I am pleased to confirm that we have concluded negotiations with the Investment Manager in respect of their fees. We have aligned their remuneration to a Net Asset Value basis, with a performance element linked to the underlying property performance. A separate announcement will be made detailing the revised terms shortly. The Investment Manager has also provided a contribution of £250,000 towards the cost of amendments to the loan covenants.  In addition, the Board undertook a review of the Company's auditor over the period and following a panel selection process was pleased to be able to appoint KPMG as the Company's auditor.

Looking to the future, we are now starting to see significantly reduced capital movements in the IPD Index and in certain subsectors of the market we are beginning to see increasing signs of price stability. However, until there is comfort that the UK economic position has stabilised there continue to be short term threats to income, although we expect opportunities to arise as the market starts to recover. The Company continues to benefit from a diversified asset and tenant base, an attractive low cost debt position and a fully covered dividend. We believe the Company is well positioned now to weather ongoing difficult conditions and believe it is poised to take advantage of opportunities that will continue to arise out of the current economic environment.

Nicholas Thompson

24 August 2009

  Responsibility Statement

We confirm to the best of our knowledge:

(a)               the condensed set of Financial Statements have been prepared in accordance with IAS 34 ‘Interim Financial Reporting’;

 

(b)               the interim Investment Manager’s Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

 

(c)                the interim Investment Manager’s Report includes a fair review of the information required by Disclosure and Transparency Rule 4.2.8R (disclosure of related parties’ transactions and changes therein).

By order of the Board

Nicholas Thompson

Investment Manager's Report

ECONOMIC OVERVIEW

Over the six month period to 30 June 2009, GDP in the UK declined by an unexpectedly sharp 3.2%, which was considerably larger than the 2.5% decline seen in the preceding six months. Having experienced two consecutive quarters of negative economic growth, the economy officially moved into recession in January 2009, the first time since 1991. The economic slowdown has led to a rise in unemployment over the six months, with the claimant count measure increasing from 1.25 million in January 2009 to 1.56 million in June 2009. 

Inflation, as measured by CPI, continued to drift downwards over the six months, moving from 3.0% per annum at the start of the year to 1.8% per annum in June 2009. The latter figure is just below the Bank of England's target of 2% per annum but nevertheless well below 2008's peak of 5.2% per annum. RPI inflation turned negative over the six month period, and at June 2009 stood at -1.6% per annum, largely as a result of reduced mortgage interest payments. 

Set against this backdrop, the Bank of England lowered the base rate from 2% to 0.5% over the period and introduced a quantitative easing programme of buying government and corporate bonds in an effort to thaw the credit markets. The spread between the base rate and LIBOR, a measure of confidence in the banking system, continued to narrow, suggesting that the Bank's measures are having some positive effect. 

The FTSE 100 fell by 1.6% between January 2009 and June 2009, with a 10.3% decline over the first quarter, and a 9.7% increase over the second quarter reflecting stronger investor sentiment.  

PROPERTY MARKET REVIEW

The pace at which capital values are being written down has continued to slow progressively during the second quarter of the year, reaching only -0.9% over the month to June 2009, notably less than the figure of -1.6% in May 2009, according to IPD's Monthly Index. The capital fall in June 2009 was the smallest monthly fall since August 2008, as more positive signs for the market begin to emerge. Rental decline has now also taken over from yield impact as the principal driver of capital value falls; rental value declines have accelerated this year, while the monthly yield impact in June 2009 was the least negative since the formative stages of the downturn in August 2007. The All Property initial yield stood at 7.92% in June 2009: just 26 basis points higher than at the end of the first quarter, although this represents a nearly 90 basis point movement since the turn of the year.

There are now definite signs that the capital value fall due to outward yield movement is close to having run its course. Nevertheless, rental values still have some way to fall as the occupational market lags the economy. Unemployment is still rising, corporate profits are falling and correspondingly vacancy rates across commercial property continue to rise. The impact on retail property voids, through lower levels of consumer spending and a wave of retailer administrations, has been almost immediate, but office and industrial properties are also set to see voids steadily rise, putting downward pressure on rental values.

By virtue of the contracted lease term the full effect of rental declines will not be seen in cashflows but nevertheless will dampen any rebound in capital values in the short term.

Figure 1: All Property Total Returns

Date	Monthly Total Return %	Date	Monthly Total Return %
Jun-06	2.1	Jan-08	-1.6
Jul-06	1.3	Feb-08	-1.0
Aug-06	1.1	Mar-08	-0.8
Sep-06	1.3	Apr-08	-0.5
Oct-06	1.0	May-08	-0.7
Nov-06	1.2	Jun-08	-1.5
Dec-06	1.5	Jul-08	-1.3
Jan-07	0.7	Aug-08	-1.1
Feb-07	0.7	Sep-08	-2.4
Mar-07	0.9	Oct-08	-3.8
Apr-07	0.7	Nov-08	-5.1
May-07	0.7	Dec-08	-5.3
Jun-07	0.7	Jan-09	-2.4
Jul-07	0.2	Feb-09	-2.5
Aug-07	0.0	Mar-09	-2.4
Sep-07	-1.2	Apr-09	-1.6
Oct-07	-1.5	May-09	-0.9
Nov-07	-3.6	Jun-09	-0.2
Dec-07	-3.7

Source: IPD Monthly Digest

STRATEGY

The operational strategy is set in order to implement the Group's objective and for the first half of 2009 was highly focused on the need to manage the debt position in light of a rapidly deteriorating market and the need to remain compliant with covenants. 

Being now in a position where the Group has headroom against further declines in the market, along with some tentative signs of price stability, the emphasis is towards positioning the Group through a period of weaker occupational demand.

With such extreme shocks to the capital markets over the period, we had reduced our refurbishment programme, seeking to retain cash for covenant purposes. We are now in a position, having provided operational flexibility, where we can seek to enhance a number of assets which will in turn lead to improved income prospects in due course.

PORTFOLIO PERFORMANCE

At an underlying property level, the portfolio continued to perform ahead of the UK market as measured by IPD, both on an income and a total return basis. 

In the six months to 30 June 2009, the underlying portfolio delivered a total return of -8.4% against the IPD quarterly benchmark of -9.3%. The Group's income return was 3.9% against a benchmark of 3.5%.

REVIEW OF HALF YEAR TO JUNE 2009

The primary focus for the period related to the need to remain compliant with loan covenants against a backdrop of rapidly deteriorating property values. The disposals programme continued whilst at the same time proposals to restructure the underlying loan were approved by Rating Agents and then presented to Noteholders. A successful outcome, increasing the loan to value covenants, was achieved in May 2009 and is detailed further below.  

Maintaining income remained a priority along with managing the existing assets with a view to maintaining, or where possible enhancing, cashflow. In particular, and faced with a number of tenants in administration, efforts were on mitigating the effects of negative cashflow through such events.

Generally, rent collection remains strong, and as at the June Quarter, over 99% of rent due had been received, ignoring those tenants in administration or on payment plans. As at 30 June 2009 tenants in administration or liquidation represented less than 3% of the total rent roll.

With the general economic outlook, occupier activity was subdued, but one of the most significant successes was securing an occupier led disposal of our largest void in the portfolio, which exchanged just after the end of the period.

ACQUISITIONS & DISPOSALS

In the six months to 30 June 2009, the Group made no acquisitions and disposed of six properties for a consideration of over £28 million. Further disposals of £26.8 million have either exchanged or completed following the period end.

These disposals were made in line with the strategy to reduce the Group's debt and to ensure compliance with debt covenants. 

In particular the proceeds were utilised in the prepayment of £35 million of debt which completed in July 2009.

OCCUPANCY

As at 30 June 2009, the occupancy rate within the portfolio stood at 91%, which was in line with the IPD Quarterly Benchmark of 91%.  The sale of the largest void in the portfolio referred to in the Chairman's Statement will improve this to 93% in August 2009 when completion occurs.

Over the period, three tenants entered administration or liquidation and we expect partial recovery in two instances. It is likely that the remaining space will be returned and re-let as soon as practically possible. 

This increase in unexpected voids and weaker tenant demand is depressing rental levels in the short term and we are taking a pragmatic approach to re-letting accommodation with the emphasis on cashflow.

DEBT

During the period the Group had a total of £225 million of AAA rated loan notes in the debt market, with interest payable on the initial £200 million at 4.79% and the further £25 million at 5.38%, both fixed by way of interest rate swaps. These loan notes are repayable on 31 January 2013.

In May 2009 and after consultations with the Noteholders the following amendments were achieved in respect of the notes:

• Increase the loan to value covenant from 50% to 60% until January 2012, when it will reduce to 55%, falling back to 50% in July 2012;

• Increase the interest cover ratio from 1.5 times to 1.75 times until maturity of the Securitised Loan Facility in January 2013;

• Reduce the Group's flexibility to make non-core investments, residential investments and undertake developments or major upgrade projects within the Securitised Loan Facility; and

• Remove the Group's ability to hold any additional indirect property investments within the Securitised Loan Facility for the purpose of the various financial covenants.

Following the quarter end, and as part of the loan restructuring above, the Group pre-paid £35 million of debt. As at the date of this Report the Group had £190 million of debt outstanding at a weighted average cost of 4.87% per annum, excluding loan arrangement costs.

OUTLOOK

At the period end the portfolio provided a net initial yield of over 8.5% and weighted average unexpired lease length of over 8.5 years. The portfolio remains well diversified, to reduce geographic, asset and tenant risk.

Having restructured the debt within the structure, without any increased margin, there is stability provided without the need for any immediate refinancing, enabling us to focus on active management and the opportunities created by the current market dynamics.  

Having seen substantial declines in asset values over the past two years, the sector, as measured by IPD, now offers an attractive income return of just under 8% per annum.

With the recently published IPD Monthly results for July showing the first positive total return since July 2007, the market appears to be stabilising. It is apparent from transactional activity that in certain subsectors we are starting to see increased competition for assets and in some instances signs of rising pricing.

Despite this, rental value growth has been negative since May 2008 and whilst there is an improvement in investor sentiment, declining rental value growth and risks to cashflow are continuing to adversely affect capital values. The more stable capital environment is enabling a yield correction which in order to be sustainable will require an improvement in the occupier market which, in turn, will be dependent upon economic recovery.

Within the UK commercial property market, there remain significant debt related issues either in relation to covenants or refinancing and as such we remain cautious about the strength of any immediate recovery. Paradoxically, these issues are likely to provide the opportunities of the future.

Michael Morris

ING Real Estate Investment Management (UK) Limited

24 August 2009

  Portfolio Analysis

Geographical

As at 30 June 2009 the regional weightings of the Property Portfolio, as a percentage of current portfolio value, are summarised as follows:

	£000	% of Portfolio
Central London	26,105	7.3
South East and Greater London	96,940	27.2
East	41,835	11.7
South West	19,545	5.5
Midlands	74,590	20.9
North	59,725	16.8
Scotland	9,800	2.8
Wales	20,640	5.8
Northern Ireland	-	-
Isle of Man	7,100	2.0
Total	356,280	100

Sector

As at 30 June 2009 the sector weightings of the Property Portfolio, as a percentage of current portfolio value, are summarised as follows:

	£000	% of Portfolio
Offices	156,005	43.8
Industrial	114,700	32.2
Retail	43,145	12.1
Retail Warehouse	24,375	6.8
Leisure/Other	18,055	5.1
Total	356,280	100

Covenant Strength

The covenant strength, based as a percentage of current passing rent by risk rating, as at 30 June 2009 is summarised as follows:

	Portfolio %
Negligible and Government risk	50.9
Low risk	29.3
Low-medium risk	2.3
Medium-high risk	2.8
High risk	11.7
Ineligible/not matched	3.0
Total	100

Longevity of Income

As at 30 June 2009, based as a percentage of current net annual rent, the length of the leases to the first termination is summarised as follows:

Years	£000	%
Up to 5	13,136	40.5
5 to 10	11,573	35.7
10 to 15	4,145	12.8
15 to 25	2,300	7.1
25 and over	1,249	3.9
Total	32,403	100

Top Ten Tenants

The top ten tenants, based as a percentage of current passing rent, as at 30 June 2009 is summarised as follows:

	% of Passing Rent
TNT UK Limited	8.7
Merrill Lynch Europe Plc	3.5
Cadence Design Systems Limited	3.0
Tanfield Group Plc	2.6
Exel UK Limited	2.6
Menzies Hotels Property No.20 Limited	2.4
BT Telecommunications Plc	2.4
Chiltern International Limited	2.3
S P Group Limited	2.1
Scottish Provident International Life Assurance Limited	1.8
	31.4

VALUATION SCHEDULE AS AT 30 JUNE 2009

Properties valued in excess of £20 million	Sector
Unit 5320, Magna Park, Lutterworth, Leics.	Industrial
Units A-G2 River Way Industrial Estate, Harlow, Essex	Industrial
Properties valued between £15 million and £20 million
Phase II, Parc Tawe, Link Road, Swansea	Retail Warehouse
Properties valued between £10 million and £15 million
Colchester Business Park, The Crescent, Colchester, Essex	Office
56, Castle Street, 2/12 English Street and 12-21 St Cuthberts Lane, Carlisle, Cumbria	Retail
Properties valued between £5 million and £10 million
Boundary House, Jewry Street, London EC3	Office
City Link House & Tolley House, Addiscombe Road, Croydon	Office
Vigo 250, Birtley Road, Washington, Tyne and Wear	Industrial
Angouleme Way Retail Park, Bury, Greater Manchester	Retail Warehouse
Unit 3220, Magna Park, Lutterworth, Leics.	Industrial
Regency Wharf , Broad Street, Birmingham	Leisure
Strathmore Hotel, Arndale Centre, Luton, Beds.	Leisure
401 Grafton Gate East, Milton Keynes, Bucks.	Office
Angel Gate Office Village, City Road, London EC1	Office
L'Avenir, Opladen Way, Westwick, Bracknell, Berks.	Office
1-3 Chancery Lane, London WC2	Office
Lincoln Place (Block 2), Farringdon Road, London EC1	Office
Westlea Campus, Chelmsford Road, Swindon, Wilts.	Office
The Business Centre, Molly Millars Lane, Wokingham, Berks.	Industrial
Units 1-13 Dencora Way, Sundon Park, Luton, Beds.	Industrial
Unit 2, Ravensbank Business Park, Redditch, Worcs.	Industrial
Provident House, Ballacottier Business Park,  Isle Of Man	Office
Scots Corner, High Street/Institute Road,  Birmingham	Retail
17/19 Fishergate, Preston	Retail
171 Bath Road, Slough, Berks.	Office
3 The Boulevard, Croxley Green, Watford, Herts.	Office
Northampton Business Park, 800 Pavilion Drive, Northampton	Office
Queens House, 17/29 St Vincent Place, Glasgow	Office
Lawson Mardon Buildings, Kettlestring Lane, York	Industrial
Sentinel House, Ancells Business Park, Fleet, Hants.	Office
Waterside Park, Longshot Lane, Bracknell, Berks.	Office
53/55/57 Broadmead, Bristol	Retail
9/12 St James Parade, Bristol	Office
Longcross Court, Newport Road, Cardiff	Office
Haynes Way, Swift Valley Industrial Estate, Rugby, Warwickshire	Industrial

Properties valued under £5 million
Easter Court, Gemini Park, Warrington	Industrial
Trident House, 42/48 Victoria Street, St Albans, Herts.	Office
Zenith, Downmill Road, Bracknell, Berks	Industrial
Waterside House, Kirkstall Road, Leeds	Office
Atlas House, Third Avenue, Globe Park, Marlow, Bucks.	Office
72/78 Murraygate, Dundee	Retail
Merchants House, Crook Street, Chester	Office
6/12 Parliament Row, Hanley, Worcs.	Retail
7&9 Warren Street, Stockport	Retail
Units 1- 3, 18/28 Victoria Lane, Huddersfield, West Yorks.	Retail
Heron Industrial Estate, Spencers Wood, Reading	Industrial

Risk Management

There are a number of potential risks and uncertainties which could have a material impact on the Group's long term performance and could cause actual results to differ materially from expected and historic results. The main risks and how they are mitigated are shown below;

Issue	Risk	Mitigation
Market risk	The Group operates in the property sector which is known to be cyclical.	The Investment Manager undertakes significant research to ensure that the strategy of the Group can be constantly amended to take account of changes in the prevailing market.
Geographical risk	Property market returns can vary significantly between geographical areas.	By maintaining a diversified portfolio the Investment Manager can minimise exposure to one particular market.
Investment risk	Identifying good investments ahead of competitors.	The Investment Manager has a dedicated and experienced team which assists in identifying, negotiating and completing acquisitions and sales according to strict returns criteria.
Letting risk	The risk of being unable to let the majority of lettable space.	The Investment Manager maintains close contact with leasing agents and utilises its research team to ensure exposure to less favourable markets is minimised.
Valuation risk	The property portfolio is susceptible to fluctuations in property valuations.	By maintaining a diversified portfolio the Investment Manager may spread the risk of a large downturn in a specific class of asset
Expertise risk	The risk of being unable to attract appropriate individuals to manage the portfolio.	The Investment Manager has a policy of ensuring that remuneration is linked to the market. The Investment Manager's agreement is regularly reviewed by the Board.
Liquidity risk	The risk that insufficient funds are available for operating costs, maintenance of debt and asset management initiatives.	Cash flows are continuously monitored and detailed forecasts prepared to ensure sufficient resources exist. Funding maturities are spread over a range of time scales, and good relationships are maintained with lenders. Covenant requirements are also continually monitored and reported regularly to the Board.
Interest rate risk	The risk of fluctuation of interest rates on loans.	Interest payable on floating rate loans are fixed by way of interest rate swaps to minimise exposure.
Credit risk	The risk of default by tenants.	The Investment Manager has a policy of only dealing with creditworthy counterparties. Counterparty limits are regularly reviewed. Trade debtors consist of a large number of tenants spread across diverse industries and geographical areas.
Cash flow risk	The risk of a shortfall in funds to operate the Group.	The Investment Manager monitors cash flows and assesses all capital and operational expenditure. The Board are regularly updated on major cash flows.

  Independent Review Report

INDEPENDENT REVIEW REPORT TO ING UK REAL ESTATE INCOME TRUST LIMITED ('The Company')

Introduction

We have been engaged by the Company to review the condensed set of financial statements in the Half Yearly Financial Report for the six months ended 30 June 2009 which comprises the Condensed Consolidated Statement of Comprehensive Income, the Condensed Consolidated Statement of Changes in Equity, the Condensed Consolidated Balance Sheet, the Condensed Consolidated Cash Flow Statement and the related explanatory notes. 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 information in the condensed set of financial statements.

This report is made solely to the Company in accordance with the terms of our engagement to assist the Company in meeting the requirements of the Disclosure and Transparency Rules ('the DTR') of the UK's Financial Services Authority ('the UK FSA'). Our review has been undertaken so that we might state to the Company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company for our review work, for this report, or for the conclusions we have reached.

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 DTR of the UK FSA.

As disclosed in note 2, the Annual Financial Statements of the Company are prepared in accordance with International Financial Reporting Standards. The condensed set of financial statements included in this Half Yearly Financial Report has been prepared in accordance with IAS 34 'Interim Financial Reporting'.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of 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 UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial 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 in 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 condensed set of financial statements in the Half Yearly Financial Report for the six months ended 30 June 2009 is not prepared, in all material respects, in accordance with IAS 34 and the DTR of the UK FSA.

KPMG Channel Islands Limited
Chartered Accountants
24 August 2009

  Financial Statements

Condensed Consolidated Statement of Comprehensive Income For the period from 1 January to 30 June 2009
				1 Jan to 30 June 2009	1 Jan to 30 June 2008	1 Jan to 31 December 2008
				Unaudited	Unaudited	Audited
	Notes	Income	Capital	Total	Total	Total
		£000	£000	£000	£000	£000
Income
Rental income	3	16,054	-	16,054	17,825	35,812
Service charges recharged to tenants		2,897	-	2,897	1,770	4,284
Other operating income		5	-	5	2,442	5,522
Total operating income		18,956	-	18,956	22,037	45,618
Gains and losses on investments
Realised (losses)/gains arising on disposal of investment properties	8	-	(4,026)	(4,026)	3,243	2,524
Realised gains arising on disposal of finance leases		-	40	40	-	-
Unrealised losses on revaluation of investment properties	8	-	(48,476)	(48,476)	(60,221)	(140,757)
Unrealised losses on revaluation of assets held under finance leases		-	(34)	(34)	(257)	(404)
Total gains and losses on investments		-	(52,496)	(52,496)	(57,235)	(138,637)
Expenses
Property operating expenses		(2,073)	-	(2,073)	(1,109)	(4,027)
Service charge costs		(2,897)	-	(2,897)	(1,770)	(4,284)
Management expenses	5	(1,927)	-	(1,927)	(2,880)	(5,345)
Other operating expenses	6	(2,015)	-	(2,015)	(1,293)	(2,667)
Total operating expenses		(8,912)	-	(8,912)	(7,052)	(16,323)
Profit/(loss) before finance costs and tax		10,044	(52,496)	(42,452)	(42,250)	(109,342)
Financing
Interest receivable		126	-	126	1,424	2,663
Interest payable		(5,426)	-	(5,426)	(7,335)	(14,059)
Unrealised gains/(losses) on revaluation of interest rate swaps		-	2,779	2,779	8,393	(19,677)
Total finance costs		(5,300)	2,779	(2,521)	2,482	(31,073)
Profit/(loss) before tax		4,744	(49,717)	(44,973)	(39,768)	(140,415)
Tax		-	-	-	-	-
Profit/(loss) for the year/period		4,744	(49,717)	(44,973)	(39,768)	(140,415)
Loss per share
Basic and diluted				(13.6)p	(12.0)p	(42.5)p

There is no comprehensive income other than the loss for the period.

The total column of this statement represents the Group's Condensed Consolidated Statement of Comprehensive Income. The supplementary income return and capital return columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations.  

All income is attributable to the equity holders of the parent Company. There are no minority interests. Notes 1 to 14 form part of these Condensed Consolidated Financial Statements.

Condensed Consolidated Statement of Changes in Equity For the period from 1 January to 30 June 2009
	Notes	Share Capital	Share Premium Account	Distributable Reserve	Retained Earnings	Total
		£000	£000	£000	£000	£000
Balance as at 31 December 2007		-	31,389	297,776	40,352	369,517
Net loss for the period		-	-	-	(39,768)	(39,768)
Dividends paid	7	-	-	(1,250)	(9,074)	(10,324)
Balance as at 30 June 2008		-	31,389	296,526	(8,490)	319,425
Net loss for the period		-	-	-	(100,647)	(100,647)
Dividends paid	7	-	-	357	(8,825)	(8,468)
Balance as at 31 December 2008		-	31,389	296,883	(117,962)	210,310
Net loss for the period		-	-	-	(44,973)	(44,973)
Dividends paid	7	-	-	-	(3,304)	(3,304)
Balance as at 30 June 2009		-	31,389	296,883	(166,239)	162,033

Notes 1 to 14 form part of these Condensed Consolidated Financial Statements.

Condensed Consolidated Balance Sheet As at 30 June 2009
		30 June 2009	30 June 2008	31 Dec 2008
		Unaudited	Unaudited	Audited
	Notes	£000	£000	£000
Non-current assets
Investment properties	8	357,349	536,092	436,005
Total non-current assets		357,349	536,092	436,005
Current assets
Accounts receivable	9	5,358	6,699	8,488
Cash and cash equivalents		51,398	63,779	20,084
Total current assets		56,756	70,478	28,572
Total assets		414,105	606,570	464,577
Current liabilities
Accounts payable and accruals		(14,094)	(17,001)	(13,210)
Loans and borrowings	10	(35,000)	-	-
Total current liabilities		(49,094)	(17,001)	(13,210)
Non-current liabilities
Loans and borrowings	10	(202,978)	(270,144)	(241,057)
Total non-current liabilities		(202,978)	(270,144)	(241,057)
Total liabilities		(252,072)	(287,145)	(254,267)
Net assets		162,033	319,425	210,310
Equity
Ordinary share capital		-	-	-
Share premium account		31,389	31,389	31,389
Distributable reserve		296,883	296,526	296,883
Retained earnings		(166,239)	(8,490)	(117,962)
Total equity		162,033	319,425	210,310
Net asset value per share	12	0.49	0.97	0.64

These Condensed Consolidated Financial Statements were approved by the Board of Directors on 24 August 2009 and signed on its behalf by:

Robert Sinclair                         Trevor Ash                

Director                                   Director

Notes 1 to 14 form part of these Condensed Consolidated Financial Statements.

Condensed Consolidated Cash Flow Statement For the period from 1 January to 30 June 2009
		1 Jan to 30 June 2009	1 Jan to 30 June 2008	1 Jan to 31 December 2008
		Unaudited	Unaudited	Audited
	Notes	£000	£000	£000
Loss before tax		(44,973)	(39,768)	(140,415)
Adjusted for
Interest receivable		(126)	(1,424)	(2,663)
Interest payable		5,426	7,335	14,059
Realised and unrealised (gains) and losses on investments		49,717	48,842	158,313
Amortisation of finance costs		163	260	705
Cash flows from operating profit before working capital changes		10,207	15,245	29,999
(Increase)/decrease in trade and other receivables		2,968	(680)	(2,470)
Increase/(decrease) in trade and other payables		905	(755)	(4,990)
Net cash flows from operating activities		14,080	13,810	22,539
Cash flows from investing activities
Purchase of investment properties	8	(476)	(1,791)	(2,806)
Disposal of investment properties	8	26,314	41,670	61,370
Interest received		126	1,424	2,663
Net cash flows from investing activities		25,964	41,303	61,227
Cash flows from financing activities
Repayment of long term borrowings	10	-	(24,825)	(81,981)
Interest paid on loans		(5,426)	(7,335)	(14,059)
Dividends paid	7	(3,304)	(10,324)	(18,792)
Net cash flows from financing activities		(8,730)	(42,484)	(114,832)
Net increase in cash and cash equivalents		31,314	12,629	(31,066)
Cash and cash equivalents at beginning of year/period		20,084	51,150	51,150
Cash and cash equivalents at end of year/period		51,398	63,779	20,084

Notes 1 to 14 form part of these Condensed Consolidated Financial Statements.

  Notes to the Condensed Consolidated Financial Statements 

For the period from 1 January to 30 June 2009

1.     General information

ING UK Real Estate Income Trust Limited was incorporated on 15 September 2005 and is registered as a closed-ended Guernsey investment Company. 

These Half Yearly Financial Statements are prepared for the period from 1 January to 30 June 2009, with unaudited comparatives for the period from 1 January to 30 June 2008. Comparatives are also provided from the audit financial statements for the year ended 31 December 2008.

The financial information for the year ended 31 December 2008 is derived from the Financial Statements delivered to the UK Listing Authority and does not constitute statutory accounts.  

2.     Significant accounting policies

These Half Yearly Financial Statements have been prepared in accordance with IAS 34 'Interim Financial Reporting'. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the Financial Statements of the Company as at and for the year ended 31 December 2008.

Except as described below, the accounting policies applied by the Company in these Half Yearly Financial Statements are the same as those applied by the Company in its Financial Statements as at and for the year ended 31 December 2008.

The Annual Financial Statements of the Company are prepared in accordance with International Financial Reporting Standards ('IFRS').

Presentation of financial statements

The Company applies revised IAS 1: 'Presentation of Financial Statements (2007)', which became effective as of 1 January 2009. As a result, the Company presents in the Condensed Consolidated Statement of Changes in Equity all owner changes in equity, whereas all non-owner changes in equity are presented in the Consolidated Statement of Comprehensive Income. This presentation has been applied in these Half Yearly Financial Statements as of and for the six months period ended on 30 June 2009. Comparative information has been re-presented so that it also is in conformity with the revised standard. Since the change in accounting policy only impacts presentation aspects, there is no impact on earnings per share.

The following standards, which became effective on 1 January 2009, have had no material impact on the Half Yearly Financial Statements:

IFRS 3 - Business Combinations
IFRS 8 - Operating Segments

IAS 23 (Revised) - Borrowing Costs

3.     Rental income

Rent receivable is stated exclusive of Value Added Tax and arose wholly from continuing operations in the United Kingdom and the Isle of Man.

4.     Business and Geographical segments

The Directors are of the opinion that the Group, through its subsidiary undertakings, operates in one reportable industry segment, namely real estate investment, and across one primary geographical area, namely the United Kingdom and the Isle of Man and therefore no segmental reporting is required. The portfolio consists of 48 commercial properties, which are in the office, retail, retail warehouse, industrial and leisure sectors. 

Notes to the Condensed Consolidated Financial Statements 

For the period ended 1 January to 30 June 2009 (continued)

5.     Management expenses

	1 Jan to 30 June 2009	1 Jan to 30 June 2008	Year ended 31 Dec 2008
	£000	£000	£000
Investment Manager’s fees	1,927	2,880	5,345

Under the terms of the Investment Management Agreement, ING Real Estate Investment Management (UK) Limited (the 'Investment Manager') receives remuneration for property management and administration services. The management fee is payable quarterly in arrears and is equal to the aggregate of the following:

• one quarter of 90 basis points of gross property assets up to and including £600 million

• one quarter of 82.5 basis points of gross property assets in excess of £600 million and up to and including £800 million

• one quarter of 75 basis points of gross property assets in excess of £800 million

• one quarter of 40 basis points of cash assets

6.     Other operating expenses

	1 Jan to 30 June 2009	1 Jan to 30 June 2008	Year ended 31 Dec 2008
	£000	£000	£000
Valuation expenses	61	93	169
Audit fees	45	59	100
Amortisation of finance costs	163	260	705
Swap break fee and prepayment fee	-	-	841
Other expenses	1,746	881	852
	2,015	1,293	2,667

Other expenses include costs of £1.4m relating to the amendment to the loan documents and loan prepayment (see note 10).

The Group has no employees other than the Directors. 

7.     Dividends

	1 Jan to 30 June 2009	1 Jan to 30 June 2008	Year ended 31 Dec 2008
Declared and paid:	£000	£000	£000
Interim dividend for the period ended 31 December 2007: 1.5625 pence	-	5,162	5,162
Interim dividend for the period ended 31 March 2008: 1.5625 pence	-	5,162	5,162
Interim dividend for the period ended 30 June 2008: 1.5625 pence	-	-	5,163
Interim dividend for the period ended 30 September 2008: 1 pence	-	-	3,305
Interim dividend for the period ended 31 December 2008: 1 pence	3,304	-	-
	3,304	10,324	18,792

No dividend was paid in relation to the quarter ended 31 March 2009. The interim dividend of 1 pence per ordinary share in respect of the period ended 30 June 2009 has not been recognised as a liability in accordance with IFRS as it was declared after the period end. A dividend of £3,304,000 will be paid on 28 August 2009.

Notes to the Condensed Consolidated Financial Statements 

For the period ended 1 January to 30 June 2009 (continued)

8.     Investment properties 

	1 Jan to 30 June 2009	1 Jan to 30 June 2008	Year ended 31 Dec 2008
	£000	£000	£000
Property valuation	356,280	534,190	434,250
Valuations of assets held under finance leases	1,439	1,902	1,755
Lease incentives held as debtors	(370)	-	-
	357,349	536,092	436,005

	£000	£000	£000
Opening valuation	434,250	631,047	631,047
Additions	476	1,791	2,806
Disposals	(26,314)	(41,670)	(61,370)
	408,412	591,168	572,483
Gains and losses on investments held at fair value through profit and loss:
(Losses)/gains on disposals	(4,026)	3,243	2,524
Unrealised losses on revaluation	(48,476)	(60,221)	(140,757)
Lease incentives held as debtors	370	-	-
Closing valuation	356,280	534,190	434,250
Historic cost	521,204	585,302	570,334

The investment properties were valued by King Sturge LLP, Chartered Surveyors, as at 30 June 2009, on the basis of Market Value in accordance with the Royal Institution of Chartered Surveyors Valuation Standards. 

The Group's borrowings (note 10) are secured by a first ranking fixed charge over the investment properties held.

Rental income and property operating expenses arise from the properties shown above.

9.     Accounts receivable     

	1 Jan to 30 June 2009	1 Jan to 30 June 2008	Year ended 31 Dec 2008
	£000	£000	£000
Tenant debtors	4,047	4,683	7,186
Prepayments	172	270	-
Capitalised finance costs	1,139	1,746	1,302
	5,358	6,699	8,488

The loan arrangement costs as at 30 June 2009 are £2,296,000 (30 June 2008: £2,882,000, 31 December 2008: £2,296,000). These are amortised over the lives of the loans. For the period ended 30 June 2009 £163,000 of these costs were written off to the Income Statement (period ended 30 June 2008: £260,000, year ended 31 December 2008: £705,000).

The Directors consider that the carrying amount of accounts receivable approximates their fair value.

Notes to the Condensed Consolidated Financial Statements 

For the period ended 1 January to 30 June 2009 (continued)

10.    Loans and borrowings

	Maturity	30 June 2009	30 June 2008	31 Dec 2008
Current		£000	£000	£000
Floating rate notes – due in less than one year	31 January 2013	35,000	-	-
		35,000	-	-
Non-current
Floating rate notes – due in more than one year	31 January 2013	190,000	225,000	225,000
Bank loan	4 December 2009	-	57,156	-
		190,000	282,156	225,000
Interest rate swaps		11,250	(14,040)	14,029
Obligations under finance leases		1,728	2,028	2,028
		202,978	270,144	241,057

On 20 December 2005 the Group issued £200 million of AAA rated seven year loan notes to the debt market. The interest payable on these notes is fixed at 4.795% by means of an interest rate swap. On 6 July 2006 a further £25 million of loan notes were issued on the same terms, with the interest payable fixed at 5.3804% by means of a further swap. The loan notes are secured over the investment properties held by the GPUT, and are repayable on 31 January 2013. The loan notes were issued by ING (UK) Listed Real Estate Issuer PLC, a Special Purpose Entity that is consolidated under the principles of SIC 12.

On 4 December 2006 the Group entered into a three year term loan with J P Morgan for £93 million which was fully repaid during 2007 and 2008. 

The interest rate swaps mature on the same dates as the associated borrowings. 

The weighted average interest rate paid on the Group's borrowings for the period was 4.86% (30 June 2008: 5.091%, 31 December 2008: 4.86%).

On 17 April 2009 the Group announced it had breached the loan to value ('LTV') covenant on its securitised loan facility. The covenant states that the LTV of the property portfolio must not exceed 50%. As at 17 April 2009 the loan to value was 53.4%. The loan documents allow for a 30 day remedy period from the date of breach of a covenant. 

A meeting of Noteholders was held on 15 May, when the following measures were approved;

• Increase the LTV covenant from 50 per cent to 60 per cent until January 2012, when it will reduce to 55 per cent, falling back to 50 per cent in July 2012;

• Increase the interest cover ratio from 1.5 times to 1.75 times until maturity of the Securitised Loan Facility in January 2013;

• Prepayment of £35 million of the principal amount outstanding under the £225 million Facility to be made by January 2010 through one or more tender offers, with the first tender offer being held in July 2009 for a minimum of £15 million principal amount of notes. The tender offers will be at par.

The LTV breach was therefore resolved. The Group is in compliance with all loan covenants at the date of reporting. On 31 July 2009 a total of £35 million was prepaid. No further tenders are required under this agreement.

The fair value of the loans may be lower than the book value given that, at the present time, lenders are less willing to provide financing for the type of assets held by the Group at the interest annually paid by the Group. However, the Group does not fair value its debt obligations nor is it practical or possible to measure the fair value of the loan due to the current market conditions.

Notes to the Condensed Consolidated Financial Statements 

For the period ended 1 January to 30 June 2009 (continued)

11.    Contingencies and capital commitments

The Group has entered into contracts of approximately £100,000 across the portfolio at 30 June 2009 (30 June 2008: £600,000, 31 December 2008: £100,000). There are no other contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or enhancements as at 30 June 2009.

12.    Net asset value

The net asset value per ordinary share is based on net assets at the period end and on 330,401,300 (30 June 2008: 330,401,300, 31 December 2008: 330,401,300) ordinary shares, being the number of ordinary shares in issue at the period end.

At 30 June 2009, the Company had a net asset value per ordinary share of £0.49 (30 June 2008: £0.97, 31 December 2008: £0.64).  

13.    Related party transactions

During the period the Investment Manager was paid a total of £1,927,000 (30 June 2008: £2,880,000, 31 December 2008: £5,345,000) in respect of the property management and administration services. As at 30 June 2009 the Group owed £900,000 to the Investment Manager (30 June 2008:£1,300,000, 31 December 2008:£900,000).

The Group paid £756,000 to ING Bank N.V. during the period in connection with the amendment to the loan documents and loan prepayment (see note 10). The Investment Manager paid a contribution to the Group of £250,000 to be offset against these costs.

The Group has one non-independent Director, who is connected with the Investment Manager. The remuneration in respect of this appointment was waived.

ING UK Real Estate Income Trust Limited has no controlling parties.

14.    Events after the balance sheet date

Following the balance sheet date sales where completed on the property in Bristol for £5.6 million, the property in Redditch for £7.3 million and the property in the Isle of Man for £7.1 million. Contracts were exchanged on the sale of the property in Watford for £6.75 million.

On 31 July 2009 a payment of £35 million was made to loan note holders to prepay their loan notes, in accordance with the Noteholder meeting held on 15 May 2009.

A dividend of £3,304,000 (1 pence per share) was approved by the Board on 27 July 2009 and will be paid on 28 August 2009.  

For further information;

ING Real Estate Investment Management (UK) Limited

Helen Stott, 020 7767 5648, [e-mail]

Financial Dynamics

Dido Laurimore/Laurence Jones, 020 7831 3113

Enquiries

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Limited

Trafalgar Court

Les Banques

St Peter Port
Guernsey

GY1 3QL

Tel:    [phone]

Fax:    [phone]

END

 

END

 

 

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