Annual Financial Report
04/10/2013 18:00
RNS Number : 8211P
F&C UK Real Estate Investments Ltd
04 October 2013
To: RNS
Date: 4 October 2013
From: F&C UK Real Estate Investments Limited
· Merged with ISIS Property Trust Limited, increasing net assets by £89 million at the time of the transaction
· Share price total return of 19.5 per cent for the year
· Portfolio ungeared total return of 4.0 per cent for the year
· Net asset value per share total return of 3.9 per cent for the year
· Net asset value per share total return since launch of 43.0 per cent
· Dividend of 7.2 pence per share for the year
Chairman's Statement
In April this year the Company completed the merger of its entire assets with the assets of ISIS Property Trust Limited ("IPT"). This was affected through a Scheme of Reconstruction through which IPT Shareholders received New Shares issued by the Company on a NAV for NAV basis. The combination of these complementary property businesses resulted in the enlarged Group which was renamed F&C UK Real Estate Investments Limited ('FCRE'), having a market capitalisation of £151 million at the year end. We believe that this has enhanced liquidity in the shares and increased the attractiveness of the enlarged Group. This transaction resulted in a more diversified property portfolio and has given the Group more flexibility for its future investment strategy. The merged entity will also benefit from a material reduction in the Total Expense Ratio moving forward.
Share price performance has been strong, particularly in the second half of the year and was trading at a premium to net asset value of 1.1 per cent at the year end, with the price at 72.5 pence per share. The share price total return for the year was 19.5 per cent reflecting the shift in sentiment for UK commercial property from the previous year end when the shares were trading at a discount of 13.4 per cent.
The net asset value ('NAV') total return for the year was 3.9 per cent with a NAV as at 30 June 2013 of 71.7 pence per share. The movement in the interest rate swap valuations had a positive impact on the NAV, with the liabilities decreasing by £3.8 million during the year, increasing the NAV per share by 2.4 pence. The swap valuation is significant and reduced the NAV by 6.9 pence per share at the year end; however future movements should reflect positively over time as the liability reduces to nil by the conclusion of the contract in January 2017.
Share Issues
The Company has experienced continued market demand for its shares and subsequent to the year end, the Company has issued 5 million Ordinary Shares of 1 pence each at a price of 73.5 pence per share, a 2.5 per cent premium to the latest published net asset value, as at 30 June 2013. This is the Company's first tap issue since inception.
Property Market and Portfolio
The UK commercial property market as a whole has seen a return to positive quarterly returns, resulting in an annual total return of 4.8 per cent for the year ended 30 June 2013, as measured by the Investment Property Databank ('IPD') Quarterly Funds Index. Capital values fell over the course of the year; although the improvement in the market resulted in a positive capital return during the final three months. Performance in the year to June 2013 remained highly polarised, with Central London offices and shops strongly out-performing.
At 30 June 2013 the portfolio was valued at £276.6 million, returning 4.0 per cent over the twelve months. The range of returns for individual properties and sectors was very diverse with Central London offices being particularly strong. The Manager is continuing with a strategy of disposing smaller and non-performing assets which no longer fit the profile of the enlarged Group. There have been a number of new lettings and lease renewals and restructures throughout the portfolio which has enabled the Group to maintain the relatively low vacancy rate of 3.2 per cent at the year end and an average weighted unexpired lease term of 7.9 years.
Dividends
Three interim dividends of 1.80 pence per share were paid during the year. As announced on 7 February 2013, as part of the merger proposals and following consultation with larger shareholders, it was proposed that FCRE's dividend would be set at a sustainable level, which was expected to be fully covered by net rental income when the Group was fully invested. In order to achieve this policy the dividend of FCRE will be reduced by approximately 30 per cent to 5.0 pence per share per annum, a yield of 6.9 per cent on the year end share price. Accordingly, a fourth interim dividend of 1.25 pence per share was paid on 27 September 2013, giving a total dividend for the year ended 30 June 2013 of 6.65 pence per share. In the absence of unforeseen circumstances, it is the intention of the Group to continue to pay quarterly interim dividends at the revised rate.
Borrowings
The net gearing level as at 30 June 2013 was 39.7 per cent, which compares with 40.4 per cent as at 30 June 2012 and 40.0 per cent at launch on 1 June 2004.
As part of the merger, the Facilities of the Group and IPT which were previously in place were replaced with a new term and revolving credit loan facility. The New Facility permits a maximum amount of £115 million to be drawn down. The interest rate swaps which were in place for the Group and IPT, and which fix the interest payable in respect of £100 million in aggregate of the existing borrowings, were novated to a subsidiary of the Group, F&C UK Real Estate Finance Limited without any amendments or additional cost. As a condition of obtaining the consent of Lloyds TSB Bank to the merger, the aggregate margin under the New Facility with £112 million drawn down will increase by 0.18 per cent per annum (based on the current loan to value and drawn down amounts) giving a fixed interest rate payable on £100 million of the New Facility of 5.77 per cent per annum (including the margin increase referred to above) and a floating rate which is currently around 1 per cent per annum on the balance. The New Facility is repayable in January 2017, the same repayment date as applied under the previous Facilities. The other terms of the New Facility and related security and finance documents are substantially similar to the terms of the previous Facilities.
The Group had £5.8 million of cash available at 30 June 2013 and an undrawn loan facility of £3 million. It is the Company's intention to maintain a prudent attitude to gearing.
Change in Directorate
On 11 April 2013, following the merger, Vikram Lall, Graham Harrison and Michael Soames who were previously Directors of IPT, were appointed as Directors of the Company. Chris Spencer and Giles Weaver retired from the Board on the same day. Mr Spencer and Mr Weaver have been important members of the Board since the launch of the Company and we thank them for their hard work over the years.
It was with enormous sadness that the Board announced that Michael Soames died suddenly on 2 June 2013. Michael had been a Director of IPT since its launch in October 2003 and had made a valuable contribution over many years. He will be greatly missed by the Board and the Manager.
Outlook
Against a background of some caution, there is a consensus that the property market has reached the low point in this cycle. As the economy improves, increased demand for property should help to support rental growth in areas of tight supply and this is expected to continue to favour well-let property in established locations. The Board believes that the Group's portfolio is well placed to take advantage of market conditions and the Manager will continue with the strategy to dispose of smaller properties. This and the recent success in issuing new shares will provide the Group with working capital and allow the Manager to seek new investments for the portfolio.
Manager's Review
The UK commercial property market delivered a portfolio total return of 4.8 per cent in the year to June 2013, as measured by the Investment Property Databank ("IPD") Quarterly Universe. This represents a modest improvement on the 4.6 per cent return of the previous year. However, in contrast to the previous year, performance saw quarter on quarter improvements.
Performance was supported by a portfolio income return of 5.8 per cent. Although capital values fell over the course of the year, the improvement in the market resulted in a positive out-turn during the final three month period.
The year to June 2013 has seen the UK economy gradually recovering, with GDP turning positive during the latter part of the period, helped by some easing in monetary conditions. The government remains committed to fiscal austerity and the need to re-balance the public accounts, which may limit the speed of the upturn but there are signs that business and consumer sentiment are steadying.
Investment activity in the UK commercial property sector totalled £36 billion in the year to June 2013, more than 15 per cent above the previous year, according to Property Data. The market remains driven by overseas investors, especially for Central London offices. However, the year also witnessed investors broadening their interest to other sectors of the market and to the regions. The low level of gilt yields has attracted investors seeking long-term stable income and this has produced intense competition for long-leased and index-linked stock.
The improvement has been largely investment-led and the occupational market has been more subdued, with rental growth patchy and largely focused on Central London. It has remained challenging to grow the income stream given occupier caution, the impact of rising business rates on the ability of tenants to pay higher rents and tenant administrations. Demand is still predominantly driven by negotiating new leases rather than growth.
The property market in the year to June 2013 remained highly polarised, with Central London offices and shops strongly out-performing other regions. Most regions outside London recorded falls in capital values for the full year. This masks an improving tone to much of the regional property market during the three months to June 2013, but the regions were still generally under-performing London.
The retail sector as a whole under-performed the all-property average, affected by subdued consumer spending, margin pressure on retailers and the continued diversion of trade online and to supermarkets. Standard retail properties in the regions and retail warehousing were especially vulnerable but there were bright spots such as London retail and supermarkets. In the office market, double digit annual total returns in the West End contrasted with negative total returns for offices outside London and the South East. The industrial sector also delivered a mixed performance. Distribution warehousing saw total returns improve from a year earlier to out-perform the all-property average but standard industrial properties were weaker. Again, there was a regional dimension with the heartlands of London, the South East and the Midlands out-performing more peripheral locations.
Prime property generally out-performed secondary stock during the year with the disparity especially marked for town centre retail and non-London offices, although there have been tentative signs of greater interest in good secondary stock towards the end of the reporting period.
The past year recorded a relatively muted performance but with signs of improvement becoming increasingly apparent.
Portfolio
On 11 April 2013 the Company merged with ISIS Property Trust Limited ("IPT") and was renamed F&C UK Real Estate Investments Limited. The merged Group resulted in a sizeable increase in the size of the portfolio to £276.8 million. This effectively diversified further the property and tenant exposure, provided greater flexibility in banking covenants, and over time will allow the Group to obtain exposure to assets with a larger lot size. The two portfolios both had complementary geographic and sector exposure whilst maintaining an overweight position in London and the South-East.
Previously the Group's portfolio comprised 33 properties with an aggregate market value of £157.9 million and a rent roll of £11.5 million, giving a net initial yield of 6.9 per cent. The IPT portfolio comprised 23 properties with an aggregate market value of £119.2 million and a rent roll of £8.6 million, giving a net initial yield of 6.8 per cent.
At the time of the merger the combined portfolio had an aggregate market value of £276.8 million and a rent roll of £20.1 million, giving a net initial yield of 6.9 per cent.
At 30 June 2013 the portfolio was valued at £276.6 million, which showed an increase in capital value of £1.19 million or 0.4 per cent on a like for like basis over the valuation of the portfolios at merger. There have also been two property sales in the period between merger and the year end. An industrial property at 6 James Street, York and a unit shop at 67/69 King Street, South Shields were sold for a total of £1.52 million, in line with the previously reported valuations.
Over the year to 30 June 2013, the portfolio returned 4.0 per cent, which reflected an income return of 7.1 per cent, but with a capital fall of 2.9 per cent. The range of returns for individual properties and sectors was very diverse. West End offices, which account for 6.7 per cent of the portfolio by value, outperformed and industrial properties, making up 29.3 per cent of the portfolio had positive returns. However, portfolio returns were particularly disadvantaged by Rest of UK offices.
The vacancy rate on the portfolio reduced from 3.7 per cent at the time of the merger to 3.2 per cent as at 30 June. Dreams plc went into administration during the second quarter of 2013 but the Group was able to relet Unit A, Halls Mill Retail Park, Bury virtually immediately. Steinhoff UK Group Properties Limited (trading as Bensons for Bed) took a lease of the 10,000 square foot unit at £150,000 per annum, the same rent as previously paid by Dreams, on a ten year lease with break at the fifth year with an 18 month rent free period.
The Group negotiated a lease extension with Bunzl UK Limited at the Maxi Centre, Theale which comprises a modern distribution unit of 61,000 square foot. The existing lease, due to expire in September 2014 has been extended until December 2023 (with a tenant's option to break in 2016 and 2018) at a rent of £500,880 per annum with a 10 month rent free period.
There have been a number of smaller lettings and this has enabled the Group to maintain a relatively low vacancy rate. At Above Bar Church, Southampton, the Group secured a new letting of the unit that became vacant earlier in 2012 as a result of Bon Marche going into administration. The unit has now been let to The Works Stores Limited on the basis of a new ten year lease, with a tenant's break at the fifth year, on a stepped rent averaging £120,000 per annum for the first five years, and subject to a six month rent free period. At 67/69 King Street, South Shields, the vacant shop unit was let to Greenwoods Menswear Limited, at a rent increasing to £30,000 per annum on the basis of a five year lease. The property was subsequently sold. At 25 Northbrook Street, Newbury, the tenant renewed its lease for a further five years at £40,000 per annum, but subject to a break at the third year. At George Street, Croydon, the upper floors, used as serviced offices, were re-let for a further 15 years at £21,000 per annum.
In addition the manager has continued to identify opportunities to extend and re-gear leases in order to add value. As at 30 June the average weighted unexpired lease term was 7.9 years.
Outlook
The market cycle shows signs of having passed its low point, but uncertainties remain. Problems in the Eurozone still need to be resolved and consensus forecasts are for modest UK growth, although it is expected to be sustained over the medium-term. As the economy improves and excess capacity is eliminated, the impact of minimal new development may become increasingly felt, helping to support rental growth in areas of tight supply. More generally, the challenge will continue to be to protect and enhance the income stream from property and this is expected to continue to favour well-let property in established locations.
Against this background the Manager believes that the Group's portfolio is well placed to take advantage of improvements in market sentiment and that this will feed through to valuations and occupancy levels. Since the merger with IPT, the Manager has sought to dispose of smaller assets which are no longer commensurate with the size of the Group's portfolio and which add little value to ultimate performance. This strategy and the recent success in issuing new shares will allow the Group to reduce borrowings and associated risk. The improved level of working capital also gives the Manager ready access to funds for improvements to property, as well as for restructuring leases with key tenants. Further targeted sales will also enable the Manager to seek new investments and enhance the quality of the Group's portfolio.
All enquiries to:
Ian McBryde
Scott Macrae
F&C Investment Business Limited
Tel: 0207 628 8000
The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
Tel: 01481 745001
F&C UK Real Estate Investments Limited
Consolidated Statement of Comprehensive Income
| Year ended 30 June 2013 | Year ended 30 June 2012 | |
| £'000 | £'000 | |
| Revenue | ||
| Rental income | 13,791 | 11,788 |
| Total revenue | 13,791 | 11,788 |
| Losses on investment properties | (4,313) | (2,483) |
| 9,478 | 9,305 | |
| Expenditure | ||
| Investment management fee | (1,242) | (1,137) |
| Expenses of merger | (746) | - |
| Other expenses | (1,204) | (1,253) |
| Total expenditure | (3,192) | (2,390) |
| Net operating profit before finance costs | 6,286 | 6,915 |
| Net finance costs | ||
| Interest receivable | 15 | 12 |
| Finance costs | (4,222) | (3,453) |
| (4,207) | (3,441) | |
| Net profit from ordinary activities before taxation | 2,079 | 3,474 |
| Taxation on profit on ordinary activities | (479) | (303) |
| Profit for the year | 1,600 | 3,171 |
| Other comprehensive income to be reclassified to profit or loss in subsequent periods | ||
| Net gain/(loss) on cash flow hedges, net of tax | 3,783 | (2,515) |
| Total comprehensive income for the year, net of tax | 5,383 | 656 |
| Basic and diluted earnings per share | 1.2p | 2.9p |
| 30 June 2013 £'000 | 30 June 2012 £'000 | |
| Non-current assets | ||
| Investment properties | 271,063 | 160,310 |
| Current assets | ||
| Trade and other receivables | 6,362 | 3,133 |
| Cash and cash equivalents | 5,775 | 1,396 |
| 12,137 | 4,529 | |
| Total assets | 283,200 | 164,839 |
| Non-current liabilities | ||
| Interest-bearing bank loan | (112,998) | (65,423) |
| Interest rate swap | (9,888) | (8,825) |
| (122,886) | (74,248) | |
| Current liabilities | ||
| Trade and other payables | (6,181) | (3,623) |
| Income tax payable | (472) | (170) |
| Interest rate swap | (4,546) | (2,613) |
| (11,199) | (6,406) | |
| Total liabilities | (134,085) | (80,654) |
| Net assets | 149,115 | 84,185 |
| Represented by: | ||
| Share capital | 2,081 | 1,105 |
| Special distributable reserve | 153,929 | 89,445 |
| Capital reserve | 760 | 5,073 |
| Other reserve | (7,655) | (11,438) |
| Equity shareholders' funds | 149,115 | 84,185 |
| Net asset value per share | 71.7p | 76.2p |
| Share Capital £'000 | Special Distributable Reserve £'000 | Capital Reserve £'000 | Other Reserve £'000 | Revenue Reserve £'000 | Total £'000 | |
| At 1 July 2012 | 1,105 | 89,445 | 5,073 | (11,438) | - | 84,185 |
| Profit for the year | - | - | - | - | 1,600 | 1,600 |
| Other comprehensive gains | - | - | - | 3,783 | - | 3,783 |
| Total comprehensive income for the year | - | - | - | 3,783 | 1,600 | 5,383 |
| Issue of ordinary shares on merger | 976 | 66,527 | - | - | - | 67,503 |
| Dividends paid | - | - | - | - | (7,956) | (7,956) |
| Transfer in respect of losses on investment properties | - | - | (4,313) | - | 4,313 | - |
| Transfer of net deficit for the year | - | (2,043) | - | - | 2,043 | - |
| At 30 June 2013 | 2,081 | 153,929 | 760 | (7,655) | - | 149,115 |
| Share Capital £'000 | Special Distributable Reserve £'000 | Capital Reserve £'000 | Other Reserve £'000 | Revenue Reserve £'000 | Total £'000 | |
| At 1 July 2011 | 1,105 | 91,747 | 7,556 | (8,923) | - | 91,485 |
| Profit for the year | - | - | - | - | 3,171 | 3,171 |
| Other comprehensive losses | - | - | - | (2,515) | - | (2,515) |
| Total comprehensive income for the year | - | - | - | (2,515) | 3,171 | 656 |
| Dividends paid | - | - | - | - | (7,956) | (7,956) |
| Transfer in respect of losses on investment properties | - | - | (2,483) | - | 2,483 | - |
| Transfer of net deficit for the year | - | (2,302) | - | - | 2,302 | - |
| At 30 June 2012 | 1,105 | 89,445 | 5,073 | (11,438) | - | 84,185 |
| Year ended 30 June 2013 | Year ended 30 June 2012 | |
| £'000 | £'000 | |
| Cash flows from operating activities | ||
| Net profit for the year before taxation | 2,079 | 3,474 |
| Adjustments for: | ||
| Losses on investment properties | 4,313 | 2,483 |
| Decrease in operating trade and other receivables | 1,619 | 337 |
| Decrease in operating trade and other payables | (1,646) | (181) |
| Interest received | (15) | (12) |
| Finance costs | 4,222 | 3,453 |
| 10,572 | 9,554 | |
| Taxation paid | (177) | (216) |
| Net cash inflow from operating activities | 10,395 | 9,338 |
| Cash flows from investing activities | ||
| Purchase of investment properties | - | (3,359) |
| Capital expenditure | (329) | (160) |
| Sale of investment properties | 1,522 | - |
| Cash transferred on merger | 658 | - |
| Interest received | 15 | 12 |
| Net cash inflow/(outflow) from investing activities | 1,866 | (3,507) |
| Cash flows from financing activities | ||
| Dividends paid | (7,956) | (7,956) |
| Bank loan interest paid | (698) | (760) |
| Payments under interest rate swap arrangement | (3,228) | (2,650) |
| Bank loan drawn down | 4,000 | 5,000 |
| Net cash outflow from financing activities | (7,882) | (6,366) |
| Net increase/(decrease) in cash and cash equivalents | 4,379 | (535) |
| Opening cash and cash equivalents | 1,396 | 1,931 |
| Closing cash and cash equivalents | 5,775 | 1,396 |