F&C UK Real Estate - Annual Financial Report
16/10/2014 11:54
RNS Number : 4949U
F&C UK Real Estate Investments Ltd
16 October 2014
To: RNS
Date: 16 October 2014
From: F&C UK Real Estate Investments Limited
Share price total return of 23.2 per cent for the year
Portfolio ungeared total return of 14.9 per cent for the year
Net asset value per share total return of 23.9 per cent for the year
Net asset value per share total return since launch of 77.2 per cent
Dividend of 5.0 pence per share for the year
Chairman's Statement
With 15 months having passed since the Company completed the merger with ISIS Property Trust Limited, performance continues to be good and combined with the issue of a significant number of new Ordinary Shares during the year, has resulted in market capitalisation increasing from 151 million as at 30 June 2013 to 194 million as at 30 June 2014.
Share price performance has been strong during the year and the shares were trading at a premium to net asset value of 0.7 per cent at the year end, with the price at 84.0 pence per share. This represented a share price total return for the year of 23.2 per cent.
The net asset value ('NAV') total return for the year was 23.9 per cent with a NAV as at 30 June 2014 of 83.4 pence per share. The movement in the interest rate swap valuations had a positive impact on the NAV of 5.2 million during the year, which reduced the swap liability and increased the NAV per share by 2.4 pence. Future movements should reflect positively over time as the liability reduces to nil by the conclusion of the contract in January 2017.
Property Market and Portfolio
The UK commercial property market has seen positive returns across all sectors, resulting in an annual total return of 16.7 per cent for the year ended 30 June 2014, as measured by the Investment Property Databank ('IPD') Quarterly Funds Index. Although the economic backdrop has been supportive, with GDP consensus growth forecasts being revised higher, consumer sentiment improving and inflation remaining below 2 per cent; it may be that the improvement owes more to the weight of money coming into property. The UK property market remains attractive as a large, transparent, relatively liquid market.
At 30 June 2014 the portfolio was valued at 300.6 million, returning 14.9 per cent over the twelve months. The buoyancy of the property market assisted the Manager in continuing with the strategy of disposing smaller and non-performing assets which no longer fit the profile of the enlarged Group. The Manager was successful in selling five properties for a combined value of 16.05 million (excluding costs). The proceeds of these sales and the cash raised from share issues has created sufficient funds to facilitate the Company's purchase of two retail warehouses for a combined value of 18.05 million (excluding costs) and a further purchase of an office building completing post year end for 6.97 million.
The occupational market remains challenging, especially in the retail sector and this continues to have an effect on rental values and the number of vacancies in some locations. Despite new lettings during the year, the void rate on the portfolio has risen to 5.7 per cent although this has reduced since the year end following the sale of the property at Marlow. As a result of ongoing property management, the average unexpired lease length across the portfolio has been maintained at a creditable 7.8 years, compared with 7.9 years in June 2013.
Dividends
Three interim dividends of 1.25 pence per share were paid during the year and a fourth interim dividend of 1.25 pence per share was paid on 30 September 2014. This gives a total dividend for the year ended 30 June 2014 of 5.0 pence per share, a yield of 6.0 per cent on the year end share price. In the absence of unforeseen circumstances, it is the intention of the Group to continue to pay quarterly interim dividends at this rate.
The merged entity has benefited from a material reduction in the Total Expense Ratio with the ongoing charges as a percentage of average net assets at 2.1 per cent, well below the 2.6 per cent experienced in the previous year. This has helped the level of dividend cover which, even after property sales and an increased level of voids, was 89 per cent for the year ended 30 June 2014 compared to 74 per cent for the year ended 30 June 2013.
Borrowings
The net gearing level as at 30 June 2014 was 31.7 per cent, which compares with 39.7 per cent as at 30 June 2013 and 40.0 per cent at launch on 1 June 2004. The fall in the gearing percentage was due to a combination of the loan drawn down being reduced to 109.0 million from 112.0 million, an increase in the overall market value of the portfolio and proceeds from share issues and property sales being held in cash. The Group had 16.8 million of cash available at 30 June 2014 and an undrawn loan facility of 6 million. The Group retains a prudent attitude to gearing.
Alternative Investment Fund Managers' Directive ("AIFMD")
In July 2014, the Company entered into arrangements necessary to ensure compliance with the AIFMD. Following a review of the Company's arrangements, the Board approved the appointment of its existing investment manager, F&C Investment Business Limited ("FCIB"), as the Company's alternative investment fund manager (the "AIFM") on the terms of and subject to the conditions of a new investment management agreement between the Company and the AIFM. The Company's existing management agreement with FCIB was replaced with a new agreement. The management fee, performance fee and notice period provisions remain unchanged.
The Board has appointed J.P. Morgan Europe Limited (the "Depositary") to act as the Company's Depositary (as required by the AIFMD) on the terms of and subject to the conditions of a depositary agreement between the Company, the AIFM and the Depositary.
Share Issues
The Company has experienced continued market demand for its Ordinary Shares and has issued 22.8 million Ordinary Shares during the year at a premium to the published net asset value at the time of each issuance, raising proceeds of 18.2 million. At the year end there were 230,855,539 Ordinary Shares in issue.
In order to take advantage of the prevailing market conditions and investment opportunities identified by the Investment Manager, the Board is proposing to raise additional share capital through a Placing Programme of up to 100 million new Ordinary Shares. Initially the Board is proposing to issue new Ordinary Shares pursuant to the shareholder authority to allot up to 23,085,500 new Ordinary Shares (being approximately 10 per cent of the current issued share capital) being sought at the Annual General Meeting. Once the Annual General Meeting authority has been exhausted, the Company will convene further general meetings to seek shareholder approval for the additional disapplication of pre-emption rights in relation to the issue of further new Ordinary Shares under the Placing Programme.
New Ordinary Shares will only be issued to new and existing shareholders under the Placing Programme at a premium to the prevailing NAV at the time of issue.
The Company intends to publish a prospectus containing full details of the Placing Programme in due course.
UK REIT Status
Since 1 January 2007 there has been legislation in place in the United Kingdom to enable qualifying companies (or groups) to apply for Real Estate Investment Trust (REIT) status. The main tax advantage of the UK-REIT regime is that net rental income derived from its rental property portfolio is exempt from UK income or corporation tax, as are capital gains on the disposal of the rental properties. Prior to 17 July 2012 groups entering the UK-REIT regime were required to pay a one off charge equal to 2 per cent of the value of their property assets. This conversion charge has now been abolished and becoming a UK REIT is more attractive.
The Company has been paying progressively more tax on its profits over recent years and looks set to pay even more moving forward as it has to renegotiate its inter-company loan arrangements. The Board therefore believes that it is in the best interests of the Group and shareholders taken as a whole that the Group keeps UK tax to a minimum and accordingly is proposing that the Company takes the necessary steps on behalf of the Group in order for the Group to achieve UK-REIT status.
A separate Circular, outlining this proposal in more detail and convening an extraordinary general meeting will be sent to shareholders shortly.
Outlook
The UK commercial property market appears to be set fair for the foreseeable future. There is likely to be continued investor demand for an asset class whose fundamentals are correlated to the wider economic position. Uncertainties may exist but the property market is predicted to deliver sustained positive total returns. Whereas it is well placed to take advantage of the current market conditions, the Board is conscious of the need to reflect quality throughout the portfolio, with an emphasis on longer term income and good quality covenants. We believe that the portfolio is more resilient following recent sales and asset management initiatives, and that there are further opportunities to improve the quality of stock in a strengthening market. The Manager will continue to use the current strong investor demand to dispose of further properties which do not fit the profile of the enlarged fund. At the same time the Company will purchase further investments using new equity raising and sales proceeds to strengthen the portfolio.
Manager's Review
The UK commercial property market delivered a total return of 16.7 per cent in the year to June 2014, as measured by the Investment Property Databank ("IPD") UK Quarterly Index for all-property, excluding transactions and developments. This represented a sharp turnaround from the 4.8 per cent return of the previous year. This is the best June to June annual performance since 2010.
Performance was supported by an income return of 5.5 per cent, but the year was marked by a return to capital growth, and this drove the improvement in total returns. Capital values rose by 10.6 per cent during the year, following two years of decline.
The year to June 2014 has seen the UK economy deliver sustained growth, with GDP rising by more than 3 per cent according to preliminary estimates and finally recovering the output losses seen during the recession. Both business and consumer confidence are on an improving trend. Inflation has remained subdued at 1.9 per cent over the period, slightly below the official target. Fiscal policy is still focused on reducing government account imbalances but monetary conditions are supportive, with low official interest rates remaining unchanged, ten year gilt yields modest by past standards, and signs of some easing in credit market conditions.
Although the economic backdrop has brightened, it may be that the improvement in total returns owes more to the weight of money coming into property. Investment activity totalled almost 55 billion in the year to June 2014, well ahead of the 30 billion seen in the previous 12 month period, according to Property Data. Overseas investors have remained a major source of net investment into property and have continued to boost the London market in particular. However, the year also saw greater net investment in property by institutions, often for long-lease, index-linked assets.
Investor interest in prime property and London assets remained intense but strong competition, keen pricing and a lack of stock led to investors broadening their search to the regions, to some secondary assets and to emerging property segments. IPD data shows initial yields at the all property level compressing by 60 basis points to 5.4 per cent in the year to June.
The upturn in the property market has been broadly based, with all the standard IPD segments delivering double digit total returns in the year to June 2014. The turnaround in the fortunes of the office markets outside London and industrials was especially marked. There are differences in absolute performance with West End/Midtown offices, Rest of South East offices and industrials recording annual total returns in excess of 20 per cent. In contrast, standard retails outside the South East delivered a total return of 9.9 per cent.
The retail sector as a whole continued to under-perform the all property average. Central London retail recorded another strong performance but elsewhere, the impact of structural changes to retailing, business rates and "the wrong space in the wrong place", coupled with the trend to shorter leases all had an effect on performance. In the office market, London and the South East generally out-performed, although the central City area moved broadly in line with the all property average and there were wide variations in performance between provincial cities. The industrial sector was generally firm with out-performance focused on the core locations of London, the South East and the Midlands.
The occupational market has been more muted than the investment market. Rental growth improved to 2 per cent in the year to June but positive rental advance was still largely confined to London and the South East and some rents are still under pressure especially in some regional office and town centre retail locations. Although there are signs of improved tenant interest, it will take time for economic recovery to produce reduced rental incentives and lead to enhanced rental growth. Net income growth improved to 1.2 per cent during the year but this is still modest and is negative in real terms in the three main property sectors.
Prime property generally out-performed secondary stock during the year in terms of total return, especially in retail. The year saw signs of a move towards near prime and higher yielding assets by investors with inward movements in initial yields at the secondary end becoming more pronounced. This would appear to be largely investment driven and in terms of the income stream, IPD data indicates that the disparity between prime and secondary assets has persisted in most parts of the market.
The property market has delivered a strong performance over the year to June 2014, but the current pace of yield compression may reflect an investment market that has moved somewhat ahead of the underlying fundamentals.
Property portfolio
The year saw capital growth return to the portfolio which was valued at 300.6 million as at 30 June, up from 276.6 million the previous year. The portfolio produced an ungeared total return of 14.9 per cent, which included a return from income of 6.9 per cent..
Properties in the industrial sector witnessed the highest returns at 19.2 per cent, enhanced by some sales and asset management initiatives, followed by offices which returned 16.8 per cent. The return from retail properties was 11.3 per cent overall, with shops in the Rest of the UK sub-sector in particular still witnessing falling rental values and a lack of investor and occupational demand, causing a drag on the portfolio total returns.
Following on from the issue of new equity together with the proceeds of sales, the Company has purchased two new retail warehouses and agreed terms to buy a South East office investment.
The B&Q unit at Northfields Retail Park, Rotherham was purchased for 10.5 million reflecting a yield of 7.3 per cent. The unit extends to 52,120 square foot and is let to B&Q plc for a term of 20 years from August 2009, with a tenant's break in 2024. The rent is 810,346 per annum and is subject to five yearly reviews geared to the increase in RPI, capped at 3.0 per cent.
The Company also purchased Brook Retail Park in Bromsgrove, a newly completed out of town development comprising two units of 25,000 square foot and 9,000 square foot. Unit 1 is let to Homebase Limited for 20 years at 362,500 per annum, and Unit 2 is let to Pets at Home Ltd for 15 years at 132,750 per annum. The Company purchased the investment for 7.55 million which reflected a yield of 6.2 per cent.
In the last quarter, terms were agreed to buy Building A3, Glory Park, High Wycombe and the purchase was completed on 10 July, after the Company's year-end. The property comprises a 3 storey office building of 19,572 square foot. Two floors are let to Takeda UK Ltd for 15 years with a tenant's break in 2024. A further floor is let to Aptiv Ltd until 2020. The purchase price was 6.97 million reflecting a yield of 7.0 per cent.
The Company has continued with the strategy of selling the smaller lot size properties and those where future returns look compromised. This has been carried out in a market in which investors have become less risk adverse creating better opportunities to sell some of the more secondary assets.
Over the year to 30 June, the Company sold five properties with an aggregate value of 16.05 million (excluding costs). The Company disposed of three older industrial properties; Units A-C, Foundry Lane, Horsham were sold for 5.05 million reflecting a yield of 10.1 per cent and Swift House, Cosford Lane, Rugby was sold for 5.25 million, a yield of 9.4 per cent. Both these properties were subject to lease expiries in 2018 and 2019 with concerns of the risks of potential voids on older secondary units. A single industrial unit in King George Close, Romford, let to a local company, achieved 2.45 million, reflecting a yield of 7.1 per cent.
On the retail side, Units1/2 Above Bar Church, 89 Above Bar, Southampton was sold for 1.8 million reflecting a yield of 8.6 per cent, but was subject to lease expiries and breaks in 2016/17. 12/20 High Street, Wickford, a leasehold secondary parade of shops was sold for 1.5 million reflecting a yield of 10.6 per cent.
In addition to these sales, the Company also successfully agreed terms to regear the head leasehold interest of 2-3 Pavilion Buildings, Brighton and subsequently sold the investment for 2.5 million reflecting a yield of 6.0 per cent, delivering a return of 30.3 per cent. The Company also exchanged contracts to sell a vacant office building of 14,300 square foot at Globe Park, Marlow for 1.71 million, which compared with the June 2013 value of 1.15 million. These two sales completed in July 2014, after the Company's year-end.
A number of properties out-performed as a result of implementing asset management opportunities, lease renewals or new lettings. One of the largest tenants, HSBC plc agreed to renew the office lease on 1-2 Lochside Way, Edinburgh Park for 10 years from August 2014, with a break at the fifth year, at 699,616 per annum. This increased the value of the property from 6.6 million to 7.3 million and produced a total return for the asset of 24.7 per cent over the period. Unit 2, Wide Lane, Eastleigh, an industrial property, was re-let during the final quarter to UTI Worldwide (UK) Ltd at a rent of 213,899 per annum, increasing the value from 4.9 million to 6.2 million creating a return of 30.9 per cent over the year. The lease of the largest of the two units at Hemel Gateway, Hemel Hempstead, with an area of 62,000 square foot occupied by Majestic Wines, was extended from 2020 for a further 10 years thereby increasing the value from 7.5 million to 9.3 million, returning 29.8 per cent over the year. At 11 Church Street, Kingston upon Thames, the Company took a surrender of the shop lease and relet to Calzedonia on a new lease for 10 years at 165,500 per annum (previously 134,500 per annum), producing a return on that asset of 34.9 per cent.
Against this background, the occupational market for some secondary property, especially retail remains challenging. The effect of lack of demand, coupled with oversupply in some towns continues to have an effect on rental values and the incidence of vacancies in some locations.
Despite new lettings during the year, the void rate on the portfolio has risen to 5.7 per cent although this figure includes Globe Park, Marlow which has since been sold. As a result of the various lease renewals and lettings, the average unexpired lease length across the portfolio has been maintained and is now 7.8 years, compared with 7.9 years in June 2013.
Outlook
The Manager will continue to instigate asset management opportunities to add value within the existing property portfolio. Further sales of smaller and secondary properties which no longer fit the profile of the portfolio will be brought forward, in order to take advantage of the investor appetite for such assets. The proceeds of these sales together with monies raised from further equity raising will be deployed in purchasing new properties as part of the strategy to grow the Company's portfolio, improve the quality of the asset base and reduce levels of gearing. This will be dependent on seeking out suitable investment properties which are priced at a level to generate sustainable returns going forward.
Investor sentiment has improved in the wake of a stronger UK economic performance and an easing of fears about debt markets in Europe. The major uncertainty would appear to be the timing and extent of an upturn in UK interest rates and its impact on the wider economy and property yields. While there are downside risks both in the UK and from abroad, if the economy performs in line with consensus expectations, the property market is predicted to deliver sustained positive total returns. The recent level of total returns may be exceptional, and we would expect some moderation to occur with the income component showing greater prominence over time.
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 2014 | Year ended 30 June 2013 | |
| '000 | '000 | |
| Revenue | ||
| Rental income | 19,603 | 13,791 |
| Total revenue | 19,603 | 13,791 |
| Gains/(losses) on investment properties | 21,253 | (4,313) |
| 40,856 | 9,478 | |
| Expenditure | ||
| Investment management fee | (1,707) | (1,242) |
| Expenses of merger | (32) | (746) |
| Other expenses | (1,697) | (1,204) |
| Total expenditure | (3,436) | (3,192) |
| Net operating profit before finance costs | 37,420 | 6,286 |
| Net finance costs | ||
| Interest receivable | 49 | 15 |
| Finance costs | (6,016) | (4,222) |
| (5,967) | (4,207) | |
| Net profit from ordinary activities before taxation | 31,453 | 2,079 |
| Taxation on profit on ordinary activities | (540) | (479) |
| Profit for the year | 30,913 | 1,600 |
| Other comprehensive income to be reclassified to profit or loss in subsequent periods | ||
| Net gain on cash flow hedges, net of tax | 5,198 | 3,783 |
| Total comprehensive income for the year, net of tax | 36,111 | 5,383 |
| Basic and diluted earnings per share | 14.4p | 1.2p |
| 30 June 2014 '000 | 30 June 2013 '000 | |
| Non-current assets | ||
| Investment properties | 295,387 | 271,063 |
| Current assets | ||
| Trade and other receivables | 6,061 | 6,362 |
| Cash and cash equivalents | 16,773 | 5,775 |
| 22,834 | 12,137 | |
| Total assets | 318,221 | 283,200 |
| Non-current liabilities | ||
| Interest-bearing bank loan | (109,930) | (112,998) |
| Interest rate swap | (4,776) | (9,888) |
| (114,706) | (122,886) | |
| Current liabilities | ||
| Trade and other payables | (6,110) | (6,181) |
| Income tax payable | (377) | (472) |
| Interest rate swap | (4,459) | (4,546) |
| (10,946) | (11,199) | |
| Total liabilities | (125,652) | (134,085) |
| Net assets | 192,569 | 149,115 |
| Represented by: | ||
| Share capital | 2,309 | 2,081 |
| Special distributable reserve | 170,704 | 153,929 |
| Capital reserve | 22,013 | 760 |
| Other reserve | (2,457) | (7,655) |
| Equity shareholders' funds | 192,569 | 149,115 |
| Net asset value per share | 83.4p | 71.7p |
| Share Capital '000 | Special Distributable Reserve '000 | Capital Reserve '000 | Other Reserve '000 | Revenue Reserve '000 | Total '000 | |
| At 1 July 2013 | 2,081 | 153,929 | 760 | (7,655) | - | 149,115 |
| Profit for the year | - | - | - | - | 30,913 | 30,913 |
| Other comprehensive gains | - | - | - | 5,198 | - | 5,198 |
| Total comprehensive income for the year | - | - | - | 5,198 | 30,913 | 36,111 |
| Issue of ordinary shares | 228 | 17,955 | - | - | - | 18,183 |
| Dividends paid | - | - | - | - | (10,840) | (10,840) |
| Transfer in respect of gains on investment properties | - | - | 21,253 | - | (21,253) | - |
| Transfer to revenue reserve | - | (1,180) | - | - | 1,180 | - |
| At 30 June 2014 | 2,309 | 170,704 | 22,013 | (2,457) | - | 192,569 |
| 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 to revenue reserve | - | (2,043) | - | - | 2,043 | - |
| At 30 June 2013 | 2,081 | 153,929 | 760 | (7,655) | - | 149,115 |
| Year ended 30 June 2014 | Year ended 30 June 2013 | |
| '000 | '000 | |
| Cash flows from operating activities | ||
| Net profit for the year before taxation | 31,453 | 2,079 |
| Adjustments for: | ||
| (Gains)/losses on investment properties | (21,253) | 4,313 |
| Decrease in operating trade and other receivables | 301 | 1,619 |
| Decrease in operating trade and other payables | (71) | (1,646) |
| Interest received | (49) | (15) |
| Finance costs | 6,016 | 4,222 |
| 16,397 | 10,572 | |
| Taxation paid | (636) | (177) |
| Net cash inflow from operating activities | 15,761 | 10,395 |
| Cash flows from investing activities | ||
| Purchase of investment properties | (18,812) | - |
| Capital expenditure | (48) | (329) |
| Sale of investment properties | 15,789 | 1,522 |
| Cash transferred on merger | - | 658 |
| Interest received | 49 | 15 |
| Net cash (outflow)/inflow from investing activities | (3,022) | 1,866 |
| Cash flows from financing activities | ||
| Shares issued (net of costs) | 18,183 | - |
| Dividends paid | (10,840) | (7,956) |
| Bank loan interest paid | (1,467) | (698) |
| Payments under interest rate swap arrangement | (4,617) | (3,228) |
| Bank loan (repaid)/drawn down | (3,000) | 4,000 |
| Net cash outflow from financing activities | (1,741) | (7,882) |
| Net increase in cash and cash equivalents | 10,998 | 4,379 |
| Opening cash and cash equivalents | 5,775 | 1,396 |
| Closing cash and cash equivalents | 16,773 | 5,775 |