REG - UK Comm Prop Tst Ltd - Annual Financial Report <Origin Href="QuoteRef">UKCM.L</Origin> - Part 4
15/07/2015 13:48
- Part 4: For the preceding part double click ID:nRSU7602Kc
2014£'000 2013£'000
Rents receivable (net of provision for bad debt - see below) 960 1,256
Lease Incentive 7,084 5,978
Other Debtors and prepayments 2,274 1,668
VAT receivable 308 -
10,626 8,902
Provision for Bad Debts as at 31 December 2013/2012 1,508 764
Movement in the year (790) 744
Provision for Bad Debts as at 31 December 2014/2013 718 1,508
Other debtors include tenant deposits of £1,891,000 (2013 - £807,000). All other debtors are due within one year. No other
debts past due are impaired.
11. Trade and Other payables
2014£'000 2013£'000
Rental income received in advance 14,016 13,749
Investment Manager fee payable 2,153 1,976
VAT payable - 2,495
Other payables 6,217 2,220
22,386 20,440
The Group's payment policy is to ensure settlement of supplier invoices in accordance with stated terms.
12. Bank Loan and Interest rate swaps
2014 2013
£'000 £'000
Total Facilities available 230,000 230,000
Drawn down:
Lloyds facility 80,000 80,000
Barclays facility 150,000 150,000
Set up costs incurred (2,541) (2,541)
Accumulated amortisation of set up costs 1,454 1,091
Accrued variable rate interest on bank loan 724 702
Total due 229,637 229,252
(i) Lloyds Facility
The Company has a seven year £80 million facility, maturing in June 2015, with Lloyds Banking Group plc, all of which is
drawn down. The bank loan is secured on a proportion of the property portfolio of the Group. Under bank covenants related
to the loan the Company is to ensure that at all times:
• The loan to value percentage does not exceed 50 per cent (this is defined as the ratio of the loan compared
to the aggregate of the open market property valuations plus any cash deposits);
• The qualifying adjusted net rental income for any calculation period (any 3 month period) is not less than
175 per cent of the projected finance costs for that period;
• No single tenant accounts for more than 30 per cent of the total net rental income;
• The five largest tenants do not account for more than 50 per cent of total net rental income;
• No single property accounts for more than 25 per cent of the gross secured asset value (this is defined
as the sum of the value of the properties as stated in the latest valuations plus any cash deposits).
The Company met all the covenant tests during the year.
Interest rate exposure has been hedged by the purchase of two interest rate swap contracts. The hedge has been achieved by
matching the notional amount of the swaps with the loan principal and matching the swap term to the loan term.
Interest on the swaps is receivable at a variable rate calculated on the same LIBOR basis as for the bank loan (as
detailed below but excluding margins) and payable at a fixed rate of 3.0 per cent per annum on £42.1 million and 2.215 per
cent per annum on £37.9 million respectively. The fair value of the liability in respect of the two interest rate swap
contracts at 31 December 2014 is £0.8 million (2013: £2.2 million) which is based on the marked to market value. Both swaps
are deemed effective for accounting purposes.
Interest is payable by the Company at a rate equal to the aggregate of LIBOR, mandatory costs of the Bank and a margin.
The applicable margin depends on the ratio of all loans made available to the Company (under the Bank Facility or
otherwise) to the "Gross Assets Value", expressed as a percentage (the "LTV Percentage"). "Gross Assets Value" takes into
account the value of the properties and any other assets held by the Company and the Guarantors (currently UK Commercial
Property Holdings Limited, UK Commercial Property GP Limited and UKCPT Limited Partnership) as well as unsecured cash. If
the LTV percentage is greater than 5 per cent and does not exceed 10 per cent, the margin is 0.55 per cent per annum. If
the LTV percentage is greater than 10 per cent and does not exceed 40 per cent, the margin is 0.60 per cent per annum. If
the LTV percentage is greater than 40 per cent and does not exceed 50 per cent, the margin is 0.70 per cent per annum. As
at 31 December 2014 the applicable margin was 0.60 per cent (2013 - 0.60 per cent.)
(ii) Barclays Facility
The Group also has a seven year £150 million facility, maturing in May 2018, with Barclays Bank plc taken out in May 2011.
As at 31 December 2014 this entire loan was drawn down. The bank loan is secured on the property portfolio held by UKCPEL.
Under bank covenants related to the loan UKCPEL is to ensure that at all times:
• The loan to value percentage does not exceed 60 per cent
• Interest cover at the relevant payment date is not less than 160 per cent UKPCEL met all covenant tests during
the year. Interest rate exposure has been hedged by the purchase of three interest rate swap contracts. The hedge has been
achieved by matching the notional amount of the swaps with the loan principal and matching the swap term to the loan term.
As at 31 December 2014 the Group had in place interest rate swaps totalling £150 million with Barclays bank plc (2013:
£150 million). All of these interest rate swaps effectively hedged the current drawn down loan with Barclays Bank plc.
Interest on the swap is receivable at a variable rate calculated on the same LIBOR basis as for the bank loan (as detailed
below but excluding margins) and payable at a fixed rate of 2.9925 per cent per annum on the £100 million swap, 1.2 per
cent per annum on the
£30 million swap and 1.893 per cent per annum on the £20 million swap. The fair value of the liability in respect of the
interest rate swap contracts at 31 December 2014 is £7.5 million (2013: £4.7 million) which is based on the marked to
market value.
Interest is payable by UKPCEL at a rate equal to the aggregate of LIBOR, mandatory costs of the Bank and a margin. The
applicable margin depends on the ratio of all loans made available to the Company (under the Bank Facility or otherwise) to
the market value of the property portfolio in UKCPEL expressed as a percentage (the "LTV Percentage") as well as any cash
generated from the sale of one of these properties. If the LTV percentage is equal to or less than 25 per cent, the margin
is 1.60 per cent per annum. If the LTV Percentage is greater than 25 per cent and does not exceed 35 per cent, the margin
is 1.70 per cent per annum. If the LTV Percentage is greater than 35 per cent and does not exceed 40 per cent, the margin
is 1.85 per cent per annum. If the LTV Percentage is greater than 40 per cent and does not exceed 45 per cent, the margin
is 1.95 per cent per annum. If the LTV Percentage is greater than 45 per cent and does not exceed 60 per cent, the margin
is 2.0 per cent per annum. As at 31 December 2014 the applicable margin was 1.70 per cent (2013 - 1.70 per cent.)
Swap Instruments
As at 31 December 2014 the Group had in place interest rate swap instruments totalling £230 million all of which were
deemed to be effective hedges as per note 1(q).
The revaluation of these swaps at the year end resulted in a loss arising on interest rate swaps of £1.3 million (2013:
gain £9.7 million). Of the total loss arising on interest rate swaps, £1.3 million related to effective hedge instruments
(2013: gain £9.7 million) which is credited through Other Comprehensive Income in the Statement of Comprehensive Income.
The valuation techniques applied to fair value the derivatives include the swap models including the CVA/DVA swap models,
using present value calculations. The model incorporates various inputs including the credit quality of counterparties and
forward rates.
The fair value of the interest rate swaps as at 31 December 2014 amounted to £8.3 million (2013: £6.9 million). Based on
current yield curves and non-performance risk, £3.6 million of this value relates to the next 12 months and is therefore
classified as a current liability. The remainder is classified as a long term liability.
13. Share capital accounts
2014 2013
£'000 £'000
Share capital
Opening balance 482,703 482,703
18,999,527 Treasury Shares of 25 pence each reissued on 7 May 2014 3,333 -
21,755,495 Treasury Shares of 25 pence each reissued on 20 May 2014 3,925 -
690,120 Treasury Shares of 25 pence each reissued 29 August 2014 135 -
17,694,149 Ordinary Shares of 25 pence each issued 29 August 2014 14,244 -
10,320,260 Ordinary Shares of 25 pence each issued 9 September 2014 8,308 -
32,604,056 Ordinary Shares of 25 pence each issued 14 November, 27,224 -
Share Capital as at 31 December 2014 539,872 482,703
(number of shares in issue at the year end being 1,299,412,465 (2013: 1,197,348,858))
Treasury shares
Balance in Treasury account as at 31 December 2013 and 31 December 2012 (25,264) (25,264)
18,999,527 Treasury Shares of 25 pence each reissued on 7 May 2014 11,581 -
21,755,495 Treasury Shares of 25 pence each reissued on 20 May 2014 13,262 -
690,120 Treasury Shares of 25 pence each reissued 29 August 2014 421 -
Share Capital as at 31 December 2014 - (25,264)
(number of shares held in treasury at 31 December 2014: Nil (2013: 41,445,142))
Ordinary shareholders participate in all general meetings of the Company on the basis of one vote for each share held. The
Articles of Association of the Company allow for an unlimited number of shares to be issued. There are no restrictions on
the shares in issue.
14. Net Asset Value per Share
The net asset value per ordinary share is based on net assets of £1,078,946,000 (2013: £875,753,000) and 1,299,412,465
(2013: 1,197,348,858) Ordinary Shares, being the number of Ordinary Shares in issue at the year end.
15. Related Party Transactions
No Director has an interest in any transactions which are or were unusual in their nature or significant to the nature of
the Group.
Ignis Investment Services Limited and Ignis Fund Managers Limited received fees for their services as investment managers.
Further details are provided in notes 2 and 3. The total management fee charged to the Statement of Comprehensive Income
during the year was £8,168,000 (2013: £7,456,000) of which £2,110,000 (2013: £1,933,000) remained payable at the year end.
The Investment Manager also received an administration fee of £172,000 (2013: £168,000), of which £43,000 (2013: £43,000)
remained payable at the year end. This administration fee rises each July in line with the rise in CPI for the preceding 12
months.
The Directors of the Company are deemed as key management personnel as per IAS 24 and received fees for their services.
Further details are provided in the Directors' Remuneration Report (unaudited) on page 29. Total fees for the year were
£196,000 (2013: £183,000) none of which remained payable at the year end (2013: nil).
The Group invests in the Ignis Liquidity Fund which is managed by Ignis Investment Services Limited. As at 31 December
2014 the Group had invested £41.2 million in the Ignis Liquidity Fund (2013: £38.8 million). No additional fees are payable
to Ignis as a result of this investment.
The Company's immediate parent is Phoenix Life Limited and ultimate controlling party is Phoenix Group Holdings.
16. Financial Instruments and Investment Properties
The Group's investment objective is to provide Ordinary Shareholders with an attractive level of income together with the
potential for income and capital growth from investing in a diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial property investments. The Group's financial instruments
consist of cash, receivables and payables that arise directly from its operations and loan facilities and swap
instruments.
The main risks arising from the Group's financial instruments are credit risk, liquidity risk, market risk and interest
rate risk. The Board reviews and agrees policies for managing its risk exposure. These policies are summarised below and
remained unchanged during the year.
Fair values
The fair value of financial assets and liabilities is not materially different from the carrying value in the financial
statements.
Fair value hierarchy
The following table shows an analysis of the fair values of investment properties recognized in the balance sheet by level
of the fair value hierarchy:
Investment Properties
31 December 2014 Level 1 Level 2 Level 3 Total fair value
£'000 £'000 £'000 £'000
Investment properties - - 1,265,231 1,265,231
31 December 2013 Level 1 Level 2 Level 3 Total fair value
£'000 £'000 £'000 £'000
Investment properties - - 1,042,728 1,042,728
The lowest level of input is the underlying yield on each property which is an input not based on observable market data.
Bank Loans
31 December 2014 Level 1 Level 2 Level 3 Total fair value
£'000 £'000 £'000 £'000
Bank loans - 229,591 - 229,591
31 December 2013 Level 1 Level 2 Level 3 Total fair value
£'000 £'000 £'000 £'000
Bank loans - 229,730 - 229,730
The lowest level of input is the interest rate payable on each borrowing which is a directly observable input.
The following table shows an analysis of the fair values of financial instruments recognised in the balance sheet by level
of the fair value hierarchy:
31 December 2014 Level 1 Level 2 Level 3 Total fair value
£'000 £'000 £'000 £'000
Interest rate swap - (8,267) - (8,267)
31 December 2013 Level 1 Level 2 Level 3 Total fair value
£'000 £'000 £'000 £'000
Interest rate swap - (6,919) - (6,919)
The lowest level of input is the three month LIBOR yield curve which is a directly observable input.
Explanation of the fair value hierarchy:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at
the measurement date.
Level 2 - Use of a model with inputs (other than quoted prices included in level 1) that are directly or indirectly
observable market data. Level 3 - Use of a model with inputs that are not based on observable market data.
The fair value of investment properties is calculated using unobservable inputs as described in note 8.
The fair value of the derivative interest rate swap contract is estimated by discounting expected future cash flows using
current market interest rates and yield curves over the remaining term of the instrument.
The fair value of the bank loans are estimated by discounting expected future cash flows using the current interest rates
applicable to each loan.
Real Estate Risk
The Group has identified the following risks associated with the real estate portfolio:
• The cost of any development schemes may increase if there are delays in the planning process. The Group uses
advisers who are experts in the specific planning requirements in the scheme's location in order to reduce the risks that
may arise in the planning process;
• A major tenant may become insolvent causing a significant loss of rental income and a reduction in the value of
the associated property (see also credit risk below). To reduce this risk, the Group reviews the financial status of all
prospective tenants and decides on the appropriate level of security required via rental deposits or guarantees;
• The exposure of the fair values of the portfolio to market and occupier fundamentals such as tenants
financial position.
Market risk
Market risk is the risk that the market value of properties and financial instruments will change. A 10 per cent increase
in the fair value of the investment properties held as at 31 December 2014 would have increased net assets available to
shareholders and increased the net profit by £126.5 million (2013: £104.3 million). A 10 per cent decrease in the fair
value would have reduced net assets available to shareholders and net profit by £126.5 million (2013: £104.3 million).
The calculations above are based on investment property valuations at the respective balance sheet dates and are not
representative of the year as a whole, nor reflective of future market conditions.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered
into with the Group.
At the reporting date, the maturity of the Group's financial assets was:
Financial Assets 2014 3 months or less£'000 More than More than Total£'000
3 months but less one year£'000
than one year
£'000
Cash 63,379 - - 63,379
Rent receivable 960 - - 960
Other debtors 2,232 - - 2,232
66,571 - - 66,571
Financial Assets 2013 3 months More than More than Total
or less 3 months but less one year
than one year
£'000 £'000 £'000 £'000
Cash 80,734 - - 80,734
Rent receivable 1,256 - - 1,256
Other debtors 1,612 - - 1,612
83,602 - - 83,602
In the event of default by a tenant, the Group will suffer a rental shortfall and incur additional costs, including legal
expenses, in maintaining, insuring and re-letting the property until it is re-let. The Board receives regular reports on
concentrations of risk and any tenants in arrears. The Investment Manager monitors such reports in order to anticipate and
minimise the impact of defaults by tenants.
The Company has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 31
December 2014 is £960,000 (2013: £1,256,000). The Group holds rental deposits of £1,891,000 (2013: £807,000) as collateral
against tenant arrears/defaults. All tenant deposits are in line with market practice. There is no residual credit risk
associated with the financial assets of the Group. No financial assets past due are impaired.
All of the cash is placed with financial institutions with a credit rating of A or above. £41.2 million (2013: £38.8
million) of the year end cash balance is held in the Ignis Liquidity Fund, which is a money market fund and has a triple A
rating. Bankruptcy or insolvency of a financial institution may cause the Group's ability to access cash placed on deposit
to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly
deteriorate, the Investment Manager would move the cash holdings to another financial institution subject to restrictions
under the loan facility.
Liquidity Risk
Liquidity risk is the risk that the Group will encounter difficulty in realising assets or otherwise raising funds to meet
financial commitments. While commercial properties are not immediately realisable, the Group has sufficient cash resources
to meet liabilities.
The Group's liquidity risk is managed on an ongoing basis by the Investment Manager and monitored on a quarterly basis by
the Board. In certain circumstances, the terms of the Group's bank loan entitles the lender to require early repayment, and
in such circumstances the Group's ability to maintain dividend levels and the net asset value attributable to the ordinary
shares could be adversely affected.
As at 31 December 2014 the cash balance was £63,379,000 (2013: £80,734,000).
At the reporting date, the maturity of the Group's liabilities was:
Financial Liabilities 2014 3 months More than More than Total£'000
or less£'000 3 months but less one year£'000
than one year
£'000
Bank loan and interest rate swap 2,234 85,296 164,769 252,299
Other creditors 20,495 - 1,891 22,386
22,729 85,296 166,660 274,685
Financial Liabilities 2013 3 months More than More than Total
or less 3 months but less one year
than one year
£'000 £'000 £'000 £'000
Bank loan 2,234 6,702 254,749 263,685
Other creditors 17,139 - 807 17,946
19,373 6,702 255,556 281,631
The amounts in the table are based on contractual undiscounted payments.
Interest rate risk
The cash balance as shown in the Balance Sheet, is its carrying amount and has a maturity of less than one year.
Interest is receivable on cash at a variable rate ranging from 0.2 per cent to 0.6 per cent at the year end and deposits
are re-priced at intervals of less than one year.
An increase of 1 per cent in interest rates as at the reporting date would have increased the reported profit by £634,000
(2013: increased the reported profit by £807,000). A decrease of 1 per cent would have reduced the reported profit by
£634,000 (2013: decreased the reported profit by £807,000). The effect on equity is nil (excluding the impact of a charge
in retained earnings as a result of a change in net profit).
As the Group's bank loans have been hedged by interest rate swaps, these loans are not subject to interest rate risk.
As at 31 December 2014 the Group had in place a total of £230 million of interest rate swap instruments (2013: £230
million). The values of these instruments are marked to market and will change if interest rates change. It is estimated
that an increase of 1 per cent in interest rates would result in the swap liability falling by £5.2 million (2013: £7.0
million) which would increase the reported other comprehensive income by the same amount. A decrease of 1 per cent in
interest rates would result in the swap liability increasing by £5.2 million (2013: £7.0 million) which would decrease the
reported other comprehensive income by the same amount. The other financial assets and liabilities of Group are
non-interest bearing and are therefore not subject to interest rate risk.
Foreign Currency Risk
There was no foreign currency risk as at 31 December 2014 or 31 December 2013 as assets and liabilities of the Group are
maintained in pounds Sterling.
Capital Management Policies
The Group considers that capital comprises issued ordinary shares, net of shares held in treasury, and long-term
borrowings. The Group's capital is deployed in the acquisition and management of property assets meeting the Group's
investment criteria with a view to earning returns for shareholders which are typically made by way of payment of regular
dividends. The Group also has a policy on the buyback of shares which it sets out in the Directors' Authority to Buy Back
Shares section of the Directors' Report.
The Group's capital is managed in accordance with investment policy which is to hold a diversified property portfolio of
freehold and long leasehold UK commercial properties. The Group invests in income producing properties. The Group will
principally invest in four commercial property sectors: office, retail, industrial and Leisure. The Group is permitted to
invest up to 15 per cent of its Total Assets in indirect property funds and other listed investment companies. The Group is
permitted to invest cash, held by it for working capital purposes and awaiting investments, in cash deposits, gilts and
money market funds.
The Group monitors capital primarily through regular financial reporting and also through a gearing policy. Gearing is
defined as gross borrowings divided by total assets less current liabilities. The Group's gearing policy is set out in the
Investment Policy section of the Report of the Directors. The Group is not subject to externally imposed regulatory capital
requirements but does have banking covenants on which it monitors and reports on a quarterly basis. Included in these
covenants are requirements to monitor loan to value ratios which is calculated as the amount of outstanding debt divided by
the market value of the properties secured. The Group's Loan to value ratio is shown below.
The Group did not breach any of its loan covenants, nor did it default on any other of its obligations under its loan
arrangements in the year to 31 December 2014.
2014 2013
£'000 £'000
Carrying amount of interest-bearing loans and borrowings 229,637 229,252
External valuation of completed investment property 1,272,315 1,048,705
Loan to value ratio 18.05% 21.86%
The Group's capital balances are regarded as the Group's equity and net funds.
17. Capital Commitments
The Group had no contracted capital commitments as at 31 December 2014 (31 December 2013 - nil).
18. Lease Length
The Group leases out its investment properties under operating leases.
The future income under non-cancellable operating leases, based on the unexpired lease length at the year end was as
follows (based on total rentals):
Less than one yearBetween one and five years Over five yearsTotal 2014£00067,477209,661341,578-------618,716------- 2013£00063,511196,210264,955-------524,676-------
The largest single tenant at the year end accounted for 3.74 per cent (2013: 6.44 per cent) of the current annual rental
income.
The unoccupied property expressed as a percentage of annualised total rental value was 2.6 per cent (2013: 4.4 per cent) at
the year end.
The Group has entered into commercial property leases on its investment property portfolio. These properties, held under
operating leases, are measured under the fair value model as the properties are held to earn rentals. The majority of these
non-cancellable leases have remaining non-cancellable lease terms of between 5 and 15 years.
19. Service charge
The Group's managing agents Jones Lang LaSalle manage service charge accounts for all the Group's properties. The Group
pays the service charge on any vacant units. Service charges on rental properties are recharged to tenants. The total
service charge incurred in the year to 31 December 2014 was £7.1 million (2013: £8.5 million). Of this figure, the service
charge paid by the Group in respect of void units was £1.7 million (2013: £2.2 million) and is included in direct property
expenses.
20. Post Balance Sheet Events
On 23 January 2015 the Company completed the sale of Pall Mall Court, King Street, Manchester for a consideration of £19.5
million.
On 28 January 2015 the Company completed the sale of the Weston-super-Mare Unit Trust for a consideration of £29.9
million.
On 6 February 2015 the Company completed the purchase of the car park at Regent Circus, London for a consideration of £1.8
million.
In March 2015, the Company secured twelve year financing at an all in-rate of 3.03% from Cornerstone Real Estate Advisors
Europe LLP, part of the Mass Mutual Financial Group. This was used to repay the £80 million Lloyds facility which was due
to expire in June 2015 and the associated swap liabilities at the time of repayment. In addition, the Company obtained a
£50 million revolving credit facility from Barclays at a margin of 1.5% over 1 month LIBOR. As part of this deal, the
existing Barclays term loan was extended out to April 2020 and the margin on this loan was cut to 1.5%. To date this
revolving credit facility has not been utilised. The Company also repaid all swaps with Barclays that existed at 31
December 2014 and replaced these with one new 5 year swap at a rate of 1.299%.
As part of the restructuring required to facilitate the new debt arrangements a new subsidiary company was set up in March
2015 called UK Commercial Property Finance Holdings Limited. The purpose of this Company is a holding company. In addition,
linked to the debt process described above the Company also held an Extraordinary General Meeting in March 2015 at which
Shareholders passed a Resolution to amend the Articles of Association of the Company so as to replace the continuation vote
due in 2016 with a continuation vote in 2020 and at least seven yearly thereafter.
This Annual Financial Report announcement is not the Company's statutory accounts for the year ended 31 December 2014. The
statutory accounts for the year ended 31 December 2014 received an audit report which was unqualified.
The Annual Report will be posted to shareholders in April 2014 and additional copies will be available from the Manager
(Tel. 0131 245 3151) or by download from the Company's webpage (www.ukcpt.co.uk).
Please note that past performance is not necessarily a guide to the future and that the value of investments and the income
from them may fall as well as rise. Investors may not get back the amount they originally invested.
This information is provided by RNS
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