Last checked at 31 Mar 2009 17:13
To: RNS
Date: 31 March 2009
From: F&C Commercial Property Trust Limited
Results in respect of the Year Ended 31 December 2008 (audited)
Highlights
6.0p per share dividend maintained and now paid monthly
£69.0 million realised through the sale of Lion Walk Shopping Centre, Colchester at above valuation
£43.8 million realised through the sale of units in the Indirect Holdings
Cash balance of £162.3 million at the year end and net gearing of 10.3 per cent
Positive amendment to the management fee arrangements during the year
EGM to be held to consider the continuation of the Company, to be followed by proposals to provide additional flexibility, including a wider investment policy
Chairman's Statement
2008 was the most difficult year in memory for the UK commercial property market, as capital values continued to fall from the peak reached in June 2007. With increasing concerns over the health of the banking sector and the deterioration in economic conditions, investor sentiment was poor throughout the year. In addition, the continuing lack of bank financing led to a significant slowdown in transaction activity. Property values fell in each of the calendar quarters, with the fall in the last quarter being particularly severe.
Against this backdrop, your Company's net asset value ('NAV') total return was -28.8 per cent. This compares with a market total return of -22.3 per cent as measured by the Investment Property Databank ('IPD') UK Quarterly Index.
The poor sentiment towards property was also reflected in the performance of the share price, which recorded a total return of -26.5 per cent for the year. The share price at the end of the year was 62.0p per share, representing a discount of 27.7 per cent to the NAV per share of 85.8p per share, and provided a dividend yield of 9.7 per cent.
The following table provides an analysis of the movement in the NAV per share for the year
(including the effect of gearing):
Pence
Published NAV per share as at
31 December 2007 129.2
Unrealised decrease in valuation
of direct property portfolio (34.4)
Unrealised decrease in valuation
of Indirect Holdings (3.2)
Realised loss on sale of direct property (0.6)
Realised loss on sale of Indirect
Holdings (4.7)
Share buy backs 0.6
Movement in revenue reserve (1.1)
----------
NAV per share as at 31 December 2008 85.8
----------
Property Portfolio - Direct Properties
The valuation of the direct property portfolio fell from £978 million to £654 million during the year, representing an ungeared capital decrease of 27.4 per cent and a total return of -23.2 per cent. This compares with a total return from the IPD All Quarterly and Monthly funds (comprising directly held properties only, and is the Company's performance fee benchmark) of -22.3 per cent. The portfolio underperformed largely due to its overweight exposure to Central London offices.
The Company sold one property during the year: Lion Walk Shopping Centre, Colchester, its only directly held shopping centre. The sale price, gross of selling costs and rental guarantees, was £69.0 million and compared favourably with a valuation of £68.7 million as at 31 March 2008. The transaction was in accordance with the Board's strategy to reduce the Company's exposure to the retail sector. There were no property purchases during the year.
Property Portfolio - Indirect Holdings
The Company's investments in two indirectly held property funds, the Industrial Property Investment Fund ('IPIF') and The Mall Fund (the 'Indirect Holdings'), represented 0.8 per cent of the property portfolio as at 31 December 2008 compared with 9.8 per cent as at 31 December 2007. During the year, the Company realised £39.0 million through disposals of units in IPIF and £4.8 million through disposals of units in The Mall Fund.
The Board, in its announcement of the Company's results for the year ended 31 December 2007, signalled a departure from calculating the NAV in accordance with International Financial Reporting Standards ('IFRS'), when it did not use the externally provided NAVs of the Indirect Holdings in arriving at the Company's published NAV per share. The Board did not consider these to be appropriate valuations in the prevailing market conditions at that time. Accordingly the Board discounted the NAVs of the Indirect Holdings by 10 per cent to reflect its view of their likely realisable value should the Company wish to dispose of them in an orderly fashion over time.
However, solely to meet the technical requirements of IFRS and following extensive consultation with the Company's auditor, the Balance Sheet as at 31 December 2007 included the values of the Indirect Holdings at their full, externally provided, NAVs. This resulted in a higher NAV per share in those accounts compared with the published NAV per share. To overcome this anomaly, during the year the Board appointed an independent valuer to place a market valuation on the units held in the Indirect Holdings for the Directors to consider on a quarterly basis. Accordingly, the Company's NAV as at 31 December 2008 of 85.8p per share incorporates the Indirect Holdings at the Directors' valuation, which reflects these independently produced values. The Company's auditor is satisfied that this treatment meets the requirements of IFRS. Accordingly, there is now no divergence between the Board's valuation of the Indirect Holdings and the valuations required by IFRS. The basis of valuation of the Indirect Holdings will, however, continue to be reviewed regularly by the Board, with independent advice as appropriate, and amended, as required, to reflect changes in market conditions and practice.
Dividends
First and second interim dividends each of 1.5p per share were paid on 25 July and 24 October 2008 respectively. In November the Board announced a move to monthly, rather than quarterly, dividends. This move significantly increases the headroom in respect of the bond covenants relating to dividends and improves the Company's ability to pay an attractive level of dividend whilst also giving it flexibility to use its cash reserves to take advantage of any emerging opportunities in current market conditions.
Accordingly, a third interim dividend of 1.0p per share was paid on 31 December 2008 and fourth and fifth interim dividends, each of 0.5p per share were paid on 30 January and 27 February 2009 respectively. A sixth interim dividend of 0.5p per share was paid on 27 March 2009 and a seventh, and last, interim dividend in respect of the year of 0.5p per share will be paid on 24 April 2009 to shareholders on the register on 3 April 2009.
This will bring the total dividend for the year to 6.0p per share, which level has been maintained since the Company's launch in 2005.
Although the Company's rental income flows remained healthy during the year, it should be noted that current economic conditions, and the Company's significant cash balances which are earning very little income, are likely to have an adverse impact on the income position for the current year. However, on the positive side, the rebasing of the investment management fee in 2008, as explained in more detail below, combined with the asset management initiatives taken since the Company's launch in 2005 have strengthened the income position. Furthermore, the quality of the Company's tenants remains high.
The Board is very conscious of the importance shareholders place on a sustainable and transparent dividend and that the monthly dividend is a valuable income stream. The Directors intend to keep the level of dividend under review in the light of economic conditions, the level of rental income received by the Company and progress in investing its cash reserves.
Discount and Share Buy Backs
Shareholders will be aware of the Board's stated policy to use the share buy back authority to purchase shares (subject to income and cash flow requirements) if the share price is more than five per cent below the published NAV per share for a continuous period of 20 dealing days or more.
In line with this statement, the Company bought back 52.0 million shares during the year, equivalent to 7.1 per cent of the issued share capital as at 31 December 2007. The shares were bought back at an average discount of 32.3 per cent to the published NAV per share (adjusted for any dividends for which the share price had gone ex-dividend) and provided an enhancement of 0.6p to the NAV per share. 41.5 million of these shares were bought back to be held in treasury, for subsequent re-issue at a premium to the published NAV per share, and the balance of 10.5 million shares were bought back for cancellation. Of the total shares bought back, 26.9 million were acquired in three on-market transactions from a life assurance subsidiary of the Company's majority shareholder, the Friends Provident plc group. In carrying out the share buy backs the Board gave careful consideration to income and cashflow requirements and bond covenant constraints, as well as amounts committed to future investment opportunities.
It is the Board's intention that it will continue to consider share buy backs while the discount to the published NAV per share is in excess of five per cent (adjusted for any dividends for which the share price has gone ex-dividend). In addition to taking into account income and cash flow requirements, the Directors will seek to ensure that any share buy backs are undertaken at prices which are in the best interests of all shareholders.
Continuation Vote
It was stated in the launch prospectus in 2005 that, in the event of the discount to the published NAV per share being more than five per cent for 90 dealing days or more, the Directors would convene an Extraordinary General Meeting ('EGM') to consider an ordinary resolution for the continuation of the Company. The first such EGM (the 'First Continuation EGM') was held on 28 September 2007 and it was stated in the circular that the Directors did not intend to convene another EGM to consider the Company's continuation unless the shares traded at a discount of over five per cent to the published NAV per share for 90 dealing days or more following the first anniversary of the First Continuation EGM.
On 5 February 2009 the Directors announced that the Company's shares had traded at a discount of more than five per cent to the published NAV for 90 dealing days following the first anniversary of the First Continuation EGM and accordingly that the Directors would convene an EGM (the 'Second Continuation EGM') to consider a further continuation resolution.
A circular for the Second Continuation EGM which will be held on 1 May 2009 has been announced separately and will be enclosed with the Annual Report. The purpose of the document is to convene the EGM to consider an ordinary resolution to approve the continuation of the Company. The document also explains why the Directors believe that the continuation of the Company is in the best interests of shareholders as a whole. In the event that the resolution is passed the Directors intend to bring forward Proposals (the 'Proposals') to provide additional flexibility to the Company, including a wider investment policy. Accordingly the document also sets out the details of these Proposals.
The Directors also believe that it is in the best interests of shareholders that, if the resolution to approve the continuation of the Company is passed, the Company should not be required to hold another continuation vote unless the discount to the published NAV per share is more than five per cent for a continuous period of 90 dealing days or more following the second anniversary of the Second Continuation EGM. This will extend by one year the period for considering a further continuation resolution should the shares continue to trade at a discount of more than five per cent.
Friends Provident plc's life insurance subsidiaries directly and indirectly hold 50.3 per cent of the Company's issued share capital and have indicated that they currently intend to vote in favour of the resolutions to be proposed at the Second Continuation EGM. They have also confirmed that it is their current intention to support the Proposals when they are published.
Borrowings
The Company has borrowings in the form of £230 million Secured Bonds due 2017 which have been assigned an 'Aaa' rating by Moody's Investor Services. The bonds carry interest at a fixed rate of 5.23 per cent per annum.
As at 31 December 2008, as a reflection of the Board's cautious view of markets, the Company held cash balances of £162.3 million. Consequently, the level of gearing, net of cash, at the year end was 10.3 per cent, compared with 11.7 per cent as at 31 December 2007. The Board considers this to be a prudent level of gearing in current market conditions, and it also provides a degree of flexibility to take advantage of any attractive investment opportunities.
Investment Management Agreement
During the year the Board announced that it had agreed terms with the Managers for a reduction in the base management fee payable and the introduction of a performance fee. The Board believes that the amendments better align the interests of the Managers with the interests of shareholders through a challenging relative performance based fee. The Board has ensured that the total fees payable to the Managers will be capped at a reasonable level.
The previous management fees payable by the Company were 0.75 per cent per annum of its gross assets. Under the new arrangements, a base management fee is payable of 0.60 per cent per annum of the Company's invested assets (including indirect property holdings) and 0.25 per cent per annum of its net current assets. The revised base fee took retrospective effect from 19 March 2008.
The Company has also agreed to pay the Managers a performance fee equal to 20 per cent of the amount by which the total return (whether positive or negative) on the directly held properties exceeds 110 per cent of the total return (90 per cent if the total return is negative) on the benchmark and multiplied by the Company's average total assets (excluding any indirect property holdings). The benchmark for measuring the comparative performance of directly held properties is the total return from the IPD All Quarterly and Monthly funds, which identifies the total return on direct UK commercial property held by all quarterly and monthly measured funds in the IPD universe. The performance fee therefore excludes the performance of any indirect property holdings and the impact of gearing.
The performance fee payable in each financial year is capped at an amount which, when taken with the aggregate base management fee payable in each financial year, equals 1.0 per cent of the gross assets of the Company. Performance fees in excess of this capped return can be carried forward for up to two subsequent financial years subject to the annual 1.0 per cent cap.
The performance fee is measured over a rolling three year period and the performance fee payable in respect of any one financial year is equal to the total performance fee earned over that three year period less any performance fees already paid in the previous two years. In the event that the amount already paid in the previous two years is in excess of the amount earned over the rolling three year period, such excess shall be repaid to the Company by the Managers.
The first performance fee was calculated for the period from 31 March 2008 to 31 December 2008. However, for that period, although the total return from the directly held properties exceeded the total return from the benchmark index, it did not exceed the additional hurdle rate, such that no performance fee is payable in respect of the period.
The inflation linked administration fee payable to the Managers, which is currently £107,000 per annum, remains unchanged.
Since the year end the Board has agreed terms with the Managers such that the investment management agreement may now be terminated by either party by giving not less than 6 months' notice. Previously 12 months' notice had been required.
Management Arrangements
During the year F&C Asset Management plc ('F&C') announced changes to the structure of its property management team and the combination of that business with REIT Asset Management to form F&C REIT Asset Management LLP.
As previously announced, the Board will continue to monitor closely the impact of the new structure on the investment management of the Company's assets to ensure this remains in line with the Company's stated strategy and performance objectives.
Outlook
Economic conditions will remain challenging throughout 2009, with significant uncertainty as to what effect recent Government action will have and when conditions might improve. With bank financing continuing to be limited, this creates a challenging backdrop for the commercial property market and the expectation is for another year of negative returns.
Nonetheless, the Board believes that your Company, with a diversity of tenants, low void rate and average unexpired lease length of 7.9 years, is relatively well placed. The Board also believes that the Company's high level of cash and low levels of net borrowings are appropriate in the current environment. It is optimistic that these factors, along with continuing added value through asset management initiatives, will deliver positive total returns in the longer term.
Peter Niven
Chairman
Managers' Review
Property Market Review
The worsening economic environment coupled with the deepening crisis in the financial and banking sectors hit capital values severely in 2008. Performance deteriorated across the board with steepening declines witnessed in the last quarter. Total returns were -22.3 per cent in 2008, as recorded by Investment Property Databank ('IPD') UK Quarterly Index, making it by far the worst annual IPD performance on record. Performance deteriorated markedly in the final quarter of the year, with total returns of -13.2 per cent. Capital values fell by 14.5 per cent in the quarter and by the year end were down approximately 35 per cent from the mid 2007 peak. The speed of this wholesale markdown is unprecedented.
Due to the virtual shutdown of the debt markets, investment activity remained subdued with transactions totalling only £21 billion over the year, significantly down on the £55 billion recorded in 2007. The main sellers of stock were open ended funds hit by continued redemptions and property companies attempting to strengthen their balance sheets. Investors and real estate valuers completely moved away from equivalent yields to initial yields as risk perceptions changed. A general flight to quality was witnessed with property fundamentals coming back to the fore and the quality of tenant covenants and rental profile being heavily scrutinised. Prime property was by no means immune from this, especially large lot sizes, but many secondary properties proved to be effectively unsaleable.
The intensification of the credit crisis during the final quarter of 2008 saw IPD initial yields at 6.9 per cent at the year end, having moved out by 190 bps over the course of the year; more than half of which occurred during the final quarter.
The occupational markets also began to deteriorate over the course of the year. All sectors recorded a decline in rental values, with offices much weaker than retail and industrial. The quoted rents on accommodation available to let are declining at a significant pace. The weakness in the occupational markets has been witnessed in the retail market with a number of high profile retail failures. The number of defaults and the reduced propensity of tenants to renew at lease expiry were reflected in a rise in void rates. Voids as measured by the IPD UK Monthly Index now equate to more than 10 per cent of rental income at the all property level, up from 8.2 per cent at the peak of the market.
During 2008 the Company's portfolio fell in value from £1,085 million (stated after application of 10 per cent discount to the valuation of the indirect property funds in the prior year) as at 31 December 2007 to £659 million. This represents an ungeared capital decrease of 28.9 per cent.
On a total return basis the Company's direct property portfolio returned -23.2 per cent, compared with the return from the IPD All Quarterly and Monthly funds (comprising directly held properties only and is the Company's performance fee benchmark) of -22.3 per cent.
Retail
Retail property experienced total returns of -13.8 per cent in the final quarter of 2008 recording -22.6 per cent for the year as a whole. This poor final quarter, much in anticipation of widely expected tenant failures after Christmas, made the sector the weakest performer over the quarter. Standard shop units were most resilient, recording -18.8 per cent, retail warehouses recorded -25.2 per cent and shopping centres recorded -23.8 per cent. Rental values are under serious pressure as voids increase and retailers look to take flexible leases with significant incentive packages and rent-free periods being negotiated.
The Company's direct retail properties produced a total return of -19.8 per cent.
In accordance with the Company's strategy to reduce its exposure to the retail sector and especially shopping centres, the Company completed the sale of Lion Walk Shopping Centre, Colchester in July 2008. This was the Company's only directly held shopping centre and, at the time of the sale, the Company's third largest asset. The sale price of £69.0 million was gross of twelve months' rental guarantees on vacant units, a maximum exposure to the Company of £865,000. The sale was negotiated and concluded in an extremely challenging environment and further reduces the Company's exposure to non-recoverable expenditure and the very real possibility of future voids at the property.
The Company continued with its programme of upgrading accommodation at St. Christopher's Place Estate, London W1 with several office lettings completed, but the headline rental levels achieved are now under pressure. There were no notable retail lettings at St. Christopher's Place during 2008 as, until September, all retail units were let. The only tenant default at St Christopher's Place was Joy, which entered into administration with a rental liability of £139,600 per annum. Elsewhere, at 124/125 Princes Street, Edinburgh, Zavvi vacated its unit prior to its lease expiry at the end of December 2008, and before entering into administration. While this unit is currently the Company's largest void it is hoped that an agreement to take a new lease will be secured soon.
The Company's retail warehousing experienced a significant capital decline over the year, of -27.4 per cent, producing total returns of -23.2 per cent. It is becoming increasingly difficult to settle rent reviews by negotiation in this sector and a number of reviews remain outstanding, having been referred to third party determination. More positively, the rent review of the JJB unit at Sears Retail Park, Solihull was settled reflecting an uplift of £27,000 per annum over the previous passing rent, and at Newbury Retail Park two rent reviews were concluded producing £245,315 per annum more than the previous passing rents. The Company suffered one tenant default at Newbury Retail Park when Roseby's entered administration with a rental liability of £172,845 per annum. It is likely that this unit will be subdivided to achieve lettings.
Offices
Offices delivered a total return of -23.1 per cent. The performance of Central London was markedly weaker than the regions with the City recording -26.3 per cent and the West End -23.6 per cent. The bulk of the capital value falls occurred in the final quarter. Occupationally, there is little demand and rents are falling and incentives increasing.
The Company's offices produced a total return of -28.0 per cent with the negative impact coming through the overweight exposure to Central London offices (City total returns -33.8 per cent and West End -32.2 per cent).
Prior to the market turmoil of the last quarter, the Company had success in leasing its refurbishment projects. The refurbishment of four floors at Charles House, 5-11 Regent Street, London SW1 completed in December 2007. All four of the refurbished floors let well ahead of the pro-forma rental values, generating an income of £999,404 per annum. At 7 Birchin Lane, London EC3 two of the three refurbished floors were let, at a rent of £186,387 per annum, and the third floor remains available. At 17A Curzon Street, London W1 the Company agreed a renewal of Bank of Beirut's leases of 4,900 sq ft on the ground, first and second floors. These floors are undergoing a phased refurbishment and the bank has entered into a new 10 year lease at a rent of £380,000 per annum compared with the previous rent passing of £157,340 per annum.
Against a background of global economic and financial uncertainty and the need to preserve capital, the Company has delayed its commitment to redevelop 24-27 Great Pulteney Street, London W1, although the Board and the Managers remain confident in the scheme and its longer term contribution to the Company's future performance. The project will be regularly reviewed and progressed when fundamentals improve and there is greater certainty in the market.
Industrials
Industrial property performance saw total returns of -21.0 per cent in 2008, making it the best performing sector during the year. Occupier demand for smaller units is coming under severe pressure and voids are increasing on multi-let estates, while yields have moved out on well-let distribution units to levels where transactions are occurring at net initial yields of around 7.75%-8.0%.
The Company's industrial properties produced a total return of -11.2 per cent. The Company reduced its holding in the Industrial Property Investment Fund ('IPIF') in December 2008 realising £39.0 million. This sale was driven by concern over the resilience of income from multi-let estates especially those of a more secondary nature.
The Company is now underweight to the industrial sector and this will be addressed by opportunistic purchases.
The Company has settled the insurance claim following the severe fire at The Cowdray Centre, Colchester. The damaged properties have now been demolished and the site cleared. The master plan for the area continues to evolve and proposals include a mix of residential, retail, offices, industrial and hotel use. Progress is being made but the environment has moved against the Company. The focus of activity is to maintain the income wherever possible and to hold the land until the market improves.
Purchases and Disposals
The Company did not acquire any properties during 2008.
As reported above, the Company completed the sale of Lion Walk Shopping Centre, Colchester for £69.0 million. The Company continued to reduce its exposure to its indirect holdings in what were very illiquid secondary markets for unlisted securities. It sold £4.8 million of units in The Mall Fund and £39.0 million of IPIF units realising a total of £43.8 million through a number of separate transactions. At the end of the year the indirect holdings represented 0.8 per cent of the property portfolio, compared with 9.8 per cent as at 31 December 2007.
As a result of these sales and the postponement of major capital expenditure projects, the Company has built up a significant cash balance. At a time when the extent of leverage is under the spotlight, the level of gearing, net of cash, at the year end was 10.3 per cent. This provides a significant degree of flexibility and opportunities to take advantage of properties being offered by distressed sellers at what are now becoming attractive yields.
Property Management
The Company completed 53 lease events during the year, increasing the passing rent by £2,059,206 per annum. The Company experienced a deterioration in vacancy levels which now stand at 4.3 per cent, excluding developments, compared with 1.2 per cent at the beginning of the year. Reassuringly, rent arrears and overdue debt remain, at 0.9 per cent, extremely low for a portfolio of this size.
Property Market Outlook
The market continues to be challenging in the short-term and concern is growing about the prospects for rental and income growth over the coming year. As the industry restructures, there will be opportunities for those with cash to acquire quality stock at attractive prices. Over the medium-term, property is expected to recover and return to the traditional model of income-driven total returns supplemented by modest growth in capital values.
Richard Kirby
Investment Manager
F&C Investment Business Limited
F&C Commercial Property Trust Limited
Consolidated Income Statement (audited)
| Year ended 31 December 2008 | Year ended 31 December 2007 | ||
| £'000 | £'000 | ||
| Revenue | |||
| Rental income | 51,629 | 55,182 | |
| Income from indirect property funds | 5,533 | 6,917 | |
| ----------- | ----------- | ||
| Total revenue | 57,162 | 62,099 | |
| (Losses)/gains on investments | |||
| Unrealised losses on revaluation of investment properties | (251,874) | (71,955) | |
| Unrealised losses on revaluation of indirect property funds | (35,553) | (14,626) | |
| (Losses)/gains on sale of investment properties realised | (4,137) | 31 | |
| (Losses)/gains on sale of indirect property funds realised | (34,192) | 1,588 | |
| ----------- | ----------- | ||
| Total income/(expense) | (268,594) | (22,863) | |
| ----------- | ----------- | ||
| Expenditure | |||
| Investment management fee | (5,862) | (9,430) | |
| Other expenses | (4,097) | (3,600) | |
| ----------- | ----------- | ||
| Total expenditure | (9,959) | (13,030) | |
| ----------- | ----------- | ||
| Operating loss before finance costs | (278,553) | (35,893) | |
| ----------- | ----------- | ||
| Net finance costs | |||
| Interest receivable | 5,717 | 4,376 | |
| Finance costs | (12,133) | (12,128) | |
| ----------- | ----------- | ||
| (6,416) | (7,752) | ||
| ----------- | ----------- | ||
| Loss before taxation | (284,969) | (43,645) | |
| Taxation | 850 | (687) | |
| ----------- | ----------- | ||
| Loss for the year attributable to equity shareholders | (284,119) | (44,332) | |
| ----------- | ----------- | ||
| Basic and diluted losses per share | (39.8)p | (6.0)p | |
F&C Commercial Property Trust Limited
Consolidated Balance Sheet (audited)
| As at 31 December 2008 £'000 | As at 31 December 2007 £'000 | |
| Non-current assets | ||
| Investment properties | 654,155 | 978,425 |
| Investments in indirect property funds held at fair value | 5,116 | 118,651 |
| ----------- | ----------- | |
| 659,271 | 1,097,076 | |
| ----------- | ----------- | |
| Current assets | ||
| Trade and other receivables | 6,193 | 5,676 |
| Cash and cash equivalents | 162,336 | 103,891 |
| ----------- | ----------- | |
| 168,529 | 109,567 | |
| ----------- | ----------- | |
| Total assets | 827,800 | 1,206,643 |
| ----------- | ----------- | |
| Current liabilities | ||
| Trade and other payables | (13,859) | (18,956) |
| ----------- | ----------- | |
| Non-current liabilities | ||
| Interest-bearing bonds | (229,197) | (229,093) |
| Deferred taxation | (561) | (507) |
| ----------- | ----------- | |
| (229,758) | (229,600) | |
| ----------- | ----------- | |
| Total liabilities | (243,617) | (248,556) |
| ----------- | ----------- | |
| NET ASSETS | 584,183 | 958,087 |
| ----------- | ----------- | |
| Represented by: | ||
| Share capital | 7,531 | 687,224 |
| Capital redemption reserve | 105 | - |
| Share premium account | - | 14,390 |
| Special reserve | 673,010 | 34,043 |
| Capital reserve - investments sold | (21,293) | 325 |
| Capital reserve - investments held | (90,690) | 213,448 |
| Revenue reserve | 15,520 | 8,657 |
| ----------- | ----------- | |
| Equity SHAREHOLDERS' FUNDS | 584,183 | 958,087 |
| ----------- | ----------- | |
| Net asset value per share | 85.8p | 130.8p |
F&C Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2008 (audited)
| Share Capital£'000 | Capital Redemption Reserve £'000 | Share Premium Account £'000 | Special Reserve £'000 | Capital Reserve - Investments Sold £'000 | Capital Reserve - Investments Held £'000 | Revenue Reserve £'000 | Total £'000 | |
| At 1 January 2008 | 687,224 | - | 14,390 | 34,043 | 325 | 213,448 | 8,657 | 958,087 |
| Court reduction of share capital | (679,588) | - | (14,390) | 693,978 | - | - | - | - |
| Loss for the year | - | - | - | - | - | - | (284,119) | (284,119) |
| Dividends paid | - | - | - | - | - | - | (49,922) | (49,922) |
| Transfer from special reserve | - | - | - | (15,148) | - | - | 15,148 | - |
| Transfer in respect of unrealised losses on investment properties | - | - | - | - | - | (251,874) | 251,874 | - |
| Transfer in respect of unrealised losses on indirect property funds | - | - | - | - | - | (35,553) | 35,553 | - |
| Losses on sale of investment properties realised | - | - | - | - | (4,137) | - | 4,137 | - |
| Losses on sale on indirect property funds realised | - | - | - | - | (34,192) | - | 34,192 | - |
| Transfer of prior years' revaluation to realised reserve | - | - | - | - | 16,711 | (16,711) | - | - |
| Shares bought back | (105) | 105 | - | (39,863) | - | - | - | (39,863) |
| At 31 December 2008 | 7,531 | 105 | - | 673,010 | (21,293) | (90,690) | 15,520 | 584,183 |
Consolidated Statement of Changes in Equity
for the year ended 31 December 2007 (audited)
| Share Capital £'000 | Capital Redemption Reserve £'000 | Share Premium Account £'000 | Special Reserve £'000 | Capital Reserve - Investments Sold £'000 | Capital Reserve - Investments Held £'000 | Revenue Reserve £'000 | Total £'000 | |
| At 1 January 2007 | 661,500 | - | - | 58,434 | 4,202 | 312,412 | 3,221 | 1,039,769 |
| Issue of ordinary share capital | 25,724 | - | 14,390 | - | - | - | - | 40,114 |
| Loss for the year | - | - | - | - | - | - | (44,332) | (44,332) |
| Dividends paid | - | - | - | - | - | - | (43,845) | (43,845) |
| Transfer from special reserve | - | - | - | (8,651) | - | - | 8,651 | - |
| Transfer in respect of unrealised losses on investment properties | - | - | - | - | - | (71,955) | 71,955 | - |
| Transfer in respect of unrealised losses on indirect property funds | - | - | - | - | - | (14,626) | 14,626 | - |
| Gains on sale of investment properties realised | - | - | - | - | 31 | - | (31) | - |
| Gains on sale on indirect property funds realised | - | - | - | - | 1,588 | - | (1,588) | - |
| Transfer of prior years' revaluation to realised reserve | - | - | - | - | 12,383 | (12,383) | - | - |
| Shares bought back | - | - | - | (15,740) | (17,879) | - | - | (33,619) |
| At 31 December 2007 | 687,224 | - | 14,390 | 34,043 | 325 | 213,448 | 8,657 | 958,087 |
F&C Commercial Property Trust Limited
Consolidated Cash Flow Statement (audited)
| Year ended 31 December 2008 | Year ended 31 December 2007 | |
| £'000 | £'000 | |
| Cash flows from operating activities | ||
| Operating loss for the year before finance costs | (278,553) | (35,893) |
| Adjustments for: | ||
| Unrealised losses on revaluation of investment properties | 251,874 | 71,955 |
| Unrealised losses on revaluation of indirect property funds | 35,553 | 14,626 |
| Losses/(gains) on sale of investment properties realised | 4,137 | (31) |
| Losses/(gains) on sale of indirect property funds realised | 34,192 | (1,588) |
| Decrease in operating trade and other receivables | 472 | 541 |
| Decrease in operating trade and other payables | (4,631) | (382) |
| ----------- | ----------- | |
| 43,044 | 49,228 | |
| ----------- | ----------- | |
| Interest received | 5,717 | 4,376 |
| Interest paid | (12,029) | (12,028) |
| Taxation paid | (551) | (445) |
| ----------- | ----------- | |
| (6,863) | (8,097) | |
| ----------- | ----------- | |
| Net cash inflow from operating activities | 36,181 | 41,131 |
| ----------- | ----------- | |
| Cash flows from investing activities | ||
| Sale of indirect property funds | 43,790 | 50,188 |
| Sale of investment properties | 71,302 | 31 |
| Capital expenditure | (3,043) | (3,400) |
| ----------- | ----------- | |
| Net cash inflow from investing activities | 112,049 | 46,819 |
| ----------- | ----------- | |
| Cash flows from financing activities | ||
| Proceeds from issue of ordinary share capital | - | 40,114 |
| Share buy backs | (39,863) | (33,619) |
| Dividends paid | (49,922) | (43,845) |
| ----------- | ----------- | |
| Net cash outflow from financing activities | (89,785) | (37,350) |
| ----------- | ----------- | |
| Net increase in cash and cash equivalents | 58,445 | 50,600 |
| Opening cash and cash equivalents | 103,891 | 53,291 |
| ----------- | ----------- | |
| Closing cash and cash equivalents | 162,336 | 103,891 |
| ----------- | ----------- |
F&C Commercial Property Trust Limited
Principal Risks and Risk Management
The Company's assets comprise direct and indirect investments in UK commercial property, although recent market uncertainty has resulted in more cash being held. Its principal risks are therefore related to the commercial property market in general, but also the particular circumstances of the properties in which it is invested and their tenants. More detailed explanations of these risks and the way in which they are managed are contained in note 2. The Managers also seek to mitigate these risks through active asset management initiatives and carrying out due diligence work on potential tenants before entering into any new lease agreements. All of the properties in the portfolio are insured.
Other risks faced by the Company include the following:
Economic - inflation or deflation, economic recessions and movements in interest rates could affect property valuations.
Investment and strategic - incorrect strategy, including sector and geographic allocations and use of gearing, could lead to poor returns for shareholders.
Regulatory - breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.
Management and control - changes that cause the management and control of the Company to be exercised in the United Kingdom could lead to the Company becoming liable to United Kingdom taxation on income and capital gains.
Operational - failure of the Managers' accounting systems or disruption to the Managers' business, or that of third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders' confidence.
Financial - inadequate controls by the Managers or third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to a qualified audit report, misreporting or breaches of regulations. Breaching bond covenants could lead to a downgrading of the Secured Bonds, a loss of shareholders' confidence and financial loss for shareholders.
The Board seeks to mitigate and manage these risks through continual review, policy setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company's property portfolio, and applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.
Statement of Directors' Responsibilities in Respect of the Annual Financial Report
In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge:
The financial statements contained within the Annual Report for the year ended 31 December 2008, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;
The Chairman's Statement and Managers' Review include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;
'Principal Risks and Risk Management' includes a description of the Company's principal risks and uncertainties; and
The Chairman's Statement includes details of related party transactions that have taken place during the financial year.
On behalf of the Board
P Niven N J M Tostevin
Director Director
31 March 2009
F&C Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year to 31 December 2008
1. The Board has declared a seventh, and last, interim dividend for the year of 0.50p per share to be paid on 24 April 2009 to shareholders on the register on 3 April 2009. The ex-dividend date will be 1 April 2009.
It is the Directors' intention that the Company will continue to pay dividends monthly.
2. Financial Instruments
The Company's investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for capital and income growth from investing in a diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial property investments. In addition, the Group's financial instruments comprise interest bearing bonds, cash and receivables and payables that arise directly from its operations. The Group does not have exposure to any derivative instruments.
The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as assets and liabilities of the Group are maintained in pounds sterling.
The Board reviews and agrees policies for managing the Group's risk exposure. These policies are summarised below and have remained unchanged for the year under review.
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.
In the event of default by an occupational tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Managers monitor such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.
All of the Group's cash is placed with financial institutions with a long term credit rating of AA or better. Bankruptcy or insolvency of such financial institutions 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, cash holdings would be moved to another bank.
During the year, due to the quantum of cash balances held, counterparty risk was spread by placing cash across a number of different financial institutions.
Liquidity risk
Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments. The Group's investments comprise UK commercial property. Property and property related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements. Given the current turmoil in financial markets there has been significantly less liquidity in property markets in recent months.
The Group's liquidity risk is managed on an ongoing basis by the Managers and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to meet its obligations for a period of at least twelve months.
The Group's investments include investments in indirect property funds which are not traded in an organised public market and which generally may be illiquid. As a result, similar to the directly held properties, the Group may not be able to liquidate quickly some of its investments in those instruments in order to meet its liquidity requirements. As at 31 December 2008 the Group's investment in indirect property funds was £5,116,000 (2007: £118,651,000).
Interest rate risk
Some of the Group's financial instruments are interest bearing. They are a mix of both fixed and variable rate instruments with differing maturities. As a consequence, the Group is exposed to interest rate risk due to fluctuations in the prevailing market rate.
The Group's exposure to interest rate risk relates primarily to the Group's long-term debt obligations. Interest rate risk on long-term debt obligations is managed by fixing the interest rate on such borrowings. Long term debt obligations and the interest rate risk they confer to the Group is considered by the Board on a quarterly basis. Long term debt obligations consist of £230 million Secured Bonds due 2017 on which the rate has been fixed at 5.23 per cent until the expected maturity date of 30 June 2015. If the bonds are not redeemed at this date they will carry interest at 0.6 per cent over LIBOR until the final maturity date of 30 June 2017.
When the Group retains cash balances, they are ordinarily held on interest bearing deposit accounts. The benchmark which determines the interest income received on interest bearing cash balances is the bank base rate which was 2.0 per cent as at 31 December 2008 (2007: 5.5 per cent). The Company's policy is to hold cash in variable rate or short term fixed rate bank accounts and not usually in fixed rate securities with a term greater than three months.
Market price risk
The Group's strategy for the management of market price risk is driven by the investment policy. The management of market price risk is part of the investment management process and is typical of commercial property investment. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.
The Group also holds investments in indirect property funds which in turn invest directly in commercial property. The underlying assets in such funds are valued by external property valuers appointed by the investment managers of the indirect property funds. In addition to the price risk attaching to the underlying assets, such funds also carry the risk that the investment cannot be disposed of at its net asset value due to a lack of liquidity. As at 31 December 2007, due to the technical requirements of IFRS and following extensive consultations with the Company's auditor, these investments were included in the financial statements at their underlying net asset value, although the Board indicated that they considered a discount of 10 per cent should be applied to such investments to reflect the likely realisable value of the holdings at that date. In order to address the fact that the likely realisable value of the indirect property holdings at the balance sheet date may not be equal to each fund's underlying net asset value, during the year the Board appointed an indirect valuer to obtain estimated market values for these holdings. As at 31 December 2008, the fair value of these investments is deemed to be the Directors' valuation, which reflects these independently produced market values.
3. Investments
All the Group's investment properties were valued as at 31 December 2008 by qualified professional valuers working for the company of DTZ Debenham Tie Leung Limited ('DTZ'), Chartered Surveyors, acting in the capacity of external valuers. All such valuers are Chartered Surveyors, being members of the Royal Institution of Chartered Surveyors ('RICS').
DTZ completed the valuation of the Group's investment properties at 31 December 2008 on a market value basis and in accordance with the requirements of the RICS Valuation Standards under which market value is deemed to equate to fair value. Fair value is the amount for which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length transaction as at the valuation date. The value of these investment properties amounted to £654,155,000 (2007: £978,425,000). The DTZ valuation report is dated 15 January 2009 (the 'Valuation Report').
Gillian Rushmore BSc, FRICS has been the signatory of valuation reports provided to the Group for the same purpose as the Valuation Report for a continuous period since March 2005. DTZ has been carrying out valuations for the Group for the same purpose as the Valuation Report for the same period.
DTZ also values properties held by other companies for which the F&C Asset Management plc group is also the investment manager. DTZ provides and has provided in the past ad hoc investment and occupational agency advice, landlord and tenant and building consultancy advice to members of the F&C Asset Management plc group. DTZ Debenham Tie Leung Limited is a wholly owned subsidiary of DTZ Holdings plc. In DTZ Holdings plc's financial year to 30 April 2008, the proportion of total fees payable by the F&C Asset Management plc group to the total fee income of DTZ Holdings plc was less than five per cent.
Financial markets have seen significant turbulence over the last year or so resulting in severe liquidity shortages. This turmoil has had an immediate effect on the real estate investment market resulting in some transactions failing and/or prices being renegotiated downwards. This has caused a marked reduction in the volume of transactions with activity below the levels of recent years. Generally, there is greater volatility in the evidence generated by comparable transactions and in these circumstances there is a greater degree of uncertainty than that which exists in a more active and stronger market in forming an opinion of the realisation prices of property assets. Therefore, DTZ has indicated that, in the market conditions which currently prevail, there is likely to be a greater than usual degree of uncertainty in respect of valuations. Until the number and consistency of comparable transactions increases, this situation is likely to remain.
4. There were 680,537,003 Ordinary Shares in issue at 31 December 2008, excluding shares held in Treasury (2007: 732,534,003).
During the year the Company repurchased 51,997,000 Ordinary Shares (2007: 31,048,013) for a total consideration of £39.9m, representing 7.1 per cent of the Ordinary Shares in issue at the previous year end. Of the Ordinary Shares purchased, 41,497,000 were purchased to be held in Treasury and 10,500,000 were purchased for cancellation. At 31 December 2008, the Company held a total of 72,545,013 Ordinary Shares in Treasury (2007: 31,048,013).
5. The basic and diluted losses per share are based on the loss for the year of £284,119,000 (2007: £44,332,000) and on 713,355,033 Ordinary Shares (2007: 732,816,052), being the weighted average number of shares in issue during the year.
6. The Group results consolidate those of F&C Commercial Property Holdings Limited, a wholly owned subsidiary which invests in properties.
The Group results also consolidate the results of F&C Commercial Property Finance Limited, a special purpose vehicle incorporated to issue the interest bearing bonds.
7. These are not full statutory accounts. The full audited accounts for the year to 31 December 2008 will be sent to shareholders and will be available for inspection at Trafalgar Court, Les Banques, St Peter Port, Guernsey, the registered office of the Company and from the Company's website www.fccpt.co.uk.
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration (Guernsey) LimitedTrafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
Tel: 01481 745001
Fax: 01481 745051
Richard Kirby
F&C REIT Asset Management LLP Tel: 0207 016 3577