19 Sep 2008 07:00
To: RNS
Date: 18 September 2008
From: ISIS Property Trust 2 Limited
Results in respect of the Year Ended 30 June 2008
Financial Highlights
Net asset value total return since launch of 54.1 per cent
Share price decreased by 40.2 per cent to 75.0 pence at the year end
Net asset value per share total return of -19.9 per cent for the year
Dividend yield of 9.6 per cent based on year end share price
Dividend of 7.2 pence per share for the year, an increase of 2.9 per cent
Chairman's Statement
The Chairman, Quentin Spicer, stated:
'The 12 months to 30 June 2008 witnessed falling capital values and negative total returns, with the Company recording a net asset value ('NAV') total return of -19.9 per cent, a positive total return since launch in June 2004 of 54.1 per cent. The Company's property portfolio produced an un-geared total return of -12.6 per cent, which compared favourably against a total return of -14.9 per cent for the Investment Property Databank UK Monthly Index (the 'IPD' Monthly Index) over the same period. The additional negative returns on net asset value can be attributed to the effects of gearing in a falling market and a decrease in the swap valuation.
The negative sentiment towards property had a further impact on the Company's share price which fell 40.2 per cent over the year from 125.50 pence per share at 30 June 2007 to 75.0 pence at 30 June 2008. As at the year end the shares were trading at a discount of 38.0 per cent to NAV, significantly wider than the discount of 21.4 per cent a year earlier. Large discounts were evidenced across the peer group, with share prices largely driven by the level of a company's borrowings, as fears mounted over potential breaches of loan to value('LTV') covenants and a company's ability to pay dividends. Despite the concerns over gearing in the sector, this Company has a conservative amount of debt in place, is comfortably within covenant levels and has no immediate concerns over its ability to pay out dividends at the existing rate.
Property Market and Portfolio
The UK commercial property market has been on a downward trend during the year as the economic outlook has deteriorated. 2008 GDP growth expectations have been revised downwards and inflation has moved up, hit by higher food and fuel prices. Weaker house prices and problems in the construction industry have had a knock-on-effect on commercial property.
The credit crunch has continued and the banks are under stress, resulting in constrained levels of liquidity. This lack of finance is partly responsible for the reduced level of investment activity, especially for larger lot sizes but there is also uncertainty about the depth and duration of the downturn and a continued mismatch in buyer and seller expectations.
Capital values were marked down considerably in the fourth quarter of 2007 and the first quarter of 2008 before the pace of decline began to moderate. However, there is now increased concern about the occupier market which has begun to look more fragile with rental growth, primarily in City and West End offices, turning negative.
The Company's investment activity was limited to the first half of the year with two small sales in November 2007; the retail property at High Street, Hereford being sold for £1.7 million and another retail property at High Street, Sutton being sold for £1.0 million. The Company also purchased an office property, based in Edinburgh Park in August 2007 for £15.2 million. This building is let to HSBC until August 2014 and further improves the covenant credit risk status of the portfolio.
The Managers continue to be active on working the income stream of the portfolio, settling 14 rent reviews and lease expiries during the year at an uplift of 13.2 per cent. Rental income has increased by £704,000, primarily as a result of the investment in Edinburgh Park but also as a result of an increase in rent at Clifton Moor Gate, York and the granting of a new lease at 100A Princes Street, Edinburgh, a differential of £104,000 on last year.
The level of vacant property continues to be low at 3.3 per cent of total rental income, well below the IPD average of 9.3 per cent. Various initiatives are in place to reduce this level further in the coming months.
Dividends
Following the decision to increase the rate of the dividend, three interim dividends of 1.80 pence per share have been paid during the year. It is the intention of the Board to pay a fourth interim dividend of 1.80 pence per share, giving a total dividend for the year ended 30 June 2008 of 7.20 pence per share, in line with the amount proposed in last year's annual report and an increase of 2.9 per cent on the year ended 30 June 2007. As previously announced, the dividend will be paid on 26 September 2008 to shareholders on the register on 5 September 2008.
In the absence of a material change in circumstances, it is the intention of the Board to maintain the quarterly dividend at 1.80 pence per share, giving a total dividend for the year ending 30 June 2009 of 7.2 pence per share. This represents a dividend yield of 9.6 per cent on the share price as at 30 June 2008.
Borrowings
The net gearing level as at 30 June 2008 was 30.8 per cent, which compares with 19.0 per cent as at 30 June 2007 and 40.0 per cent at launch on 1 June 2004. The level of gearing has mainly increased as a result of using some cash reserves on the Edinburgh investment but also because of the falling capital values of the properties.
The Board is at ease with the current level of gearing, with £60 million of a £75 million revolving credit facility currently drawn down.
Change of Name
The Board is proposing, in Resolution 8 contained within the Notice of Annual General Meeting, to change the name of the Company from ISIS Property Trust 2 Limited to "IRP Property Investments Limited". This change of name will give the Company a different identity from another property investment company in the sector, ISIS Property Trust Limited, which is managed by the same investment managers but is a separate legal entity.
Outlook
The short term outlook for property has deteriorated over the last three months, reflecting concerns about the economy and financial markets. Expectations are that a weak year is in prospect for 2008 and into 2009.
Beyond this, however, the Managers predict positive real rates of return and continue to believe that performance will be largely income driven.
The balanced nature of the investment portfolio and the risk minimisation adopted by the Managers and the Board with regards to borrowings and investment opportunities, has reduced the vulnerability of the Company to the market downturn. This has placed the Company in a strong position to see out the current decline and prosper when the property market turns, whilst delivering an attractive dividend return to shareholders in the meantime.'
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
ISIS Property Trust 2 Limited
Consolidated Income Statement
| Year ended 30 June 2008 (audited) | Year ended 30 June 2007 (audited) | |
| £'000 | £'000 | |
| Revenue | ||
| Rental income | 12,513 | 11,809 |
| (Losses) / gains on investment properties | (40,215) | 16,832 |
| Total income | (27,702) | 28,641 |
| Expenditure | ||
| Investment management fee | (1,769) | (2,006) |
| Other expenses | (964) | (956) |
| Total expenditure | (2,733) | (2,962) |
| Net operating (loss) / profit before finance costs | (30,435) | 25,679 |
| Net finance costs | ||
| Interest revenue receivable | 318 | 747 |
| Finance costs | (3,508) | (4,024) |
| Loss on termination of interest rate swap | - | (1,610) |
| (3,190) | (4,887) | |
| Net (loss) / profit from ordinary activities before taxation | (33,625) | 20,792 |
| Taxation on profit on ordinary activities | - | - |
| Net (loss) / profit for the year | (33,625) | 20,792 |
| (Loss) / earnings per share | (30.4)p | 18.8p |
ISIS Property Trust 2 Limited
Consolidated Balance Sheet
| 30 June 2008 (audited) £'000 | 30 June 2007 (audited) £'000 | |
| Non-current assets | ||
| Investment properties | 190,443 | 218,024 |
| Interest rate swap | 2,269 | 3,397 |
| 192,712 | 221,421 | |
| Current assets | ||
| Trade and other receivables | 3,336 | 2,871 |
| Cash and cash equivalents | 2,468 | 16,945 |
| 5,804 | 19,816 | |
| Total assets | 198,516 | 241,237 |
| Non-current liabilities | ||
| Interest-bearing bank loan | (60,384) | (60,326) |
| (60,384) | (60,326) | |
| Current liabilities | ||
| Trade and other payables | (4,475) | (4,534) |
| Total liabilities | (64,859) | (64,860) |
| Net assets | 133,657 | 176,377 |
| Represented by: | ||
| Share capital | 1,105 | 1,105 |
| Special distributable reserve | 98,271 | 99,648 |
| Capital reserve | 32,012 | 72,227 |
| Other reserve | 2,269 | 3,397 |
| Equity shareholders' funds | 133,657 | 176,377 |
| Net asset value per share | 121.0p | 159.6p |
ISIS Property Trust 2 Limited
Consolidated Statement of Changes in Equity
For the year ended 30 June 2008 (audited)
| Share Capital £'000 | Special Distributable Reserve £'000 | Capital Reserve £'000 | Other Reserve £'000 | Revenue Reserve £'000 | Total £'000 | |
| At 1 July 2007 | 1,105 | 99,648 | 72,227 | 3,397 | - | 176,377 |
| Net loss for the year | - | - | - | - | (33,625) | (33,625) |
| Dividends paid | - | - | - | - | (7,967) | (7,967) |
| Transfer in respect of losses on investment properties | - | - | (40,215) | - | 40,215 | - |
| Transfer from special distributable reserve | - | (1,377) | - | - | 1,377 | - |
| Movement in fair value of interest rate swaps | - | - | - | (1,128) | - | (1,128) |
| At 30 June 2008 | 1,105 | 98,271 | 32,012 | 2,269 | - | 133,657 |
For the year ended 30 June 2007 (audited)
| Share Capital £'000 | Special Distributable Reserve £'000 | Capital Reserve £'000 | Other Reserve £'000 | Revenue Reserve £'000 | Total £'000 | |
| At 1 July 2006 | 1,105 | 103,288 | 55,395 | (2,652) | - | 157,136 |
| Net profit for the year | - | - | - | - | 20,792 | 20,792 |
| Dividends paid | - | - | - | - | (7,600) | (7,600) |
| Transfer in respect of gains on investment properties | - | - | 16,832 | - | (16,832) | - |
| Transfer from special distributable reserve | - | (3,640) | - | - | 3,640 | - |
| Realised loss on interest rate swap | - | - | - | 1,610 | - | 1,610 |
| Movement in fair value of interest rate swaps | - | - | - | 4,439 | - | 4,439 |
| At 30 June 2007 | 1,105 | 99,648 | 72,227 | 3,397 | - | 176,377 |
ISIS Property Trust 2 Limited
Consolidated Cash Flow Statement
| Year ended 30 June 2008 (audited) | Year ended 30 June 2007 (audited) | |
| £'000 | £'000 | |
| Cash flows from operating activities | ||
| Net operating (loss) / profit for the year before finance costs | (30,435) | 25,679 |
| Adjustments for: | ||
| Losses / (gains) on investment properties | 40,215 | (16,832) |
| (Increase) / decrease in operating trade and other receivables | (864) | 176 |
| (Decrease) / increase in operating trade and other payables | (59) | 207 |
| 8,857 | 9,230 | |
| Interest received | 273 | 702 |
| Bank loan interest paid | (3,918) | (3,759) |
| Receipts / (payments) under interest rate swap arrangement | 912 | (380) |
| (2,733) | (3,437) | |
| Net cash inflow from operating activities | 6,124 | 5,793 |
| Cash flows from investing activities | ||
| Purchase of investment properties and capital expenditure | (15,311) | (510) |
| Sales of investment properties | 2,677 | 26,610 |
| Net cash (outflow) / inflow from investing activities | (12,634) | 26,100 |
| Cash flows from financing activities | ||
| Repayment of previous bank loan | - | (70,662) |
| Draw down of new bank loan | - | 60,000 |
| New loan set-up costs paid | - | (127) |
| Payment on redemption of interest rate swap | - | (1,610) |
| Dividends paid | (7,967) | (7,600) |
| Net cash outflow from financing activities | (7,967) | (19,999) |
| Net (decrease) / increase in cash and cash equivalents | (14,477) | 11,894 |
| Opening cash and cash equivalents | 16,945 | 5,051 |
| Closing cash and cash equivalents | 2,468 | 16,945 |
ISIS Property Trust 2 Limited
Principal Risks and Risk Uncertainties
The Company's assets consist of direct investments in UK commercial property. 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 5. 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.
Strategic - incorrect strategy, including sector and property allocation and use of gearing, could all 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.
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 misreporting or breaches of regulations.
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.
The Board seek 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.
The Board and the Managers recognise the importance of the discount of share price to net asset value in shareholder value. The Managers meet with current and potential new shareholders, and with stockbroking analysts who cover the investment trust sector, on a regular basis. In addition, communication of quarterly portfolio information is provided through the Company's website.
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, in respect of the annual report for the year ended 30 June 2008, of which this statement of results is an extract:
the financial statements, prepared in accordance with the applicable set of accounting standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and
the Report of the Directors and Managers' Review include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces.
On behalf of the Board
Q Spicer
Director
18 September 2008
ISIS Property Trust 2 Limited
Notes to the Consolidated Financial Statements
for the year ended 30 June 2008
5. Financial Instruments
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. In addition, the Group's financial instruments comprise cash, receivables, a bank loan, an interest rate swap and payables.
The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk and market risk (those relating to interest rate changes and pricing movements).
There was no foreign currency risk as at 30 June 2008 or 30 June 2007 as assets and liabilities are maintained in Sterling.
The nature and extent of the financial instruments outstanding at the balance sheet date and the risk management policies employed by the fund are discussed below.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable to 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 2008
| Three months or less | More than three months but less than one year | More than one year | Total | |
| £'000 | £'000 | £'000 | £'000 | |
| Interest rate swap | - | - | 2,269 | 2,269 |
| Cash | 2,468 | - | - | 2,468 |
| Rent receivable | 1,090 | - | - | 1,090 |
| Other debtors and prepayments | 816 | 53 | 1,377 | 2,246 |
| 4,374 | 53 | 3,646 | 8,073 | |
Financial assets 2007
| Three months or less | More than three months but less than one year | More than one year | Total | |
| £'000 | £'000 | £'000 | £'000 | |
| Interest rate swap | - | - | 3,397 | 3,397 |
| Cash | 16,945 | - | - | 16,945 |
| Rent receivable | 822 | - | - | 822 |
| Other debtors and prepayments | 611 | 46 | 1,392 | 2,049 |
| 18,378 | 46 | 4,789 | 23,213 | |
Included within rent receivable is the prepayment for rent-free periods recognised over the life of the lease. As at 30 June 2008 this amounted to £101,000 (2007 : £81,000).
Included within other debtors and prepayments at 30 June 2008 is £1,017,000 (2007 : £1,075,000) relating to the reverse lease surrender premium paid to the tenants of Echo Park, Banbury.
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 until it is re-let. 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.
The Group has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 30 June 2008 is £1,090,000 (2007 : £822,000). Rental deposits from tenants at 30 June 2008 were £425,000 (2007 : £380,000).
As at 30 June 2008 £90,000 of rent receivable was greater than one month overdue. It is the practice of the Group to provide for rental debtors greater than three months overdue. At 30 June 2008 the provision was £72,000 (2007 : £68,000). Of this amount £nil was subsequently written off and £9,000 was recovered.
All of the cash is placed with financial institutions with a credit rating of AA or above. Bankruptcy or insolvency 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 Manager would move the cash holdings to another financial institution.
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 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 when such sales occur shortly after the valuation date.
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 30 June 2008 the cash balance was £2,468,000 (2007 : £16,945,000).
At the reporting date, the maturity of the Group's liabilities was:
Financial liabilities 2008
| Three months or less | More than three months but less than one year | More than one year | Total | |
| £'000 | £'000 | £'000 | £'000 | |
| Bank loan | 746 | - | 59,638 | 60,384 |
| Other creditors | 4,269 | 56 | 150 | 4,475 |
| 5,015 | 56 | 59,788 | 64,859 | |
Financial liabilities 2007
| Three months or less | More than three months but less than one year | More than one year | Total | |
| £'000 | £'000 | £'000 | £'000 | |
| Bank loan | 731 | - | 59,595 | 60,326 |
| Other creditors | 4,252 | 56 | 226 | 4,534 |
| 4,983 | 56 | 59,821 | 64,860 | |
Interest rate exposure
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 table below details the carrying amount, by maturity, of the Group's financial instruments that are exposed to interest rate risk.
As at 30 June 2008
| Within 1 year | More than 5 years | Total | |
| £'000 | £'000 | £'000 | |
| Floating rate | |||
| Cash | 2,468 | - | 2,468 |
| Bank loan | - | (60,000) | (60,000) |
| Fixed rate | |||
| Interest rate swap | - | 2,269 | 2,269 |
| 2,468 | (57,731) | (55,236) | |
As at 30 June 2007
| Within 1 year | More than 5 years | Total | |
| £'000 | £'000 | £'000 | |
| Floating rate | |||
| Cash | 16,945 | - | 16,945 |
| Bank loan | - | (60,000) | (60,000) |
| Fixed rate | |||
| Interest rate swap | - | 3,397 | 3,397 |
| 16,945 | (56,603) | (39,658) | |
Interest is receivable on cash at a variable rate. At the year end rates receivable ranged from 4.875 per cent on current account balances to 5.03 per cent for deposit account balances. Interest is payable on the bank loan at a variable rate of LIBOR plus a margin of 0.5 per cent for the first three years of the facility and 0.45 per cent thereafter. The effect of the interest rate swap is to fix interest payable at 5.655 per cent until 2010 and 5.605 per cent thereafter. The effective rate of interest on the loan is 5.95 per cent. Interest on financial instruments classified as floating rate is repriced at intervals of less than one year.
Exposure varies throughout the year as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies.
In addition, tenant deposits are held in interest-bearing bank accounts. These accounts earn interest at base rate less 1 per cent. Interest accrued on these accounts is paid to the tenant.
The other financial assets and liabilities of the Group that are not included in the above tables are non interest bearing and are therefore not subject to interest rate risk.
The Group's exposure to interest rate risk relates primarily to the Group's long-term debt obligations. The Group's policy is to manage its interest rate risk using an interest rate swap, in which the Group has agreed to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. The swap is designed to fix the interest payable on the loan. The interest rate swap covers the exact amount of the loan and has the same duration. Interest fixing periods are identical and on this basis the swap contract complies with IAS 39's criteria for hedge accounting.
An increase of 1 per cent in interest rates as at the reporting date would have increased net assets by £3.8 million (2007 : £4.4 million) and reduced the reported loss by £25,000 (2007 : increase in profit of £169,000). A decrease of 1 per cent would have reduced net assets by £3.8 million (2007 : £4.4 million) and increased the reported loss by £25,000 (2007 : reduced the reported profit by £169,000).
Market price risk
A 10 per cent increase in the value of the investment properties held as at 30 June 2008 would have increased net assets available to shareholders and reduced the net loss for the year by £19.0 million (2007 : £21.8 million); and an equal change in the opposite direction would have decreased the net assets and increased the net loss by an equivalent amount.
7. These are not full statutory accounts. The full audited accounts for the year ended 30 June 2008 will be sent to shareholders in September 2008, and will be available for inspection at Trafalgar Court, Les Banques, St Peter Port, Guernsey, the registered office of the Company. The full annual report and accounts will be available on the Company’s website: www.isispropertytrust2.com