BREI.L Regulatory News (BREI)

F&C UK Real Estate Investments Ltd - Interim Results

PR Newswire

London, February 23

To: RNSDate: 26 February 2018From: F&C UK Real Estate Investments LimitedLEI: 231801XRCB89W6XTR23

(Classified Regulated Information, under DTR 6 Annex 1 Section 1.2)  

Interim results in respect of the six month period ended 31 December 2017

* See Alternative Performance Measures

The Chairman, Vikram Lall, stated:

Despite continuing uncertainties about the outcome of the Brexit negotiations, the UK commercial property market has witnessed strong demand and the Group has experienced six months of steady performance with capital values increasing in the period by 3.5 per cent. The net asset value (‘NAV’) total return* per share for the period was 7.4 per cent and the NAV per share at the period end was 104.9 pence.

Despite the positive returns on the portfolio, there was still a degree of caution in the market and the share price fell by 3.3 per cent over the six months. The share price total return* was -0.9 per cent over the period and the shares were trading at a slight discount* to the NAV of 1.5 per cent at the period end, compared to a premium of 6.7 per cent as at 30 June 2017. 

Property Market

The UK commercial property market delivered a total return of 5.4 per cent as measured by the Investment Property Databank (‘IPD’) UK Quarterly Index for all assets in the six months to 31 December 2017, and 10.3 per cent over the year to December as momentum built over the period. Performance was driven by strength in investment demand, with overseas buyers still active and institutions returning to the market later in the period. Industrial property and alternative asset sectors continued to out-perform with all the standard segments of the IPD Index delivering positive benchmark total returns for the period.

In the six months to 31 December 2017, the income return held steady as capital growth improved and the all-property initial yield edged lower. Open market rental value growth was positive but the bulk of the upward move in capital value was due to yield compression.

Property Portfolio

The Group’s property portfolio produced an ungeared return* of 6.2 per cent over the six months to December, outperforming the IPD Quarterly Index. Performance was led by a top quartile income return* of 2.6 per cent. The portfolio’s industrial and distribution assets were again the key contributors to performance, producing a total return in excess of both the IPD UK Quarterly Index and the sector level return for the period. The exposure to industrial and logistics property at close to 35 per cent of portfolio value continues to be the mainstay of the Fund strategy alongside the majority weighting to the core south east markets.

In a further continuation of the trend witnessed last year, the portfolio’s retail assets also outperformed their peers; however the portfolio’s office assets, led lower by the regional holdings, delivered poorer performance in both actual and relative terms. The Company’s retail warehousing continues to deliver an income return, a key contributor to dividend cover, and outperform the peer group. Indeed, active asset management at the retail warehouse located at Northfields Retail Park, Rotherham delivered the highest weighted contribution to portfolio return of any property over the period.

Given the weight of money pursuing core assets, particularly Industrials, alternatives and long Income assets the Company has preserved its measured, opportunistic approach to the deployment of capital, with emphasis on the disposal of non-core assets, reflected in recent sales from the retail portfolio. Acquisitions that meet the returns criteria for the Company have been more difficult to come by in a very competitive marketplace. However we believe the acquisition of the single let industrial asset at Lister Road, Basingstoke, yielding 5.2 per cent and let for 9 years meets our criteria in the current market.

The portfolio continues to offer sustainable defensive fundamentals, including an above market income yield, a low void rate of 3.8 per cent and contractual income with an average weighted lease term of 6 years.

Dividends

The first interim dividend for the year ending 30 June 2018 of 1.25 pence per share was paid in December 2017, with a second interim dividend of 1.25 pence per share to be paid on 29 March 2018 to shareholders on the register on 9 March 2018.

The dividend cover* for the six months was 92.6 per cent, although this excludes the receipt of a negotiated surrender premium of £4,375,000 from the previous tenant at Northfields Retail Park, Rotherham. This property was subsequently re-let.

The dividend is currently at a sustainable level, and in the absence of unforeseen circumstances, it is expected that the Company will continue to pay quarterly dividends at this rate, the equivalent of 5.0 pence per share per annum.

Borrowings

The Group currently has borrowings of £103 million made up of a £90 million non-amortising term loan facility agreement with Canada Life Investments, which expires in November 2026 and a £20 million 5-year revolving credit facility agreement with Barclays Bank plc, which expires in November 2020, £13 million of which is currently drawn down. Net gearing* represented 28.2 per cent of the investment properties of the Group as at 31 December 2017. The weighted average interest rate (including amortisation of refinancing costs) on the Group's total current borrowings is 3.2 per cent. The Company continues to maintain a prudent attitude to gearing.

The Group had £9.6 million of cash available at 31 December 2017 with a further £7.0 million of the revolving credit facility also available if required. 

Responsible Property Investment

The Company continues to make good progress with its Environmental, Social and Governance (‘ESG’) related activities. The portfolio now has energy performance ratings for all of its assets and has developed a detailed strategy for addressing and maintaining a low exposure to the risks presented by energy efficiency legislation. The Company has also completed individual property sustainability appraisals to capture other investment critical information.

A major exercise is currently under way to establish baseline carbon usage for directly managed properties against which year on year reduction targets can be set, alongside longer-term portfolio objectives consistent with climate science. At asset level, directly managed assets are shortly expected to achieve the ISO14,001 environmental accreditation whilst the Manager continues to implement green lease clauses as standard, whenever possible and commercially viable. The Company will make its inaugural submission to the influential annual GRESB survey this year whilst the Manager’s recruitment of additional resource to help manage and monitor continual improvement is further indication of the Company’s aspiration to further improve its ESG credentials.

Outlook

Although there were some signs of progress in the EU negotiations as the period drew to a close, the outlook continues to be dominated by Brexit considerations and wider political uncertainty. Interest rates were raised during this reporting period and the timing and magnitude of further increases is also likely to be a consideration for property investors moving forward. Within property, performance has been buoyed by investment, especially from overseas, but the impact of proposed new tax regulations on foreign buyers in 2019, if implemented, is unclear. The economy is recording positive, if modest, growth, which is expected to persist on consensus forecasts. Sentiment is adjusting to the changed political and economic environment, however, our outlook on the market remains cautious. 

* See Alternative Performance Measures 

Enquiries to:The Company SecretaryNorthern Trust International Fund Administration Services (Guernsey) LimitedTrafalgar CourtLes BanquesSt Peter PortGuernsey GY1 3QLTel: 01481 745001Fax: 01481 745051P Lowe, S MacraeF&C Investment Business LimitedTel: 0207 628 8000Fax: 0131 225 2375 

F&C UK Real Estate Investments LimitedCondensed Consolidated Statement of Comprehensive Income

F&C UK Real Estate Investments LimitedCondensed Consolidated Balance Sheet

F&C UK Real Estate Investments LimitedCondensed Consolidated Statement of Changes in Equity

For the period ended 31 December 2017

For the period ended 31 December 2016

For the year ended 30 June 2017

F&C UK Real Estate Investments LimitedCondensed Consolidated Statement of Cash Flows

F&C UK Real Estate Investments Limited

Notes to the Condensed Financial Statementsfor the six months to 31 December 2017

1. General information

The condensed consolidated financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the United Kingdom Financial Conduct Authority, IAS 34 ‘Interim Financial Reporting’ and the accounting policies set out in the statutory accounts of the Group for the year ended 30 June 2017. The condensed consolidated financial statements do not include all of the information required for a complete set of IFRS financial statements and should be read in conjunction with the consolidated financial statements for the Group for the year ended 30 June 2017 which were prepared under full IFRS requirements. The accounting policies used in preparation of the condensed consolidated financial statements are consistent with those of the consolidated financial statements of the Group for the year ended 30 June 2017.

In the previously issued interim financial statements of the Company for the period ended 31 December 2016, lease incentives of £5,005,000 and cash deposits held for tenants of £756,000 were classified as current assets. In the comparative figures of the current year financial statements, £4,047,000 for lease incentives and £712,000 for tenant deposits have been reclassified to non-current assets. The Directors have considered the impact on the previously issued financial statements of the Company and have noted that no adjustment is required to the previously reported total assets, liabilities or equity of the Company. On this basis, the Directors do not consider the above reclassification between current and non-current assets to be material to the users of the financial statements.

2. Other income

The Company received £4,375,000 for the surrender at a leasehold interest at Northfields Retail Park, Rotherham. The Company entered into a lease arrangement at this property with a new tenant and it is now fully let.

4. Dividends

A second interim dividend for the year to 30 June 2018, of 1.25 pence per share, will be paid on 29 March 2018 to shareholders on the register at close of business on 9 March 2018.

5. Earnings per share

Earnings per Ordinary Share are based on 240,705,539 Ordinary Shares, being the weighted average number of shares in issue during the period (31 December 2016: 238,705,539 and 30 June 2017: 239,568,005). Earnings for the six months to 31 December 2017 should not be taken as a guide to the results for the year to 30 June 2018.

6. Investment properties

All the Group’s investment properties were valued as at 31 December 2017 by qualified professional valuers working in the company of Cushman & Wakefield, Chartered Surveyors. All such valuers are chartered surveyors, being members of the Royal Institution of Chartered Surveyors (‘RICS’). There were no significant changes to the valuation techniques used during the period and these valuation techniques are detailed in the consolidated financial statements as at and for the year ended 30 June 2017. The market value of these investment properties amounted to £350,730,000 (31 December 2016: £331,450,000; 30 June 2017: £335,350,000), however an adjustment has been made for lease incentives of £4,281,000 that are already accounted for as an asset (31 December 2016: £5,005,000; 30 June 2017: £4,516,000).

7. Interest-bearing bank loans

On 9 November 2015, the Group entered into an eleven year £90 million non-amortising term loan agreement with Canada Life and a five year £20 million revolving credit facility agreement with Barclays. The interest rate payable on the Canada Life loan is at a fixed rate of 3.36% per annum and the interest payable on the Barclays loan is at a variable rate based on 3 month LIBOR plus a margin of 1.45% per annum. During the period, the Company repaid £3 million of the revolving credit facility to Barclays.

At 31 December 2017 borrowings of £103 million were drawn down. The balance sheet value is stated at an amortised cost of £102,170,000 (31 December 2016: £104,956,000 and 30 June 2017: £105,061,000). Amortised cost is calculated by deducting loan arrangement costs, which are amortised back over the life of the loan. The fair value of the Canada Life loan is shown in note 8.

8. Fair value measurements

The fair value measurements for financial assets and financial liabilities are categorised into different levels in the fair value hierarchy based on the inputs to valuation techniques used. 

The different levels are defined as follows:

All of the Group’s investments in direct property are included in Level 3 as it involves the use of significant inputs. There were no transfers between levels of the fair value hierarchy during the six month period ended 31 December 2017.

Other than the fair values stated in the table below, the fair value of all other financial assets and liabilities is not materially different from their carrying value in the financial statements.

\* The fair value of the interest-bearing Canada Life Loan is based on the yield on the Treasury 2% 2025 which would be used as the basis for calculating the early repayment of such loan plus the appropriate margin.

The Group’s financial risk management objectives and policies are consistent with those disclosed in the consolidated financial statements as at and for the year ended 30 June 2017.

The Company issued nil Ordinary Shares during the period. 

10. Net asset value per share

The net asset value per Ordinary Share is based on net assets of £252,503,000 (31 December 2016: £231,959,000 and 30 June 2017: £240,842,000) and 240,705,539 Ordinary Shares (31 December 2016: 238,705,539 and 30 June 2017: 240,705,539) being the number of shares in issue at the period end.

11. Going concern

In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. They have considered the current cash position of the Group, the availability of the loans and compliance with their covenants, forecast rental income and other forecast cash flows. The Group has agreements relating to its borrowing facilities with which it has complied during the period. Based on this information the Directors believe that the Group has the ability to meet its financial obligations as they fall due for a period of at least twelve months from the date of the approval of the accounts. For this reason, they continue to adopt the going concern basis in preparing the accounts.

12. Related party transactions

The Directors of the Company received fees for their services and dividends from their shareholdings in the Company. No fees remained payable at the period end.

13. Operating segments

The Board has considered the requirements of IFRS 8 ‘Operating Segments’. The Board is of the view that the Group is engaged in a single segment of business, being property investment, and in one geographical area, the United Kingdom, and that therefore the Group has only a single operating segment. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Group. The key measure of performance used by the Board to assess the Group’s performance is the total return on the Group’s net asset value, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the condensed consolidated financial statements.

14. Investment in subsidiary undertakings

The Group results consolidate those of IRP Holdings Limited (‘IRPH’) and IPT Property Holdings Limited (‘IPTH’). IRPH and IPTH are companies incorporated in Guernsey whose principal business is that of a property investment company. These companies are 100 per cent owned by the Group’s ultimate parent company, which is F&C UK Real Estate Investments Limited.

15. Subsequent events

There are no material subsequent events that need to be disclosed.

16. The report and accounts for the half-year ended 31 December 2017 are available on the websites www.fcre.co.uk and www.fcre.gg.

 Statement of Principal Risks and Uncertainties

The Group’s assets consist of direct investments in UK commercial property. Its principal risks are therefore related to the UK commercial property market in general but also the particular circumstances of the properties in which it is invested and their tenants. Other risks faced by the Group include market, investment and strategic, regulatory, tax efficiency, financial, reporting, credit, operational and environmental risks. The Group is also exposed to risks in relation to its financial instruments. These risks, and the way in which they are mitigated and managed, are described in more detail under the heading ‘Principal Risks and Risk Management’ within the Business Model and Strategy in the Group’s Annual Report for the year ended 30 June 2017. The Group’s principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Group’s financial year.

Directors’ Responsibility Statement in Respect of the Interim Report

We confirm that to the best of our knowledge:

· the condensed set of consolidated financial statements has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’ as adopted by the European Union;

· the Chairman’s Statement constituting the Interim Management Report together with the Statement of Principal Risks and Uncertainties include a fair review of the information required by the Disclosure and Transparency Rules (‘DTR’) 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of consolidated financial statements; and

· the Chairman’s Statement together with the consolidated financial statements include a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board Vikram LallChairman23 February 2018

Alternative Performance Measures 

The Company uses the following Alternative Performance Measures (‘APMs’). APMs do not have a standard meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other entities.

Discount or Premium – The share price of an Investment Company is derived from buyers and sellers trading their shares on the stock market. If the share price is lower than the NAV per share, the shares are trading at a discount. This usually indicates that there are more sellers than buyers. Shares trading at a price above the NAV per share, are said to be at a premium.

Dividend Cover – The percentage by which profits for the year (less gains/losses on investment properties) cover the dividend paid.

A reconciliation of dividend cover is shown below:

Dividend Yield – The annualised dividend divided by the share price at the period end.

Net Gearing – Borrowings less net current assets divided by value of investment properties.

Portfolio (Property) Capital Return – The change in property value during the period after taking account of property purchases and sales and capital expenditure, calculated on a quarterly time-weighted basis.

Portfolio (Property) Income Return – The income derived from a property during the period as a percentage of the property value, taking account of direct property expenditure, calculated on a quarterly time-weighted basis.

Portfolio (Property) Total Return – Combining the Portfolio Capital Return and Portfolio Income Return over the period, calculated on a quarterly time-weighted basis.

Total Return – The return to shareholders calculated on a per share basis by adding dividends paid in the period to the increase or decrease in the Share Price or NAV. The dividends are assumed to have been reinvested in the form of Ordinary Shares or Net Assets, respectively, on the date on which they were quoted ex-dividend.