GWIK.L Regulatory News (GWIK)

29 Sep 2008 07:00



Dawnay, Day Treveria PLC

Interim Results 

Dawnay, Day Treveria PLC ("Treveria" or the "Company") (AIM: DTR) today announces interim results for the six month period ended 30 June 2008.

Highlights

Property assets of €2,221 million, after revaluation, as at 30 June 2008 (31 December 2007: €2,333 million) reflecting a decline in valuation of 6%

€79.2 million of property disposals notarised since 30 June 2008 at a 10% premium to the 31 December 2007 valuation

Gross rental income for the period rose 34% to €79.8 million (2007: €59.3 million)

Adjusted profits after tax* of €17.4 million (2007: €20.3 million)

Adjusted EPS* for the period of 2.85c (2007: 2.86c)

Adjusted NAV* per share of 91.2c, a decrease of 19.2% from 112.9c as at 31 December 2007

Total cash position of €152 million as at 30 June 2008

Strategic review now focused on strengthening the Company's balance sheet and new management arrangements progressing

Proposed name change.

*Adjusted NAV excludes deferred tax and derivative financial instruments; adjusted profits after tax and EPS exclude revaluation surplus, deferred tax, surrender premiums and derivative fair value movements

Ian Henderson, Chairman of Dawnay, Day Treveria PLC, said: "We retain a substantial and diversified portfolio of retail assets in Europe's leading economy. With a cautious approach to the use of our cash, stabilisation of the capital base, a co-operative relationship with our lenders and a targeted sales programme, we are positioning the Company in a way which should enable it to weather the current economic storms and to benefit as market conditions improve."

Enquiries:

Dawnay, Day Treveria PLC Ian Henderson

Treveria Asset Management Ltd David Hunter

Damian Wisniewski 

Chris Kingham

Chairman's statement

The Company's interim results for the six month period ended 30 June 2008 reflect what has been the most challenging period in the property industry for many years and for the Company specifically since its inception in late 2005. 

Firstly, the global credit crisis, which began in August last year, has continued to worsen. The resulting lack of liquidity in the banking markets curtailed property transactions not only in Germany, but on a global basis. Coupled with rising inflation fuelled by higher energy, food and commodity prices, this has suppressed consumer demand especially for 'big ticket' purchases. Further, concerns over the level of Treveria's gearing and property valuation expectations combined to reduce the Company's share price to a level representing a very substantial discount to its published net asset value per share. Those events prompted the Board to announce a strategic review on 9 June 2008 to seek ways to maximise returns to shareholders.  JPMorgan Cazenove was appointed to carry out the review with a remit to consider all options available ranging from returning funds to shareholders following asset disposals to a sale of the whole Company.

Strategic Review

Since the announcement of the review, the global credit environment and market sentiment have deteriorated and, in addition, parts of our external managers' wider group have been placed into administration. Despite this, Treveria has received significant interest from a number of parties for various proposals. 

Following extensive consultation, the Board has concluded that, in current market conditions, a sale of the entire Company is unlikely to produce the best outcome for shareholders and has therefore focused the review on other options. In particular, the Board has identified the need for Treveria to strengthen its capital structure and, latterly, to stabilise its asset management operations.

A thorough review of debt facilities has been conducted as part of the strategic review, not least in light of increased susceptibility to valuation swings due to the relatively high levels of gearing.

Treveria and its subsidiaries (together, the "Group") have a diversified portfolio of retail properties which offers significant interest cover on all its facilities. However, the Board acknowledges that, in current market conditions, further falls in the value of Treveria's portfolio may be possible; the Group is therefore exploring ways that it can strengthen its balance sheet.

The Board has decided to pursue a strategy of targeted disposals combined with a possible injection of new equity into the business.  We are currently working with one preferred party to underwrite this possible injection of equity and discussions are continuing on the details of this proposal, which will include negotiating amendments to certain loan terms. There are a number of issues to be addressed and there can be no certainty at this time that acceptable terms can be agreed.

Until the conclusion of the strategic review process and implementation of its findings, it has been decided that the Company should preserve its cash resources and temporarily suspend dividend payments. Accordingly, no interim dividend will be paid.

Management

Following the financial difficulties at the Dawnay, Day group, the Board and its advisers have been monitoring the financial situation of its external asset manager, Dawnay, Day Treveria Real Estate Asset Management Limited ("DDTREAM"), and property manager, Dawnay, Day Property Investment GmbH ("DDPI"), both of which are currently still trading. Having not been able to secure sufficient reassurance about their current financial stability and ability to manage the portfolio over the foreseeable future, the Board has sought a stable management solution.

The Board has been negotiating with Dawnay, Day entities to secure certain asset and property management capabilities. Despite protracted negotiations, the Board has been unable to date to reach an agreement with Dawnay, Day on this matter. 

Certain Dawnay, Day entities that provide services to DDTREAM have also gone into administration which has had an impact on DDTREAM's ability to perform its duties independently. Unless an agreement can be reached quickly with Dawnay, Day, the Board is prepared to take unilateral action to sever its links with Dawnay, Day, terminate the portfolio management agreement with DDTREAM and put in place alternative arrangements.  In anticipation of this, Treveria has set up a subsidiary, Treveria Asset Management Ltd ("TAM") under the leadership of David Hunter, Chairman of the Investment Committee since the Company's IPO, to provide an alternative solution for the management of the Group's assets.  TAM has already taken on a number of key employees who were made redundant from their previous positions within Dawnay, Day and has established a subsidiary in Germany, Treveria Asset Management GmbH.

In addition, in the absence of reaching an agreement with Dawnay, Day, the Group is likely to terminate DDPI's property management agreements which can be terminated on three months' notice.  The Company is in discussions with various parties about alternative external arrangements for property management. Some of these discussions are at an advanced stage.

Proposed change of name

The Company intends to change its name to clarify its position as an independent entity, and a general meeting will be convened in due course to seek shareholders' approval for the proposed change.

German Economy and Retail Market

The fundamentals of the Germany economy remained resilient into the first half of 2008. German GDP grew 1.2% in the first half of 2008 compared with the previous six months despite a marked decline in the second quarter. The main drags on GDP were private consumption, where actual and perceived price inflation dampened households' real disposable income, and capital investment. GDP is forecast to grow by 1.7% in 2008 and 0.8% in 2009 which is significantly ahead of the Eurozone averages of 1.2% and 0.1%, respectively. Unemployment fell to 7.6% in August 2008, the lowest level since 1992.

However, the insolvency of two well known High Street names, Hertie and Sinn Leffers, was announced in July/August 2008 and this is discussed further below.

Given the state of the global economy, it is perhaps not surprising that transaction volumes in the retail property market in Germany were lower in the first half of 2008 with the total reaching €4.5 billion, compared to €5.3 billion in the first half of 2007.  Of the transactions in 2008, €2.2 billion came from a single transaction which was the sale of a 50% stake in the Karstadt portfolio.

Results for the Six Month Period ended 30 June 2008

Gross rental income for the half year period was €79.8 million (2007: €59.3 million). The difference from the 2007 figure primarily reflects the fact that the portfolio was still being assembled in the first half of 2007. The larger proportion of ground rents payable in 2008, arising from properties acquired in 2007 and an increase in repairs and maintenance expenditure on the portfolio, gave rise to an increase in direct costs, which have been deducted from gross rental income. Ground rents payable in the first half of 2008 totalled €3.2 million against €0.8 million for the first six months of 2007. Operating loss for the period, which includes unrealised revaluation deficits in the value of investment properties, was €80.7 million (2007: profit of €76.8 million) and the adjusted operating profit, which excludes any revaluation movement and surrender premiums, was €61.9 million (2007: profit of €48.3 million). There have been no surrender premiums in the first half of 2008 (2007: €4.2 million). 

Loss before tax for the period was €111.3 million (2007: profit of €49.5 million) and the adjusted profit after tax, which excludes revaluation movement, surrender premiums and fair value adjustments on interest rate hedging taken through the income statement, was €17.4 million (2007: €20.3 million). Administrative and other expenses increased from €2.1 million to €3.1 million due mainly to the number of entities being managed in the Group and the increasing demands of compliance procedures.

Basic and adjusted EPS were a loss of 17.43c and a profit of 2.85c, respectively (2007: profit of 7.23c and 2.86c). Adjusted EPS exclude revaluation movement, surrender premiums, fair value adjustments on interest rate hedging and deferred tax.

Revaluation and Net Asset Value

The portfolio has been valued by DTZ Debenham Tie Leung Limited as at 30 June 2008 at €2,221 million, giving a net deficit of €143 million, as compared to the 31 December 2007 valuation (as adjusted for sales and purchases during the period). This represents an overall downward valuation movement of about 6% in the period. The adjusted net asset value per share of the Group has reduced to 91.2c from 112.9c as at 31 December 2007, a fall of 19.2%.

The average net yield of the portfolio as at 30 June 2008 was 6.66% (31 December 2007: 6.22%) which would rise to 7.04% (31 December 2007: 6.60%) if fully let.  The gross initial yield of the portfolio was 7.29% (31 December 2007: 6.86%).

Property Acquisitions and Disposals

During the period, the Group initiated a programme of property disposals.  Although no sales were completed in the first half, subsequent to 30 June 2008 the Group has notarised €79.2 million of property sales. The sale price represents a premium of €7.6 million to the December 2007 valuation and €11.2 million to the June 2008 valuation.

Further property disposals are being progressed in an orderly fashion and we continue to see selective interest for many types of property though the market for such transactions remains subdued by comparison with recent years.

There have been no significant new acquisitions contracted during the first half of 2008 though €26.1 million of properties, for which contracts were previously agreed, completed during the first half. The average net initial yield on the properties purchased was 6.56%.

In June 2007, the Group contracted to acquire a shopping centre in Cottbus for €75.5 million plus acquisition costs. This amount was shown as a capital commitment in the 2007 annual report. In order to conserve cash and in recognition of the changing economic environment, we have recently signed a new agreement that allows Treveria to terminate this contract for a single payment of €750,000 plus costs. The total cost is expected to be less than €1.1 million.

Finance and Banking

As at 30 June 2008, the Group's total borrowings amounted to €1,820 million, all of which are secured on its properties, compared to €1,789 million as at 31 December 2007.  The increase is due to additional net drawings as property acquisitions completed. The bank loans, provided by Citi, Deutsche Bank, ABN Amro, Eurohypo and JPMorgan, mature between January 2011 and November 2012. The current average blended interest rate in the first half of 2008 remained 4.9% inclusive of margin, approximately the same as at 31 December 2007. Finance costs for the period amounted to €46.7 million which include €2.1 million of amortised bank fees and other financing charges.  In the first half of 2007 where the portfolio was significantly smaller, the finance costs were €31.6 million of which €1.1 million related to amortisation.

The value of the Group's fixed rates and hedging contracts was estimated at €60.0 million as at 30 June 2008 against €27.1 million at 31 December 2007. Neither amount is included in the calculation of adjusted net asset value per share.

Finance income, relating mainly to cash balances held in the Isle of Man and Germany, amounted to €2.6 million, a decrease from €4.2 million in 2007. Cash balances as at 30 June 2008 were €152 million of which €30 million was held in blocked accounts for the payment of bank interest. The corresponding figures as at 31 December 2007 were €177 million and €25 million respectively. The gross LTV (gross debt against property assets) was 82.0% and the net LTV (net debt against property assets) was 75.1%. The corresponding figures as at 31 December 2007 were 76.7% and 69.1%, respectively.

The financial covenants within the Group's five bank facilities fall into two main categories: loan to value ("LTV") covenants and interest cover ("ICR") covenants on a projected 12 month basis. Breach of these causes an event of default under the facility. Each facility typically also has a lower threshold which, if exceeded, either traps the free cash flow within that facility 'silo' ("cash trap") or requires debt repayment or deposits to remedy the position.

All facilities are non-recourse with no cross-collateralisation between them.

Interest cover remains substantial; the overall ratio of net rental income over interest costs, ignoring amortisation of finance charges, was 145% in the first half of 2008 against 156% for the whole of 2007 and 149% for the second half of 2007. The Group's ICR cash trap thresholds are between 125% and 145% and 'hard breach' covenants are between 115% and 125%. 

In a relatively highly geared portfolio, downward pressure on valuations will inevitably put pressure on LTV covenants. The cash trap LTV ratios are set at between 78% and 85% and the hard breach covenants are set at between 78% and 95%. The recent decline in valuation has meant that the Eurohypo facility is now in cash trap. We have agreed a 15 month hard breach LTV covenant waiver with Eurohypo in consideration for a loan repayment of €20 million and an adjustment in the margin payable to 125 basis points. Of the loan repayment, €2.25 million will be taken from the rent account and €7.5 million was already due to be repaid by 31 December 2008. In addition, it is likely that the first Deutsche Bank/Citi facility will also be in cash trap once the latest valuation is adopted.

The Group currently has about €125 million of cash, €75 million of which is held at the PLC level. The Board has flexibility to use this cash to give extra headroom on these facilities should it consider it appropriate to do so.

Share buybacks

The Company commenced its share buyback programme in July 2007 and, in the first half of 2008, purchased 25.4 million of its own shares for cancellation during the period at a weighted average price of €0.76. The last purchase occurred on 18 April 2008. The cumulative total purchased to 30 June 2008 was 108.8 million shares at a weighted average price of €0.94. The Board has no intention of resuming share buybacks in the near future.

Asset Management

The Asset Management team is focused on the active management of the portfolio and has identified and capitalised on a number of interesting asset management opportunities during the period.  

During the first half of 2008, 203 lease extensions and new leases generating annual income of €3.4 million were completed. Rental uplift was 0.5% due to indexation on leases during the period.  As at 30 June 2008 vacant space across the portfolio represented 5.5% of rent (December 2007: 5.5%) and 8.8% by area (December 2007: 7.1%), and 58 lettings of vacant space were agreed during the period generating annual income of €0.23 million.

On 31 July, the Company announced that Hertie GmbH, a tenant at five property locations, had entered into insolvency proceedings. The Group's rental income exposure to Hertie was €3.6 million per annum representing 2.2% of annualised rent roll. Subsequently, it was announced that Sinn Leffers, a tenant at three locations, had also appointed administrators. The exposure to Sinn Leffers represented €3.2 million per annum or 1.9% of the Company's annualised rent roll. Other than at one of the Hertie stores, rent continues to be received in relation to these properties and we are working with the administrators to clarify their future plans. The asset manager is also investigating other options for these stores.

As noted below, the balance of the portfolio is well diversified in a broad spectrum of retail locations.

Portfolio Analysis

The following analysis takes into account all properties owned as at 30 June 2008.  By value, 81.4% of the properties are located in the former West Germany, 7.5% in Berlin and 11.1% in the former East Germany. The weighted average lease length of the portfolio is 5.3 years (December 2007: 5.4 years). The portfolio retains a diverse exposure to tenants with the top ten tenants constituting 35.8% (December 2007: 33.5%) of the total rent roll. Our largest tenant is C&A, which makes up 7.8% of the total rent roll, followed by Metro Group. The following table shows the breakdown of our assets by type:

Board and People

I would like to take this opportunity to thank my fellow board members for their contributions during this difficult period. I would also like to express my thanks to all the staff and advisers involved in managing the Group and its portfolio for their stalwart support throughout this very difficult transition.

Peter Klimt resigned as a non-executive director in July 2008.

Outlook and Strategy

We retain a substantial and diversified portfolio of retail assets in Europe's leading economy. With a cautious approach to the use of our cash, stabilisation of the capital base, a co-operative relationship with our lenders and a targeted sales programme, we are positioning the Company in a way which we hope will enable it to weather the current economic storms and to benefit as market conditions improve.

Ian Henderson

Chairman

29 September 2008