7 Aug 2008 07:00
Highcroft Investments PLC
Interim results for the six months ended 30 June 2008
Highlights
Profit after taxation excluding capital activities is up by 41.4% to £976,000 (June 2007 £690,000) following our conversion to a REIT
Loss after taxation including capital activities is £3,184,000 (June 2007 £1,375,000 profit). Market falls partially offset, in the case of property, by the released deferred tax liability.
Interim property income distribution will be 7.00p per share compared with a 5.00p ordinary interim dividend in 2007 but with different tax consequences for shareholders.
Net assets per share down to 736p (June 2007 847p and December 2007 807p)
Enquiries:
David Bowman 01865 840 023
Highcroft Investments plc
Philip Davies
Charles Stanley Securities 020 7149 6000
Dear Shareholder
I suspect that shareholders will not be surprised to see that the interim statement makes for more difficult reading than those of recent years. The problems of the commercial property sector have been well trailed in the media, with good growth in rental and capital values over the last decade being brought to a very swift end, and reversed, by the problems of the global credit crunch. Our caution first expressed in the 2006 Annual Report, stressed more in subsequent communications, is justified by the current economic problems. Many commentators suggest that these are the most difficult trading conditions since the early 1970s. That having been said, while we expect circumstances to deteriorate further in the short term and we continue to be cautious about the timing and strength of any recovery, I would like to reassure shareholders as to our medium term prospects and strategy.
Before moving to the medium term outlook, however, I must say something about how the economic problems have affected us. You will see from the accompanying figures that we have suffered a further decline in both the value of our property portfolio and of our equity investments. There are brighter spots in both areas but overall we report that net asset value per share has fallen to 736p from 807p at December 2007 and a high of 847p a year ago. While it is disappointing to record falls in asset values, we feel that the disposition of our portfolio, the lack of any meaningful level of gearing and the beneficial tax impact of conversion to a REIT has protected shareholders from greater declines.
In terms of the reported income statement, I would, once again, emphasise that the headline figure - a loss after taxation of £3.2m - is calculated under International Financial Reporting Standards which require changes in asset values to be shown in the income statement. If we look at the revenue figures - the nearest approximation to the old profit and loss account - the picture is a little steadier. On the minus front our operating expenses are higher - as a result of voids at two of our properties and the costs of the second EGM necessary to achieve REITs status- but on the plus side we have had higher dividend income, lower finance costs and the start of REITs tax benefits. Earnings per share on an adjusted basis are therefore 19.0p per share against 13.3p in the comparable period last year.
The outlook for the rest of the financial year and 2009 continues to look difficult and we remain cautious therefore. Our property portfolio continues, we believe, to look the right shape for the medium term. We are working hard to get new tenants in the Yeovil and Warrington properties which are currently empty but while success there would aid the valuations, we would expect the overall economic worries to continue to impact on property values.
I would like to finish by mentioning two items which should cheer shareholders. The REITs regime, effective from 1 April 2008, requires higher distributions of property earnings as a quid pro quo of tax exemption. The interim dividend is the first to benefit from the new regime so I am pleased to say that the interim dividend which is to be paid on 29 October will be 7p per share. Shareholders should note that the taxation treatment of this dividend is different as it is a property income distribution (PID) and also that we would not necessarily expect the final dividend to show the same increase. The second point is that we are very well placed to take advantage of an eventual recovery in the property market or of any distressed selling in the meantime. With a sound current portfolio, liquid assets in equities, significant ability to borrow, and REITs status the next two years might give the opportunity to lay the foundations for the next 10-15 years growth.
Yours sincerely
J Hewitt
7 August 2008
Condensed consolidated income statement (Unaudited)
for the six months ended 30 June 2008
| Six months 2008 | Six months 2007 | Twelve months 2007 | ||
| Note | £'000 | £'000 | £'000 | |
| Gross rental income | 1,034 | 1,055 | 2,126 | |
| Property operating expenses | (102) | (46) | (99) | |
| Net rental income | 932 | 1,009 | 2,027 | |
| Realised gains on investment property | - | 109 | 107 | |
| Realised losses on investment property | (5) | (6) | (6) | |
| Loss/(profit) on disposal of investment property | (5) | 103 | 101 | |
| Valuation gains on investment property | 346 | 428 | 388 | |
| Valuation losses on investment property | (3,594) | (81) | (3,819) | |
| Net valuation (losses)/gains on investment property | (3,248) | 347 | (3,431) | |
| Dividend income | 197 | 168 | 406 | |
| Gains on investments | 161 | 869 | 1,592 | |
| Losses on investments | (1,814) | (575) | (1,290) | |
| Net investment income | (1,456) | 462 | 708 | |
| Administrative expenses | (212) | (136) | (391) | |
| Operating (loss)/profit before net financing costs | (3,989) | 1,785 | (986) | |
| Finance income | 17 | 9 | 28 | |
| Finance expenses | (52) | (144) | (237) | |
| Net financing costs | (35) | (135) | (209) | |
| (Loss)/profit before tax | (4,024) | 1,650 | (1,195) | |
| Income tax credit/(expense) | 4 | 840 | (275) | 756 |
| (Loss)/profit for the financial period | (3,184) | 1,375 | (439) | |
| Earnings/(loss) per share | 6 | (61.6)p | 26.6p | (8.5)p |
Condensed consolidated balance sheet (Unaudited)
as at 30 June 2008
| 30 June | 30 June | 31 December | ||
| 2008 | 2007 | 2007 | ||
| Note | £'000 | £'000 | £'000 | |
| Assets | ||||
| Investment property | 7 | 32,021 | 39,324 | 35,545 |
| Equity investments | 8 | 8,857 | 11,840 | 10,830 |
| Total non-current assets | 40,878 | 51,164 | 46,375 | |
| Current assets | ||||
| Trade and other receivables | 134 | 407 | 326 | |
| Cash at bank and in hand | 917 | 433 | 813 | |
| Total current assets | 1,051 | 840 | 1,139 | |
| Total assets | 41,929 | 52,004 | 47,514 | |
| Liabilities | ||||
| Current liabilities | ||||
| Interest-bearing loans and borrowings | 18 | 178 | 18 | |
| Current corporation tax | 664 | 405 | 426 | |
| Trade and other payables | 733 | 879 | 743 | |
| Total current liabilities | 1,415 | 1,462 | 1,187 | |
| Non-current liabilities | ||||
| Interest-bearing loans and borrowings | 10 | 1,304 | 2,760 | 1,909 |
| Deferred tax liabilities | 1,159 | 3,997 | 2,705 | |
| Total non-current liabilities | 2,463 | 6,757 | 4,614 | |
| Total liabilities | 3,878 | 8,219 | 5,801 | |
| Net assets | 38,051 | 43,785 | 41,713 | |
| Equity | ||||
| Issued share capital | 9 | 1,292 | 1,292 | 1,292 |
| Revaluation reserve - property | 9 | 4,529 | 9,723 | 7,094 |
| Revaluation reserve - other | 9 | 3,096 | 4,635 | 4,203 |
| Capital redemption reserve | 9 | 95 | 95 | 95 |
| Realised capital reserve | 9 | 17,707 | 17,152 | 17,527 |
| Retained earnings | 9 | 11,332 | 10,888 | 11,502 |
| Total equity | 38,051 | 43,785 | 41,713 | |
Condensed consolidated statement of cash flows (Unaudited)
for the six months ended 30 June 2008
| First Half | First Half | Full Year | |
| 2008 | 2007 | 2007 | |
| £'000 | £'000 | £'000 | |
| Operating activities | |||
| Profit for the period | (3,184) | 1,375 | (439) |
| Adjustments for: | |||
| Net valuation losses/(gains) on investment property | 3,248 | (347) | 3,431 |
| Loss/(profit) on disposal of investment property | 5 | (103) | (101) |
| Net losses/(gains) on investments | 1,653 | (294) | (302) |
| Finance income | (17) | (9) | (28) |
| Finance expense | 52 | 144 | 237 |
| Income tax (credit)/expense | (840) | 275 | (756) |
| Operating cash flow before changes in working | 917 | 1,041 | 2,042 |
| capital and provisions | |||
| Decrease in trade and other receivables | 192 | 82 | 163 |
| (Decrease)/increase in trade and other payables | (10) | 40 | (94) |
| Cash generated from operations | 1,099 | 1,163 | 2,111 |
| Finance income | 17 | 9 | 28 |
| Finance expense | (52) | (144) | (237) |
| Income tax paid | (467) | (282) | (521) |
| Cash flows from operating activities | 597 | 746 | 1,381 |
| Investing activities | |||
| Purchase of fixed assets - investment property | - | (6) | (6) |
| - equity investments | (63) | (703) | (1,164) |
| Sale of fixed assets - investment property | 271 | 2,621 | 2,619 |
| - equity investments | 382 | 952 | 2,429 |
| Cash flows from investing activities | 590 | 2,864 | 3,878 |
| Financing activities | |||
| New medium term loans | - | - | - |
| Loan repayments | (605) | (2,993) | (4,004) |
| Dividends paid | (478) | (465) | (723) |
| Cash flows from investing activities | (1,083) | (3,458) | (4,727) |
| Net increase in cash and cash equivalents | 104 | 152 | 532 |
| Cash and cash equivalents at 1 January 2008 | 813 | 281 | 281 |
| Cash and cash equivalents at 30 June 2008 | 917 | 433 | 813 |
Notes
1. Interim report
The results for the six months ended 30 June 2008 are unaudited. This interim report will not appear as an advertisement in any newspaper but copies are being sent to all shareholders and are available at the company's registered office. The interim report does not constitute full accounts as defined by the Companies Act 2006 but should be read in conjunction with the most recent financial statements. Full accounts for 2007 have been delivered to the Registrar of Companies, bearing an unqualified audit opinion.
2. Significant accounting policies
Highcroft Investments PLC is a company domiciled in the United Kingdom. The interim financial statements of the company for the six months ended 30 June 2008 comprise the company and its subsidiary, together referred to as the group.
a. Statement of compliance
These interim financial statements have been prepared in accordance with IAS 34 on Interim Financial Reporting.
b. Basis of preparation
The condensed consolidated interim financial information for the six months ended 30 June 2008 is presented in pounds sterling, rounded to the nearest thousand. They are prepared on the historical cost basis except that investment property and equity investments are stated at their fair value. The accounting policies have been consistently applied to the results, other gains and losses, assets, liabilities and cash flows of entities included in the consolidated interim financial statements and are consistent with those used in the previous year.
3. Segmental reporting
Segmental information is presented in the interim financial statements in respect of the group's business segments. The business segment reporting format reflects the group's management and internal reporting structure. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
The group is comprised of the following main business segments:
Commercial property comprising retail outlets, offices and warehouses.
Residential property comprising mainly single-let houses.
Financial assets comprising exchange-traded equity investments.
| First Half | First Half | Full Year | |
| 2008 | 2007 | 2007 | |
| £'000 | £'000 | £'000 | |
| Commercial property | |||
| Gross income | 995 | 1,026 | 2,062 |
| (Loss)/profit for the period | (2,818) | 610 | (1,521) |
| Assets | 30,697 | 37,576 | 34,088 |
| Liabilities | 2,619 | 5,697 | 3,429 |
| Residential property | |||
| Gross income | 39 | 29 | 64 |
| Profit for the period | 668 | 348 | 257 |
| Assets | 2,356 | 2,475 | 2,553 |
| Liabilities | 59 | 592 | 656 |
| Financial assets | |||
| Gross income | 197 | 168 | 406 |
| (Loss)/profit for the period | (1,034) | 417 | 825 |
| Assets | 8,876 | 11,953 | 10,873 |
| Liabilities | 1,200 | 1,930 | 1,716 |
| Total | |||
| Gross income | 1,231 | 1,223 | 2,532 |
| (Loss)/profit for the period | (3,184) | 1,375 | (439) |
| Assets | 41,929 | 52,004 | 47,514 |
| Liabilities | 3,878 | 8,219 | 5,801 |
4. Taxation
| First Half | First Half | Full Year | |
| 2008 | 2007 | 2007 | |
| £'000 | £'000 | £'000 | |
| Current tax: | |||
| On revenue profits | 75 | 216 | 341 |
| On capital profits | (26) | 12 | 37 |
| Prior year overprovision | - | - | (31) |
| Deferred tax: | |||
| On revenue profits | (169) | - | (39) |
| On capital profits | (1,388) | 47 | (1,064) |
| REITs conversion charge | 668 | - | - |
| (840) | 275 | (756) |
The taxation charge has been based on the estimated effective tax rate for the full year. However, on 1 April 2008, the group became a Real Estate Investment Trust and from that date the group does not pay corporation tax on its profits and gains from its commercial and residential property activities. For entry to that regime, the group will pay a conversion charge, estimated at £668,000, and a property income dividend to shareholders equal to at least 90% of the taxable profits from its commercial and residential property activities.
5. Dividends
On 6 August 2008, the directors declared a property income dividend of 7.00p per share (2007 5.00p interim dividend) payable on 29 October 2008 to shareholders registered at 3 October 2008.
The following dividends have been paid by the company.
| First Half | First Half | Full Year | |
| 2008 | 2007 | 2007 | |
| £'000 | £'000 | £'000 | |
| 9.00p per ordinary share (2007 8.30p) | 478 | 465 | 465 |
| 2007 interim 5.00p per ordinary share | - | - | 258 |
| 478 | 465 | 723 |
6. Earnings per share
The calculation of earnings per share is based on the loss for the period of £3,184,000 (2007 £1,375,000 profit) and on 5,167,240 shares (2007 5,167,240) which is the weighted average number of shares in issue during the period ended 30 June 2008 and throughout the period since 1 January 2007.
In order to draw attention to the impact of valuation gains and losses which are included in the income statement but not available for distribution under the company's articles of association, an adjusted earnings per share based on the profit available for distribution of £976,000 (2007 £690,000) has been calculated.
| First Half | First Half | Full Year | |
| 2008 | 2007 | 2007 | |
| £'000 | £'000 | £'000 | |
| Earnings: | |||
| Basic earnings | (3,184) | 1,375 | (439) |
| Adjustments for: | |||
| Net valuation gains on investment property | 3,253 | (450) | 3,330 |
| Gains and losses on investments | 1,653 | (294) | (302) |
| Income tax on gains and losses | (746) | 59 | (1,027) |
| Adjusted earnings | 976 | 690 | 1,562 |
| Per share amount: | |||
| Basic earnings per share | (61.6)p | 26.6p | (8.5)p |
| Adjustments for: | |||
| Net valuation gains on investment property | 63.0p | (8.7)p | 64.4p |
| Gains and losses on investments | 32.0p | (5.7)p | (5.8)p |
| Income tax on gains and losses | (14.4)p | 1.1p | (19.9)p |
| Adjusted earnings per share | 19.0p | 13.3p | 30.2p |
7. Investment property
| First Half | First Half | Full Year | |
| 2008 | 2007 | 2007 | |
| Valuation at 1 January 2008 | 35,545 | 41,487 | 41,487 |
| Additions | - | 6 | 6 |
| Disposals | (276) | (2,516) | (2,517) |
| Deficit/surplus on revaluation | (3,248) | 347 | (3,431) |
| Valuation at 30 June 2008 | 32,021 | 39,324 | 35,545 |
The directors have used an external independent valuation of properties at 30 June 2008.
8. Equity investments
| Listed and unlisted | First Half | First Half | Full Year |
| 2008 | 2007 | 200 | |
| £'000 | £'000 | £'000 | |
| Valuation at 1 January 2008 | 10,830 | 11,794 | 11,794 |
| Additions | 63 | 703 | 1,164 |
| Disposals | (470) | (962) | (2,403) |
| Deficit/surplus on revaluation | (1,566) | 305 | 275 |
| Valuation at 30 June 2008 | 8,857 | 11,840 | 10,830 |
9. Total equity
| a) First half 2008 | |||||||
| Equity | Revaluation reserves | Capital | Realised | Retained | |||
| Property | Other | Redemption | Capital | Earnings | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| At 1 January 2008 | 7,094 | 4,2034 | 95 | 17,527 | 11,502 | 41,713 | |
| Total recognised gain and expense | - | - | - | - | (3,184) | (3,184) | |
| Dividends to shareholders | - | - | - | - | (478) | (478) | |
| Non-distributable items recognised in income statement: | |||||||
| Revaluation gains | (3,248) | (1,566) | - | - | 4,814 | - | |
| Tax on valuation gains and losses | 955 | 433 | - | - | (1,388) | - | |
| Realised gains | - | - | - | (66) | 66 | - | |
| Surplus attributable to assets sold | (272) | 37 | - | 235 | - | - | |
| Tax on gains attributable to assets sold | - | (11) | - | 11 | - | - | |
| At 30 June 2008 | 4,529 | 3,096 | 95 | 17,707 | 11,332 | 38,051 | |
| b) First half 2007 | |||||||
| Equity | Revaluation reserves | Capital | Realised | Retained | |||
| Property | Other | Redemption | Capital | Earnings | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| At 1 January 2008 | 1,292 | 10,169 | 4,601 | 95 | 16,055 | 10,663 | 42,875 |
| Total recognised gain and expense | - | - | - | - | - | 1,375 | 1,375 |
| Dividends to shareholders | - | - | - | - | - | (465) | (465) |
| Non-distributable items recognised in income statement: | |||||||
| Revaluation gains | - | 347 | 305 | - | - | (652) | - |
| Tax on valuation gains and losses | - | (22) | (25) | - | - | 47 | - |
| Realised gains | - | - | - | - | 80 | (80) | - |
| Surplus attributable to assets sold | - | (972) | (306) | - | 1,278 | - | - |
| Tax on gains attributable to assets sold | - | 201 | 60 | - | (261) | - | - |
| At 30 June 2008 | 1,292 | 9,723 | 4,635 | 95 | 17,152 | 10,888 | 43,785 |
| c) Full Year 2007 | |||||||
| Equity | Revaluation reserves | Capital | Realised | Retained | |||
| Property | Other | Redemption | Capital | Earnings | Total | ||
| £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | £'000 | |
| At 1 January 2007 | 1,292 | 10,169 | 4,601 | 95 | 16,055 | 10,663 | 42,875 |
| Total recognised gain and expense | - | - | - | - | - | (439) | (439) |
| Dividends to shareholders | - | - | - | - | - | (723) | (723) |
| Non-distributable items recognised in income statement: | |||||||
| Revaluation gains | - | (3,431) | 275 | - | - | 3,156 | - |
| Tax on valuation gains and losses | - | 861 | 203 | - | - | (1,064) | - |
| Realised gains | - | - | - | - | 91 | (91) | - |
| Surplus attributable to assets sold | - | (822) | (962) | - | 1,784 | - | - |
| Tax on gains attributable to assets sold | - | 317 | 86 | - | (403) | - | - |
| At 31 December 2007 | 1,292 | 7,094 | 4,203 | 17,527 | 11,502 | 41,713 | |
10. Interest-bearing loans and borrowings
| First Half | First Half | Full Year | |
| 2008 | 2007 | 2007 | |
| £'000 | £'000 | £'000 | |
| Medium term bank loan | 1,304 | 2,760 | 1,909 |
| The medium term bank loan comprises amounts falling due as follows: | |||
| Between one and two years | 71 | 202 | 37 |
| Between two and five years | 238 | 708 | 220 |
| Over five years | 995 | 1,850 | 1,652 |
| 1,304 | 2,760 | 1,909 | |
11. Related party transactions
Kingerlee Holdings Limited owns 25.3% (2007 25.3%) of the company's shares and D H Kingerlee and J C Kingerlee are directors and shareholders of both the company and Kingerlee Holdings Limited. During the period, the group made purchases from Kingerlee Holdings Limited or its subsidiaries, being repairs to properties of £1,000 (2007 Nil) and a service charge in relation to services at Thomas House, Kidlington of £7,000 (2007 £7,000). The amount owed at 30 June 2008 was nil (2007 Nil). All transactions were undertaken on an arm's length basis.