Mucklow (A & J) Regulatory News (MKLW)

Mucklow (A & J) Group plc

7 September 2011

Embargoed: 7.00am

Rupert Mucklow, Chairman commented: "I am pleased to report another solid performance by the Group for the 12 months ending 30 June 2011, with two notable highlights; a 7.8% improvement in underlying pre-tax profit and a further reduction in vacant space from 8.5% to 7.3%."

Financial Summary

for the year ended 30 June 2011

Recommended final dividend of 10.24p per share, making the total in respect of the year ended 30 June 2011 18.51p per share (2010: 17.97p). The final dividend will be paid as a Property Income Distribution (PID).

(1) See the property and financial review for the calculations.

(2) Excludes the profit on disposal of investment and trading properties and the revaluation of investment and development properties and financial instruments. See note 7.

(3) Excludes the fair value of financial instruments and includes the surplus on trading properties. See note 7

(4) See note 8.

Chairman's Statement

Rupert J Mucklow

I am pleased to report another solid performance by the Group for the 12 months ending 30 June 2011, with two notable highlights; a 7.8% improvement in underlying pre-tax profit* and a further reduction in vacant space from 8.5% to 7.3%.

The Company took advantage of a fairly lacklustre property market to acquire some attractive long term investment properties. We also completed our pre-let development at Coventry during the year and negotiated a number of early lease renewals. As a consequence, our gross annual rent roll increased by £3.5m (21%).

Property values remained virtually unchanged at our year end, following the 11% rise in values in the previous year. The balance sheet remains in good health with total assets of £267.4m and net borrowings of £67.7m.

Your Board are proposing to increase the final dividend by 3%, to 10.24p per Ordinary share.

Results

The underlying pre-tax profit, which excludes revaluation movements, the benefit of capitalised interest and profit on the disposal of investment and trading properties, was £12.2m (2010: £11.3m). Gross rental income received at 30 June 2011 had risen to £18.3m (2010: £17.0m).

Pre-tax profit for the year ended 30 June 2011 was £12.9m, compared with a pre-tax profit of £36.0m for the corresponding period last year. The previous year's profit figure included a surplus of £23.5m on the revaluation of the investment portfolio and a contribution of £1.6m from trading profit. There were no disposals of trading properties during the year, while the revaluation of investment properties and development land at 30 June 2011 showed a small deficit of £0.4m, after accounting for £1.4m in lease incentives.

EPRA net asset value per share† increased marginally during the year from 314p to 318p per share. Shareholders' funds rose to £188.6m (2010: £185.9m), while borrowings net of cash amounted to £67.7m, representing 36% of shareholders' funds (2010: £49.7m and 27%).

The Board is recommending the payment of a final dividend of 10.24p per Ordinary share, an increase of 3% over last year (2010: 9.94p), making a total for the year of 18.51p (2010: 17.97p). If approved by Shareholders, the final dividend will be paid on 3 January 2012, to shareholders on the register at the close of business on 2 December 2011. The final dividend will be paid as a PID.

Property Review

Conditions were helpful during the year in allowing us to capitalise on a weak investment market and to utilise our low cost of borrowing, to increase rental income and expand our property portfolio. We acquired five quality investment properties for a total cost of £24.2m, producing an average income return of 9% per annum. We also managed successfully to reduce our void rate from 8.5% to 7.3%, in a relatively quiet occupier market.

Enquiry levels for existing industrial space across the Midlands picked up a little in the second half of the year, but the volume of lettings in the region was generally low, while the supply and choice of available properties remained high. There were some potential pre-let opportunities floating around the market earlier in the year, but many of these appear to be on hold until economic conditions improve.

The Midlands investment market was subdued for most of the financial year, with only a few opportunities coming to the market and very little transactional evidence to support any increase in property values. The lack of investment activity caused yields for secondary properties with short leases to continue to drift, while better quality buildings, with secure tenants remained flat.

Good quality, prime industrial properties in the Midlands can still achieve premium rental values of over £5.50 psf, but older buildings in secondary locations continue to be heavily discounted, particularly in areas of oversupply. The average rent across our industrial portfolio is currently £5.10 psf, which is likely to remain stable, until occupier demand picks up.

Our occupancy rate at 30 June 2011 was 92.7% (2010: 91.5%). For the last four years, our primary objective has been to maintain occupancy levels above 90%, in order to keep overheads down, which I am pleased to say we have so far achieved, in a very competitive and challenging environment.

Most of our attention has been focused towards trying to retain as many existing tenants as possible, by being proactive and flexible in dealing with their future property requirements, in advance of lease expiries.

During the year we agreed early lease renewals on three large, single let buildings at Halesowen, Leamington and Henley-on-Thames, which involved providing some rent free periods as part of each deal. We also accounted for some rental incentives on new properties acquired at Birmingham, Milton Keynes and on our Costco development in Coventry. The total value of rental incentives recognised during the year was £1.4m, which has been reflected in the valuation deficit.

By the half year stage we had acquired three investment properties, in Birmingham, Milton Keynes and Worcester, with a further two being acquired in the second half of the year in Northampton and Bristol. The total cost of these properties was £24.2m, generating an income of £2.2m per annum.

DTZ Debenham Tie Leung reviewed the value of our investment properties as at 30 June 2011. The investment portfolio, including development land was valued at £261.3m, which showed a reduction over book value of £0.4m, after allowing for £1.4m of rental incentives. The initial yield on the investment properties was 7.5% (2010: 7.4%) and the equivalent yield was 8.3% (2010: 8.4%).

DTZ Debenham Tie Leung also reviewed the value of our trading properties as at 30 June 2011. The total value was £3.3m, which showed an unrecognised surplus of £2.8m over book value, equivalent to 5p per share. There was no trading activity during the year.

Our net borrowings rose by £18.0m during the year, increasing our debt to equity gearing to 36%. There are no long term banking facilities due for repayment until 2014 and we still had £20.5m of undrawn facilities with HSBC at 30 June 2011. The current cost of borrowing from these facilities is around 2.7%.

Board Matters

David Austin retired from the Board as a non-executive director in June 2011 after 16 years of exemplary service to the Company. We will miss his expert knowledge of the property industry and wish him well in pursuing his other business and private interests.

David leaves us with three very capable independent non-executive directors. Paul Ludlow has taken over the role of senior independent non-executive director. Jock Lennox, who joined the Board in December 2010, now chairs the Audit Committee and Stephen Gilmore has been appointed chairman of the Remuneration Committee.

It is with great sadness that I report the death of Allan J Mucklow, who retired from the Board in August 2005, after completing 49 years service with the Company, the last 28 years as a non-executive director. Allan continued to maintain a keen interest in the business after his retirement and he will be sadly missed.

Outlook

Until there are more positive signs of a sustained recovery in the UK economy, the occupier market is likely to remain cautious and industrial space take-up will continue to be sluggish. We are currently forecasting approximately 4% of our space being returned over the next 12 months, however, we remain confident that we will be able to continue to maintain a high occupancy rate.

Our long term prospects are looking good. When the market does improve, there will be a shortage of quality industrial space in the Midlands, as very little has been developed over the last 10 years and rental values have remained relatively low, compared with other regions. When demand picks up again and tenants have to take new developments, we are likely to see a substantial uplift in rental levels to over £6 psf, which will provide evidence for income growth and could significantly benefit our property values.

Rupert J Mucklow

Chairman

6 September 2011

* See the property and financial review for the calculations.

† EPRA (European Public Real Estate Association) net asset value, including the surplus on trading properties and excluding the fair value of financial instruments. See note 7 for the calculations.

Property and Financial Review

Justin Parker, Managing Director

David Wooldridge, Finance Director

Review

It has been another progressive year for the Group. Whilst continuing to maintain a high occupancy level we have taken advantage of the continued economic uncertainty and weak investment market to expand our property portfolio. As a result of strong asset management and employing our counter-cyclical investment strategy our occupancy rate has improved to 92.7% and we have successfully managed to increase our rent roll by 21% through some astute investment acquisitions.

Strategy

The Group's long term investment strategy remains unchanged. Our objective is to maintain a balanced portfolio of modern, income producing properties with potential for future rental and capital growth. The three main areas of our strategy are:

. Selectively acquiring and disposing of investment properties;

. Developing new properties for long term investment; and

. Actively managing our assets to enhance value.

We adopt a counter-cyclical investment strategy, buying investment properties when the market is weak and selling when there is strong investor demand. We aim to invest in prominent, high quality buildings, which should be easy to re-let when they become vacant and will require little capital expenditure in the future.

Property values in the Midlands for industrial and commercial properties are still more than 30% below 2007 peak levels, mainly reflecting higher yields and lower rents. We believe it is a good time to be buying modern investment properties, providing the right opportunities can be found.

Investment

Having extended our core banking facilities with HSBC in November 2009, we have been waiting for the right moment to start buying again. The investment market outside London was generally quiet during the year and we were able to selectively acquire five quality investment properties, with very little competition from other investors.

All the investment properties acquired are in prominent locations, close to motorway junctions and in established commercial areas. Some properties offer angles to enhance value through lease re-gearing, while others have been bought for rental growth prospects. The total cost of the investment properties acquired during the year was £24.2m, producing an average income return of 9% per annum. Details as follows:

1. Milton Point, Milton Keynes

Acquired in October 2010. A recently completed 41,000 sq ft warehouse, let to a national charity on a 10 year lease at a commencing rent of £240,000 per annum, with annual rental uplifts of 2.5% per annum. The property is located on the A5, close to J14 of the M1 motorway and was acquired for £3.0m, to show a net initial yield of 8.0%.

2. Quinton Business Park, Birmingham

Acquired in November 2010. A prominent 23,000 sq ft office building, built in 2002 and located at the front of a well established business park, close to J3 of the M5 motorway. The property is let to the Secretary of State for Transport on a lease expiring in 2029 at a current passing rent of £372,500 per annum. The purchase price was £5.0m, reflecting a net initial yield of 7.5%.

3. Shire Business Park, Worcester

Acquired in December 2010. A 110,345 sq ft distribution warehouse, located close to J6 of the M5 motorway and let to Nutricia Ltd until December 2012. The current rent is £567,000 per annum. Due to the relatively short nature of the lease the property was acquired for £4.1m, reflecting a net initial yield of 13.8%. The purchase price is equivalent to a capital value of £37 psf, less than half the replacement cost.

4. Grange Park, Northampton

Acquired in February 2011. A modern 86,000 sq ft distribution warehouse, built by Prologis in 2005 and let to Europa European Logistics on a lease expiring in 2020, at a current rent of £485,435 per annum. The building is situated adjacent to J15 of the M1 motorway and was acquired for £6.5m, showing a net initial yield of 7.5%.

5. Aztec West Business Park, Bristol

Acquired in March 2011. Two adjacent quality office buildings prominently located next to J16 of the M5 motorway. Both properties are occupied by serviced office provider Regus, on co-terminus leases expiring in 2017, at current passing rent of £580,560 per annum. The price paid was £5.6m, reflecting a net initial yield of 10.4%.

All purchase prices are inclusive of acquisition costs of 5.8% (including 4% stamp duty).

Disposals

We disposed of two vacant properties to owner occupiers during the year for £4.9m, approximately 40% above the valuation at 30 June 2010. The first was a modern 35,000 sq ft bespoke industrial property in Biggleswade, which was sold for £1.9m. The second property was an old industrial building in Cheltenham, on a prominent 2.6 acre site, which was sold for £3.0m.

Development

We completed our Costco development in August 2010, which is now contributing £1.3m per annum to our rent roll. No other development was carried out during the year.

We continue to actively market our remaining 34 acres of commercial land for pre-let development, but the market has been fragile and although there have been a number of serious enquiries for new space, it has proved difficult to secure any commitments from occupiers.

There is a clear shortage of good quality industrial space across the Midlands and we feel that at some point in the future, many successful businesses, currently in older, inefficient and obsolete buildings, will have to start making longer term decisions on their future property requirements. However, it is likely to be some time before we start considering any speculative development.

Asset Management

One of the most important aspects of the Group's strategy remains the implementation of a pro-active approach to the asset management of our 3.4 million sq ft property portfolio. Maintaining a high occupancy level across the portfolio is of paramount importance to us. Not only does it provide us with additional income, but it significantly reduces overheads, particularly void business rates.

Although letting conditions continue to be challenging, as the number of genuine requirements for existing space remains low and competition from landlords is strong, our occupancy rate as at 30 June 2011 had risen to 92.7%, compared with 91.5% for the corresponding period last year. Approximately 5% of our total floor space was returned to us during the year, as a result of break clauses operated and lease expiries. We experienced very few insolvencies and managed to avoid a number of potential vacancies by re-gearing some short leases.

There has been very little rental growth from the existing property portfolio over the last 12 months. Most lease renewals and new lettings have been concluded at previous passing rental levels. On a few occasions, we have had to heavily discount rents and offer large inducements, in order to secure tenants, but these have been rare and usually in areas of poor demand and oversupply of vacant space.

A number of lease extensions were negotiated during the year on some of our larger buildings, providing the Group with longer term security and avoiding properties becoming vacant in the short term. These include new 10 year leases on a 30,000 sq ft retail warehouse in Halesowen, let to Wickes and a 12,000 sq ft office building in Henley-on-Thames, let to RPS. We also took an early surrender of a 50,000 sq ft industrial unit in Leamington and re-let the building on a new 15 year lease, to a major international automotive components company.

Our investment portfolio, including development land, was valued at £261.3m at 30 June 2011 (2010: £236.9m), which after accounting for acquisitions, disposals, capital expenditure on the Costco development and rental incentives, showed a small deficit of £0.4m.

Property values have generally remained flat throughout the year, as there have been few opportunities coming to the market and investors appear to have taken a rest, after an active period in the previous 12 months. The equivalent yield on our investment portfolio was 8.3% (2010: 8.4%), while the net initial yield was 7.5% (2010: 7.4%).

Trading Property

We have very few trading properties remaining. The majority are small parcels of land leftover from our house building days. We did not sell any trading properties during the financial year. The trading properties were valued by DTZ Debenham Tie Leung at 30 June 2011 at £3.3m, to show an unrecognised surplus of £2.8m over book value.

Financial

This year's figures benefit from our strong financial position going into the property market decline, utilising the increased HSBC facilities agreed in the previous financial year to acquire five investment properties on an average income return of 9%, which have contributed £1.1m to gross annual rental income in this year's results, compared to our current marginal cost of borrowing of 2.7%.

These acquisitions, combined with the Coventry development that completed in August 2010, increased not only our annualised rent roll to £19.9m as at 30 June 2011, up from £16.4m twelve months earlier, but also accounted for most of the increase in our average unexpired lease length from 7.5 to 8.5 years.

The resulting improvement in our net rental income performance, up 7.3%, is despite ongoing pressures on lettings and lease renewals, as well as the £0.95m rental settlement recognised in the prior year.

Property outgoings, which include repairs and void rates, remain low at 3.5% of rental income (2010: 3.0%), reflecting our focus on keeping vacancy levels to a minimum and the quality of the Group's portfolio.

We have continued to keep our costs under control, with administration expenses down by £0.1m on the prior year, even though the 2010 amounts were suppressed by the agreed remuneration reductions taken by senior management that we referred to last year. Staff costs are up by 12% on the previous year, with the reversal of those agreed reductions accounting for the majority of the uplift. No bonuses have been paid or declared in respect of the current or previous financial year.

The Group has had very few tenant insolvencies in the year, with bad debt costs in the income statement amounting to only 0.1% of rental income.

Net gains on the investment portfolio of £1.0m were recognised in the year (2010: £23.5m), with a profit on disposal of two vacant industrial properties of £1.4m and a revaluation deficit of £0.4m, or 0.1% of the year end value.

Finance costs have increased from £2.6m to £2.9m in the year, mainly as a result of property acquisitions and the development of our Torrington Avenue, Coventry site, offset in part by interest on corporation tax refunded.

No corporation tax is payable in respect of the current financial year. We released £0.6m of tax to the income statement following the final resolution of historical tax liabilities, mainly related to years prior to the conversion to a REIT.

A reconciliation of the movement in our post tax profits is shown below.

£000

Profit for the financial year ended 30 June 2010 36,540

Investment and development property revaluation in 2010 (23,517)

Increase in net rental income 1,204

Decrease in profits realised from trading properties (1,594)

Reduction in administration expenses 114

Increase in profit realised from investment and development properties 1,348

Property portfolio revaluation deficit in year (369)

Increase in net finance costs (256)

Reduction in current tax (2)

_____________________________________________________________________________________

Profit for the financial year ended 30 June 2011 13,468

We have also presented on page 9 an analysis of the Group's underlying rental performance before tax, which excludes the impact of EPRA adjustments and capitalised interest. The directors consider that this further analysis of our income statement gives shareholders a useful comparison of our underlying performance for the periods shown in the consolidated financial statements.

Earnings per share

Basic and diluted earnings per share decreased from 60.91p per share to 22.43p, following a £23.9m change in the revaluation movement recognised in the income statement.

EPRA earnings per share, which removes valuation movements and profits on sale of investment and trading properties, increased by 6% to 21.36p.

Dividend

The interim dividend of 8.27p per Ordinary share was paid as a Property Income Distribution ("PID"), attracting a 20% withholding tax for shareholders who are not eligible for gross payment. The final dividend of 10.24p, if approved by shareholders, will also be paid as a PID. The dividend will be paid on 3 January 2012, to shareholders on the register on 2 December 2011.

The Board's continued intention is to grow the rent roll to enable a sustainable, covered, increase in dividends over the long term, with a view to distributing around 90% of our recurring profit.

The interim and proposed final dividends total 18.51p per share, or £11.1m, amounting to 91% of our underlying pre-tax profit.  

Underlying financial performance

Presented above is an analysis of the underlying rental performance before tax, which excludes the impact of EPRA adjustments and capitalised interest. The directors consider that this further analysis of our income statement gives shareholders a useful comparison of our underlying performance for the periods shown in the consolidated financial statements. 

Net assets

Net assets have increased from £185.9m to £188.6m, or 4p per share, with virtually no change in the revaluation of the investment and development properties in the year. Net asset value per share amounted to 314p. EPRA net asset value per share, which excludes the fair value of financial instruments and includes the valuation surplus on trading properties, rose from 314p to 318p.

Retained profit of £2.7m, which includes £1.0m of net gains on investment and the £0.6m tax credit, accounts for virtually all of the movement in net assets.

Our gearing has increased from 27% to 36%, reflecting £67.7m (2010: £49.7m) of net debt and well within our self imposed gearing limit of 50%. This level of debt equates to only 26% of the DTZ valuation of our investment and development portfolio (2010: 21%) of £261.3m, which is still at a very low level of gearing compared to other REITs and quoted property companies. This increase in gearing has arisen as a direct result of our investment property acquisitions and additions of £27.0m.

Financing, cash flow and going concern

The Group continues to generate a strong operating cash flow, with a 28% increase in net cash inflow from operating activities, and maintains a prudent level of gearing.

No banking facilities have been entered into or renewed during the financial year, with the exception of the renewal of the Group's overdraft in November 2010.

As at the date of this preliminary announcement the Group had only £25.0m from the 2014 Revolving Credit Facility and £0.4m from the overdraft, leaving undrawn amounts of £15.0m from the Revolving Credit Facility and £4.6m from the Group's overdraft, which is due for renewal in November 2011.

Of the remaining borrowings held by the Group at 30 June 2011, only £4.2m of debenture stock expires in less than five years. The £20m Lloyds Bank loan expires in 2023 and the £675,000 of preference share capital has no redemption date.

The Group's available facilities as at 30 June 2011 therefore consisted of:

Of the £89.9m, £24.9m is at fixed rates. The Group has entered into interest rate caps in respect of £50.0m (2010: £40.0m) of the HSBC term loan and revolving credit facilities, in order to limit the impact to the Group of increases in LIBOR interest rates.

Only the overdraft is due for renewal within twelve months of the date of this document.

At the date of this preliminary announcement the Group had £111.0m of properties that were unencumbered, providing significant capacity to raise additional finance, if required, or to provide additional security for existing facilities, should property values fall. We are complying with our banking covenants and the directors do not expect this position to alter in the forthcoming twelve months. Additional information about the going concern assumption is provided in the accounting policies note. The directors have considered our forecast cash flows, the Group's low gearing, significant portfolio of unencumbered properties and the maturity profile of our borrowings, and have a reasonable expectation that the Group has adequate resources to continue for the foreseeable future. Accordingly, the directors continue to adopt the going concern basis in preparing the annual report and accounts.

Analysis of borrowings at 30 June 2011

Outlook

Economic uncertainty is likely to continue for some time and we are not expecting much change in either the occupier or investment markets over the next 12 months. Prospects for rental growth will be limited, however, we intend to continue to persevere with letting void space, attracting pre-lets, retaining existing tenants and looking for further investment opportunities, in order to grow the business.

We remain optimistic about our future prospects. We have assembled a quality portfolio of modern properties, with excellent potential for rental and capital growth when the market conditions improve. Our average rent and capital value across our industrial portfolio is only £5.10 psf and £57 psf respectively, well below replacement cost.

We shall continue to maintain a strong discipline over the management of the business and the employment of its resources. Despite the current challenges the Group is well positioned to continue to take advantage of its available financial facilities and low gearing.

Justin Parker David Wooldridge

Managing Director Finance Director

6 September 2011 6 September 2011

Consolidated Income Statement

for the year ended 30 June 2011

All operations are continuing.

Consolidated Statement of Comprehensive Income

for the year ended 30 June 2011

Consolidated Statement of Changes in Equity

for the year ended 30 June 2011

*In the prior year, there was a change under IAS 40 to show revaluation movements on development properties in the income statement, previously these were recorded in reserves. Following this change in treatment the cumulative revaluation movements on development properties have been transferred to retained earnings from the revaluation reserve.

Consolidated Balance Sheet

at 30 June 2011

Rupert J Mucklow

David Wooldridge

Consolidated Statement of Cash Flows

for the year ended 30 June 2011

NOTES TO THE ACCOUNTS

Basis of preparation of financial information

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) adopted for use in the European Union and therefore comply with Article 4 of the EU IAS regulation. Whilst the financial information included in this preliminary announcement has been computed in accordance with IFRSs, this announcement itself does not contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs on 1 October 2011.

The preliminary announcement was approved by the board of directors on 6 September 2011. The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 30 June 2011 or 2010 as defined under Section 434 of the Companies Act 2006. The financial information for the year ended 30 June 2010 is derived from the statutory accounts for that year which has been delivered to the Registrar of Companies and those for 2011 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under section 498 of the Companies Act 2006.

The financial statements are prepared under the historical cost convention, except for the revaluation of investment properties, development properties and owner-occupied properties and deferred tax thereon and certain financial assets, with consistent accounting policies to the prior year.

The preparation of financial statements requires the use of estimates and assumptions that affect reported amounts of assets and liabilities during the reporting period. These estimates and assumptions are based on management's best knowledge of the amount, event or actions. Actual results may differ from those amounts.

As at 30 June 2011 the Group had £20.5m of undrawn banking facilities and had drawn down £24.5m from its HSBC £40m 2014 Revolving Credit Facility. The Group's £5.0m overdraft, which is due for renewal within 12 months of the date of this document, was undrawn. Given these facilities, the Group's low gearing level of 36% and £111.0m of unencumbered properties, significant capacity exists to raise additional finance or to provide additional security for existing facilities, should property values fall. Accordingly, the directors continue to adopt the going concern basis in preparing the annual report and accounts.

The Group financial statements consolidate the financial statements of the Company and all its subsidiaries. Control is assumed where the Parent Company has the power to govern the financial and operational policies of the subsidiary.

Unrealised gains and losses on intra-Group transactions and intra-Group balances are eliminated from the consolidated results.

At the date of authorisation of this preliminary announcement, the following Standards, Amendments and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):

In addition, Improvements to IFRSs (issued May 2010) is the 2010 tranche of the Improvements to IFRS project and these have a number of minor amendments to existing IAS and IFRS, which require implementation from 1 July 2011.

The directors are still assessing the impact that the adoption of these Standards, Amendments and Interpretations will have on the financial statements of the Group in future periods.

Revenue recognition

Rental income

Gross rental income represents rents receivable for the year. Rent increases arising from rent reviews due during the year are taken into account only to the extent that such reviews have been agreed with tenants at the accounting date.

Rental income from operating leases is recognised on a straight-line basis over the term of the lease.

Lease incentives are amortised on a straight-line basis over the lease term.

Property operating expenses are expensed as incurred. Service charges and other recoverables are credited against the related expense.

Revenue and profits on sale of investment and trading properties

Revenue and profits on sale of investment properties and trading properties are taken into account on the completion of contracts.

The amount of profit recognised is the difference between sale proceeds and the carrying amount.

Dividends and interest income

Dividend income from investments in subsidiaries is recognised when shareholders' rights to receive payment have been established.

Interest income is recognised on an accruals basis when it falls due.

Cost of properties

An amount equivalent to the total development outgoings, including interest, attributable to properties held for development is added to the cost of such properties. A property is regarded as being in the course of development until practical completion.

Interest associated with direct expenditure on investment properties which are undergoing development or major refurbishment and development properties is capitalised. Direct expenditure includes the purchase cost of a site or property for development properties, but does not include the original book cost of investment property under development or refurbishment. Interest is capitalised gross from the start of the development work until the date of practical completion, but is suspended if there are prolonged periods when development activity is interrupted. The rate used is the rate on specific associated borrowings or, for that part of the development costs financed out of general funds, the average rate.

Valuation of properties

Investment properties are valued at the balance sheet date at market value. Where investment properties are being redeveloped the property continues to be treated as an investment property. Surpluses and deficits attributable to the Group arising from revaluation are recognised in the income statement. Valuation surpluses reflected in retained earnings are not distributable until realised on sale.

Properties under development, which were not previously classified as investment properties, are valued at market value until practical completion, when they are transferred to investment properties. Valuation surpluses and deficits attributable to properties under development are recognised in the income statement.

Owner-occupied properties are valued at the balance sheet date at market value. Valuation changes in owner-occupied property are taken to revaluation reserve. Where the valuation is below historic cost, the deficit is recognised in the income statement.

Trading properties held for resale are stated at the lower of cost and net realisable value.

Critical accounting judgements and key sources of estimation uncertainty

Management has made judgements over the valuation of properties that has a significant effect on the amounts recognised in the financial statements. Management has used the valuation performed by its independent valuers as the fair value of its investment, development, owner-occupied and trading properties. The valuation is based upon assumptions including future rental income and an appropriate discount rate. The valuers also use market evidence of transaction prices for similar properties.

Property, plant and equipment

Land and buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated in the balance sheet at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date.

Any revaluation increase arising on the revaluation of such land and buildings is credited to the properties revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense, in which case the increase is credited to the income statement to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of such land and buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset.

Depreciation on revalued buildings is charged to income. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the properties revaluation reserve is transferred directly to retained earnings.

Plant and equipment is stated at cost less accumulated depreciation, less any recognised impairment.

Depreciation

Depreciation is provided on buildings, motor vehicles and fixtures and fittings on a straight-line basis over the estimated useful lives of between two and twenty-five years. Investment properties are not depreciated.

Government grants

Capital grants received relating to the cost of building or refurbishing investment properties are deducted from the cost of the relevant property. Revenue grants are deducted from the related expenditure.

Share-based payments

The cost of granting equity-settled share options and other share-based remuneration is recognised in the income statement at their fair value at grant date. They are expensed straight-line over the vesting period, based on estimates of the shares or options that eventually vest. Options are valued using the Monte Carlo simulation model.

Deferred taxation

Deferred taxation is provided in full on temporary differences that result in an obligation to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Temporary differences arise from the inclusion of items in taxation computations in periods different from when they are included in the financial statements. Deferred tax is provided on temporary differences arising from the revaluation of fixed assets. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered.

Taxation

The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income and expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Tax is recognised in the income statement except for items that are reflected directly in equity, where the tax is also recognised in equity.

Pension costs

The cost to the Group of contributions made to defined contribution plans is expensed when the contributions fall due.

Acquisitions

On the acquisition of a business, including an interest in an associated undertaking, fair values are attributed to the Group's share of separable net assets. Where the fair value of the cost of acquisition exceeds the fair value attributable to such assets, the difference is treated as purchased goodwill and capitalised in the balance sheet in the year of acquisition.

Goodwill is reviewed annually for impairment. Under the Group's previous policy, £134,728 of goodwill has been written off directly to reserves as a matter of accounting policy. This would be credited to the income statement on disposal of the business to which it related.

Group undertakings

Investments are included in the balance sheet at cost less any provision for impairment.

Financial instruments

Financial assets and financial liabilities are recognised on the Group's balance sheet when the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for any amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled, or they expire.

Trade receivables

Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in the income statement when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset's carrying amount and the present value of future cash flows discounted at the effective rate computed at initial recognition.

Available-for-sale assets

Mortgages receivable held by the Group are classified as being available-for-sale and are stated at fair value. Fair value is determined in the manner described in note 12 to the annual report. Gains and losses arising from changes in fair value are recognised directly in equity in the investments revaluation reserve with the exception of impairment losses, which are recognised directly in the income statement.

Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss recognised in the investments revaluation reserve is included in profit or loss for the period.

Financial assets at FVTPL

Financial assets are classified as at 'fair value through profit or loss' where it is a derivative that is not designated and effective as a hedging instrument. The interest rate caps are classified as FVTPL.

Cash and cash equivalents

Cash and cash equivalents comprise cash in hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities.

Bank borrowings

Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlements or redemption and direct issue costs, are accounted for on an accrual basis in the income statement using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

Trade payables

Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.

Equity instruments

Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs.

The 2010 rental income for investment and development properties includes a £0.95m settlement of rent and dilapidations, following a back to back surrender and grant of a new lease at one of our office properties.

The Group has two reportable segments: investment and development property and trading property.

These two segments are considered appropriate for reporting under IFRS 8 "Operating Segments" as these are regularly reviewed by the chief operating decision maker to allocate resources to the segments and to assess their performance. The Group has a large and diverse customer base and there is no significant reliance on any single customer.

The measure of profit or loss that is reported to the Board of Directors for the segments is profit before tax. A segmental analysis of income from the two segments is presented below, which includes a reconciliation to the results reported in the consolidated income statement.

Segmental information on assets and liabilities, including a reconciliation to the results reported in the consolidated balance sheet, are as follows:

All operations and income are derived from the United Kingdom and therefore no geographical segmental information is provided.

The tax credit in the current financial year reflects the final resolution of prior year liabilities.

The credit for the year can be reconciled to the profit per the income statement as follows:

Legislation reducing the main rate of corporation tax from 28% to 26% with effect from 1 April 2011 was substantively enacted on 29 March 2011. Accordingly, the current year tax charge has been provided for at an effective rate of 27.5% and the closing deferred tax asset has been provided for at a rate of 26% in these financial statements.

An additional reduction in the main rate of corporation tax from 26% to 25% with effect from 1 April 2012 was enacted within Finance Act 2011 on 5 July 2011. As this reduction was not substantively enacted by the balance sheet date, its effect has not been reflected in these financial statements. Further reductions in the main rate of corporation tax of 1% per annum to 23% by 1 April 2014 have been announced by the Government but have not yet been substantively enacted, therefore their effect has not been reflected in these financial statements.

The Group became a Real Estate Investment Trust (REIT) on 1 July 2007. Under the tax rules which apply to REITs properties which are developed and sold within three years of completion do not benefit from the normal REIT tax exemption on disposal gains. The Group currently own £31.2m (2010: £16.3m) of properties which have completed development during the previous three years. If these properties had been disposed of at their 30 June 2011 valuation, then tax of £1.7m (2010: £0.1m) would have become payable. No deferred tax has been provided in respect of this potential tax liability as the Group has no current plans to dispose of these properties.

The directors propose a final dividend for the year ended 30 June 2011 of 10.24p (2010: 9.94p) per Ordinary share, totaling £6.2m.

The proposed final dividend is subject to approval by shareholders at the Annual General Meeting and has therefore not been included as a liability in these financial statements.

The final dividend, if approved, will be paid on 3 January 2012 to shareholders on the register at the close of business on 2 December 2011.

7 Profit, earnings per share and net asset value per share

Profit before tax

The adjusted profit before tax has been amended from the profit before tax as follows:

Earnings per share

The basic and diluted earnings per share of 22.43p (2010: 60.91p) has been calculated on the basis of the weighted average of 60,040,486 Ordinary shares (2010: 59,991,990 Ordinary shares) and profit of £13.5m (2010: £36.5m).

The European Public Real Estate Association (EPRA) has issued recommended bases for the calculation of earnings per share information and these are included in the following tables.

The EPRA earnings per share has been amended from the basic and diluted earnings per share by the following:

The Group presents an EPRA earnings per share figure as the directors consider that this is a better indicator of the performance of the Group.

There are no dilutive shares. Options over 136,172 Ordinary shares were granted in the year (2010: 86,154 Ordinary shares) under the 2007 Performance Share Plan. The vesting conditions for these shares have not been met, so they have not been treated as dilutive in these calculations. The first three year award under the 2007 Performance Share Plan vested in the period, with 93,656 Ordinary Shares being issued and with 26,772 shares lapsed.

Net asset value per share

The net asset value per share of 314p (2010: 310p) has been calculated on the basis of the number of equity shares in issue of 60,085,646 (2010: 59,991,990) and net assets of £188.6m (2010: £185.9m). The EPRA net asset value per share has been calculated as follows:

The closing book value shown above comprises £243.2m (2010: £223.5m) of freehold and £17.0m (2010: £12.1m) of leasehold properties.

The properties are stated at their 30 June 2011 market value and are valued by DTZ Debenham Tie Leung, professionally qualified external valuers, in accordance with the RICS Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors. DTZ Debenham Tie Leung have recent experience in the relevant location and category of the properties being valued. In their valuation report the valuers have noted, in accordance with Guidance Note 5 of the Standards, that the primary source of evidence for valuations should be recent, comparable market transactions on arms length terms.

Additions to freehold and leasehold properties include capitalised interest of £0.06m (2010: £0.23m). The capitalisation rate used was 3.59% (2010: 3.73%). The total amount of interest capitalised included in freehold and leasehold properties is £5.29m (2010: £5.23m). Properties valued at £150.32m (2010: £152.29m) were subject to a security interest.

Responsibility statement of the directors on the annual report

The responsibility statement below has been prepared in connection with the company's full annual report for the year ending 30 June 2011. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

This responsibility statement was approved by the board of directors on 6 September 2011 and is signed on its behalf by:

DATES

Annual General Meeting

The Annual General Meeting will be held on Tuesday 8 November 2011 at 11.30 a.m. at the Birmingham Botanical Gardens, Westbourne Road, Edgbaston, Birmingham, B15 3TR.

Dividend

The final dividend, if approved, will be paid on 3 January 2012 to Ordinary shareholders on the register on 2 December 2011.

Report and Accounts

The full report and accounts for the year ended 30 June 2011 will be available on 1 October 2011.

A copy of this document is available on the Company's website, www.mucklow.com.