Mucklow (A & J) Regulatory News (MKLW)

Mucklow (A & J) Group plc

Half-Yearly Report

19 February 2014

Embargoed: 7.00am

Financial Summary

for the six months ended 31 December 2013

The interim dividend of £5.5m will be paid on 30 June 2014 to holders registered on 30 May 2014.

Mucklow (A & J) Group plc

Half-Yearly Report

Chairman's Statement

I am pleased to report encouraging signs of improvement in confidence and activity within the Midlands industrial property market during the first six months of our financial year, resulting in an increase in pre-tax profit and net asset value per share for the Group.

The key highlights during the period were: reducing our vacancy rate from 6.7% to 6.2%; agreeing terms on a large pre-let development; acquiring two further investment properties and a 2.8% uplift in the value of our property portfolio.

Results for the six months to 31 December 2013

Statutory pre-tax profit for the first six months was £14.2m, compared with £8.1m for the corresponding period last year. There was a small contribution of £0.03m from trading profit (31 December 2012: £nil). 

Underlying pre-tax profit† and EPRA adjusted earnings per share, which excludes property revaluations and profit on the sale of investment and trading properties were lower at £6.3m and 10.41p (31 December 2012: £6.9m and 11.44p). The previous year's underlying pre-tax profit included a one off premium of £0.36m from the surrender of a lease.

The reduction in underlying pre-tax profit was also due to a combination of other factors including additional expenditure on various properties to assist the marketing of vacant space; rent free incentives offered to existing tenants in order to secure longer leases and higher finance costs following the refinancing of the majority of our banking facilities in the previous financial year.

EPRA net asset value* per Ordinary share increased by 3.9% to 317p at 31 December 2013 (30 June 2013: 305p). Shareholders' funds were £190.3m (30 June 2013: £182.5m), while borrowings net of cash amounted to £77.3m (30 June 2013: £74.9m). Debt to equity gearing remained unchanged at 41%.

Dividend

The Directors have declared an interim dividend of 9.04p per Ordinary share, an increase of 3% over last year (31 December 2012: 8.78p). The dividend will be paid as a PID on 30 June 2014, to Shareholders on the register at the close of business on 30 May 2014.

Property Review

It has been a positive six months in terms of the regional occupier and property investment markets. Improving economic conditions and stronger tenant demand has encouraged us to invest over £0.3m of non-recoverable expenditure on some of our vacant properties, which has helped to increase the occupancy rate from 93.3% to 93.8%. Letting incentives have reduced, while a shortage of quality industrial space is causing rental levels in some areas to rise, resulting in more interest in pre-let development.

We have continued to be proactive in trying to retain existing tenants, by offering attractive terms in order to extend leases in advance of expiry dates. We have managed to grow our gross annual rental income by 2.5% during the first half year, mainly through further investment acquisitions, while property values are slowly rising on the back of increased competition amongst Investors.

Over the last six months, there has been a steady rise in the number of active letting enquiries for industrial space in the Midlands, with very little choice available for occupiers. As a consequence, typical lease incentives have reduced from 12-18 months to 3-9 months for a 5 year term; in some locations rental levels have started to increase.

A number of sizeable lease renewals and extensions were agreed during our first half year involving over £0.75m pa of rental income. Although rent free periods are reducing, the incentives have a temporary impact on cash flow, but provide us with longer term security of income and help to maintain a high occupancy level.

The regional investment market has started to gain some momentum. There has been an increase in the number of investors looking to buy modern industrial and commercial properties, with a limited supply of quality stock available.

Our gross annual rental income increased by £0.61m during the first half year to £21.7m following the acquisition of two more investment properties for a total consideration of £6.71m (excluding stamp duty and purchase costs), at an average net initial yield of 8.6%.

We acquired a modern 62,000 sq ft industrial unit with an acre of expansion land in Halesowen, West Midlands for £3.66m in September 2013. The property is currently let on a long lease at a rent of £0.34m per annum.

We also acquired three modern retail units with car parking, totalling 16,226 sq ft in December 2013. The retail properties were built in 2001 and are located next to a large Sainsburys food store, on a busy High Street in Kings Heath, Birmingham. The combined rent is currently £0.27m per annum and the cost was £3.05m.

There has been some renewed interest in pre-let development from occupiers looking to expand, but unable to satisfy requirements from available stock. We currently have two industrial sites ready for development: Signal Point, Tyseley, Birmingham (20 acres) and Apex Park, Worcester (6 acres).

We agreed terms in November 2013 to build a new 115,000 sq ft distribution warehouse for Worcester Bosch Group, on the remaining land at Apex Park, Worcester. The deal is conditional on us taking back their existing building of 50,000 sq ft at Knightsbridge Park, Worcester, on completion of the development.

Planning consent for this development was granted in January 2014 and construction is due to commence in March this year. The new property will generate an income of £0.72m per annum and will cost in the region of £6.0m (excluding land) to complete.

Property Valuation

DTZ Debenham Tie Leung Limited revalued our property portfolio at 31 December 2013. The investment properties and development land were valued at £278.5m (30 June 2013: £262.7m), which resulted in a revaluation gain of £7.7m (2.8%) for the period.

The initial yield on the investment portfolio was 7.5% (30 June 2013: 7.8%), increasing to 8.1% on the expiry of rent free periods. The equivalent yield was 8.4% (30 June 2013: 8.5%). Industrial property increased in value by 3.4%; offices by 1.7% and retail property by 2.7%.

DTZ Debenham Tie Leung Limited also revalued our trading properties at 31 December 2013. The total value was £1.9m, which resulted in a unrecognised surplus of £1.4m over book value. A small plot of land in Wigan was sold during the half year, giving rise to a profit of £0.03m.

Finance

Total net borrowings at 31 December 2013 were £77.3m (30 June 2013: £74.9m). Undrawn banking facilities totalled £24.5m, while net debt to equity gearing remained at 41% and loan to value at 28%.

Our gross finance costs, including arrangement fees, have increased over the last 12 months by £0.4m, following the renewal of £64.0m of banking facilities with HSBC in 2013 and the new £20.0m, 10 year fixed rate loan, taken out towards the end of 2012 with Lloyds Bank. The average cost of debt at 31 December 2013 was 4.3%.

Principal risks and uncertainties

There has been no change to the principal risks and uncertainties of the Group, which remain as disclosed on page 17 of the Annual Report for the year ended 30 June 2013.

Outlook

It would appear that we may have reached a turning point in the property cycle during the first half year, with strengthening occupational demand outstripping supply and a growing appetite from Investors, pushing up property values.

Economic forecasts are certainly looking better and business confidence is improving. We intend to continue our strategy of investing in quality industrial and commercial properties in the Midlands, with attractive long term growth prospects and we anticipate another satisfactory performance in the second half year.

Rupert J Mucklow

Chairman

18 February 2014

† See the investment/development column in the underlying financial performance tables in note 8 for details.

* 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 9 for details.

Group Condensed Statement of Comprehensive Income

for the six months ended 31 December 2013

All operations are continuing.

Group Condensed Statement of Changes in Equity

for the six months ended 31 December 2013

Group Condensed Balance Sheet

at 31 December 2013

Group Condensed Cash Flow Statement

for the six months ended 31 December 2013

Notes to the Half-Yearly Report

1. Accounting policies

Basis of preparation of half-yearly financial information

The annual financial statements of A & J Mucklow Group plc are prepared in accordance with IFRS's as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting", as adopted by the European Union and the disclosure requirements of the Listing Rules.

The Group's condensed set of financial statements for the period ended 31 December 2013 were authorised for issue by the Board of directors on 18 February 2014. The half-yearly financial information is unaudited but has been reviewed by Deloitte LLP and their report appears on page 18 of this half-yearly report.

The information for the year ended 30 June 2013 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

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

As at 31 December 2013 the Group had £24.5m of undrawn banking facilities, comprising the £1.0m overdraft and £23.5m of the £44.0m 2018 Revolving Credit Facility, and had fully drawn down £20.0m from its HSBC 2018 Term Loan. The Group's £1.0m overdraft is the only banking facility due for renewal within 12 months of the date of this document. The 11.5% First Mortgage Debenture Stock 2014 is due to be repaid on 1 July 2014. The Lloyds Bank 2023 £20.0m Term Loan and 2022 £20.0m Term Loan remain fully drawn. Given these facilities, the Group's low gearing level of 41% and £84.1m 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 condensed set of financial statements.

In the current financial year, the Group has adopted IFRS 13 "Fair Value Measurement". Otherwise, the same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements.

IFRS 13 has impacted the measurement of fair value for certain assets and liabilities, as well as introducing new disclosures as set out in note 11. No retrospective changes were necessary as a result of the adoption of the standard.

2. Revenue

3. Property Costs

4. Segmental analysis

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

The property revaluation gain has been recognised as follows:

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

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

5. Net finance costs

6. Taxation

There is no deferred tax charge or credit for any of the periods stated.

The Company elected to become a Real Estate Investment Trust (REIT) with effect from 1 July 2007. As a result of this, rental income and capital gains of the REIT business are not subject to tax. The tax charge for the periods shown above represents the tax payable on the non-REIT business, mainly profits on the disposal of trading properties and interest receivable.

7. Dividends

The directors propose an interim dividend of 9.04p (2012: 8.78p) per Ordinary share. This dividend has not been included as a liability in these financial statements.

The interim dividend will be paid on 30 June 2014 to shareholders on the register at the close of business on 30 May 2014.

8. Underlying financial performance

Presented below is a non-statutory analysis of the underlying rental performance before tax, as shown in the investment/development column, which excludes the profit on sale of investment and trading properties and other items (capitalised interest, property revaluation movements and the fair value movement on derivative financial instruments). The directors consider that this further analysis of our statement of comprehensive income gives shareholders a useful comparison of our underlying performance for the periods shown in the condensed set of financial statements.

9. Earnings per share and net asset value per share

Earnings per share

The basic and diluted earnings per share of 23.52p (31 December 2012: 13.52p; 30 June 2013: 27.21p) has been calculated on the basis of the weighted average of 60,268,438 (31 December 2012: 60,193,841; 30 June 2013: 60,218,113) Ordinary shares and a profit of £14.17m (31 December 2012: £8.14m; 30 June 2013: £16.4m).

The European Public Real Estate Association (EPRA) has issued recommended bases for the calculation of earnings and net asset value 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 87,606 Ordinary shares were granted in the period (2012: 112,583 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 fourth three-year award under the 2007 Performance Share Plan vested in the period, with 98,820 Ordinary shares being issued and 19,768 shares lapsed.

Net asset value per share

The net asset value per share of 315p (31 December 2012: 298p; 30 June 2013: 303p) has been calculated on the basis of the number of equity shares in issue of 60,341,338 (31 December 2012 and 30 June 2013: 60,242,518) and net assets of £190.26m (31 December 2012: £179.43m; 30 June 2013: £182.5m).

The EPRA net asset value per share has been calculated as follows:

10. Properties

The properties are stated at their 31 December 2013 fair value and are valued by DTZ Debenham Tie Leung Limited, supported by market evidence, in accordance with the RICS Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors. DTZ Debenham Tie Leung Limited, professionally qualified external valuers, have recent experience in the relevant location and category of the properties being valued. All properties are categorised as Level 3 in the IFRS 13 fair value hierarchy. Included within the Group condensed statement of comprehensive income is £7.7m of valuation gains which represent unrealised movements on investment property.

11. Fair value measurements recognised in the statement of financial position

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which fair value is observable:

· Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets and liabilities;

· Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

· Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Investment properties have been valued using the investment method which involves applying a yield to rental income streams. Inputs include yield, current rent, ERV. For the December 2013 valuation, the yields used ranged from 5.5% to 11.0% (December 2012 - 6.0% to 13.5%; June 2013 - 5.7% to 11.9%). Valuation reports are based on both information provided by the company e.g. current rents and lease terms which is derived from the company's financial and property management systems and is subject to the company's overall control environment, and assumptions applied by the valuers e.g. ERVs and yields. These assumptions are based on market observation and the valuers professional judgement.

The fair value of the mortgage receivables is determined by discounting the expected future value of repayments. Interest rate caps are externally valued based on the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates at the balance sheet date.

There were no transfers in categories in the current or prior period.

12. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Responsibility Statement

We confirm that to the best of our knowledge:

a) the condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting";

b) the half-yearly report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

c) the half-yearly report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transaction and changes therein).

Signed on behalf of the Board who approved the half-yearly report on 18 February 2014.

Rupert J Mucklow

Chairman

David Wooldridge

Finance Director

Independent Review Report to A & J Mucklow Group plc

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 December 2013 which comprises the Group condensed statement of comprehensive income, the Group condensed statement of changes in equity, the Group condensed balance sheet, the Group condensed cash flow statement and related notes 1 to 12. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 December 2013 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditor

Birmingham, United Kingdom

18 February 2014