Mucklow (A & J) Regulatory News (MKLW)

Mucklow (A & J) Group plc

Half-Yearly Report

13 February 2018

Embargoed: 7.00am

Financial Summary

for the six months ended 31 December 2017

The interim dividend of 10.18p per share (2016: 9.88p) consists of two quarterly dividends of 5.09p and 5.09p.

For further information please contact:

Rupert Mucklow, Chairman Tel: 0121 550 1841 Fiona Tooley Tel: 0121 309 0099

David Wooldridge, Finance Director TooleyStreet Communications Mob: 07785 703523

A & J Mucklow Group plc

Legal Entity Identifier (LEI): 21300M1Q89HWSY7ES84

Chairman's Statement

Half-year to 31 December 2017

I am pleased to report another solid performance by the Group for the six months ended 31 December 2017. Statutory pre-tax profit increased to £29.9m, compared with £9.1m for the corresponding period last year and EPRA net asset value per share rose by 7.4% in the first half year to 506p.

Half-Year Results to 31 December 2017

Statutory pre-tax profit for the half year was £29.9m (31 December 2016: £9.1m), which included a revaluation surplus of £14.1m (31 December 2016: £0.5m).

The underlying pre-tax profit* for the half year was £8.0m (31 December 2016: £7.9m).

EPRA earnings per ordinary share increased by 2.7% to 12.88p (31 December 2016: 12.54p).

EPRA net asset value per ordinary share increased by 35p to 506p (30 June 2017: 471p).

Shareholders' funds rose to £318.9m (30 June 2017: £296.7m), while net debt to equity gearing and loan to value (LTV) reduced to 23% and 18% respectively (30 June 2017: 26% and 20%).

Dividend

The Directors have declared an interim dividend of 10.18p per ordinary share, an increase of 3% over last year (31 December 2016: 9.88p). The dividend will be paid as a Property Income Distribution (PID) and split into two quarterly dividends of 5.09p each. The first quarterly dividend will be paid on 16 April 2018 to shareholders on the register at the close of business on 16 March 2018 and the second quarterly dividend will be paid on 16 July 2018 to shareholders on the register at the close of business on 15 June 2018.

Property Review

Our property portfolio has continued to benefit from steady occupier demand and rental levels that are still growing, during the first six months of the financial year. Property values have also continued to improve on the back of strong investor interest and a shortage of available stock.

The Group's vacancy rate at 31 December 2017 was 7.5% (30 June 2017: 4.2%). The increase was mainly due to a lease expiry on a 110,000 sq ft warehouse at Worcester, just prior to the half-year end. Our vacancy rate is likely to reduce significantly in the second half year as over half our vacant space is currently under offer, including the Worcester property.

We declined to buy any investment properties during the period. In October 2017, we sold our Bull Ring Trading Estate in Birmingham for £13.0m, significantly above our 30 June 2017 valuation of £5.4m. We also exchanged contracts to sell another industrial property at Camp Hill, Birmingham for £7.0m, which was previously valued at £5.3m at 30 June 2017. The completion of the sale of Camp Hill will take place in April 2018.

Our 44,250 sq ft pre-let industrial development at i54 Wolverhampton is progressing well and due to complete in March 2018. The substantial refurbishment of our 25,190 sq ft office building at Trinity Central, close to Birmingham International railway station, should also complete in March 2018 and is now under offer to a single tenant.

Construction of a new trunk road by Birmingham City Council, alongside our 20 acre development site at Mucklow Park, Tyseley, is due to commence in March 2018, enabling us to start actively pursuing pre-lets for the proposed first phase of the development comprising 130,000 sq ft. We are also actively marketing the remaining 11 acres of land at i54 Wolverhampton.

Property Valuation

Cushman & Wakefield revalued our property portfolio at 31 December 2017. The investment properties and development land were valued at £402.8m (30 June 2017: £386.9m), recognising a revaluation surplus of £14.1m (3.6%).

The initial yield on the investment properties was 5.8% (30 June 2017: 6.2%). The equivalent yield was 6.8% (30 June 2017: 7.0%).

Cushman & Wakefield also revalued our trading properties at 31 December 2017. The total value was £2.0m, which showed an unrecognised surplus of £1.5m against book value.

Finance

Total net borrowings at 31 December 2017 were £73.6m (30 June 2017: £78.5m). Undrawn term banking facilities totalled £44.0m, whilst net debt to equity gearing had reduced to 23% (30 June 2017: 26%) and LTV 18% (30 June 2017: 20%).

Principal Risks and Uncertainties

The process for identifying, assessing and reviewing the risks faced by the Group is described in the Principal Risks and Uncertainties section on pages 16 and 17 of the 2017 annual report and financial statements, which is available on the Company's website.

These risks comprise tenant default, changes in demand for space and market pricing affecting value in the investment portfolio; reduced availability or increased cost of debt finance, interest rate sensitivity and REIT compliance; recruitment and retention of people; and speculative development exposure on lettings, cost/time delays on contracts, inability to acquire land and holding too much development land.

In the view of the Board these principal risks and uncertainties are as equally applicable to the remaining six months of the financial year as they were to the six months under review.

The Board considers that there are no significant elements of seasonality or cyclicality in the underlying operations of the business.

Outlook

Market conditions for industrial and commercial property in the Midlands continue to look favourable for the second half year. Assuming all lettings currently under offer complete, the additional rental income we should receive from a reduction in vacant space, will comfortably offset the annual rental income lost from the £20m of property disposals agreed in the first half year. We remain optimistic about our prospects for the full year.

Rupert Mucklow

Chairman

12 February 2018

*Excludes the profit on disposal of investment, development and trading properties, the revaluation of investment and development properties and derivative financial instruments, capitalised interest and early repayment costs. See note 8.

Group Condensed Statement of Comprehensive Income

for the six months ended 31 December 2017

All operations are continuing.

Group Condensed Statement of Changes in Equity

for the six months ended 31 December 2017

Group Condensed Balance Sheet

at 31 December 2017

Group Condensed Cash Flow Statement

for the six months ended 31 December 2017

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 2017 were authorised for issue by the Board of directors on 12 February 2018. The half-yearly financial information is unaudited but has been reviewed by KPMG LLP and their report appears on page 18 of this half-yearly report.

The information for the year ended 30 June 2017 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. KPMG LLP reported on those accounts: their report was unqualified, did not draw attention to any matters by emphasis of matter and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

Investment properties reclassified as held for sale in accordance with IFRS 5 are transferred at fair value and continue to be measured at fair value as per the requirements of IAS 40.

 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, deferred tax thereon, assets held for sale and certain financial assets.

As at 31 December 2017 the Group had £45.0m of undrawn banking facilities, comprising the £1.0m overdraft and £44.0m of the £44.0m 2021 Revolving Credit Facility, and had fully drawn down £20.0m from its HSBC 2021 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 Lloyds Bank 2023 £20.0m Term Loan and the £40.0m Scottish Widows Term Loan remain fully drawn. Given these facilities, the Group's low gearing level of 23% and £108.2m of unencumbered properties, significant capacity exists to raise additional finance or to provide additional security for existing facilities, should property values fall. The directors have reviewed the current and projected financial position of the Group and compliance with its debt facilities, including a sensitivity analysis. On the basis of this review, the directors continue to adopt the going concern basis in preparing the condensed set of financial statements.

Excepting the above disclosure regarding the treatment of investment properties reclassified as held for sale, 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.

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

The early repayment costs above relate to the refinancing of the Lloyds Bank £20.0m Term Loan 2022 and includes break costs and the release of unamortised costs.

6 Taxation

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

The Group became a Real Estate Investment Trust (REIT) on 1 July 2007. As a result of this, rental income and capital gains of the REIT business are not subject to tax. 

7 Dividends

The directors propose an interim dividend of 10.18p (2016: 9.88p) per Ordinary share. This dividend has not been included as a liability in these financial statements.

The interim dividend will be paid as two quarterly dividends of 5.09p each. The first quarterly dividend will be paid on 16 April 2018 to shareholders on the register at the close of business on 16 March 2018 and the second quarterly dividend will be paid on 16 July 2018 to shareholders on the register at the close of business on 15 June 2018.

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 and early repayment costs). 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 47.36p (31 December 2016: 14.39p; 30 June 2017: 46.63p) has been calculated on the basis of the weighted average of 63,294,833 (31 December 2016: 63,294,833; 30 June 2017: 63,294,833) Ordinary shares and a profit of £29.9m (31 December 2016: £9.1m; 30 June 2017: £29.6m).

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 108,998 Ordinary shares were granted in the period (2016: 103,257 Ordinary shares) under the 2015 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 eighth three-year award under the 2007 Performance Share Plan expired in the period, with no Ordinary shares being issued and 105,418 shares lapsed.

Net asset value per share

The net asset value per share of 504p (31 December 2016: 446p; 30 June 2017: 469p) has been calculated on the basis of the number of equity shares in issue of 63,294,833 (31 December 2016: 63,294,833; 30 June 2017: 63,294,833) and net assets of £318.9m (31 December 2016: £282.3m; 30 June 2017: £296.7m).

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

10 Properties

The properties are stated at their 31 December 2017 fair value and are valued by Cushman and Wakefield, professionally qualified external valuers, in accordance with the RICS Valuation Professional Standards published by the Royal Institution of Chartered Surveyors. Cushman and Wakefield 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 except for available for sale assets. Included within the Group condensed statement of comprehensive income is £14.1m of valuation gains which represent unrealised movements on investment and development properties. Cushman and Wakefield is the trading name of Cushman & Wakefield Debenham Tie Leung Limited.

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 and ERV. For the December 2017 valuation, the yields used ranged from 4.4% to 8.3% (December 2016 - 5.0% to 8.8%; June 2017 - 5.0% to 8.7%) and the ERVs used ranged from £3.80 psf to £37.29 psf (December 2016 - £3.32 psf to £35.57 psf; June 2017 - £3.32 psf to £37.29 psf). Valuation reports are based on both information provided by the Company, e.g. current rents and lease terms which are derived from the Company's financial and property management systems and are 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.

An increase or decrease in rental values will increase or decrease valuations, and a decrease/increase in yields will increase/decrease the valuation. There are interrelationships between these inputs as they are determined by market conditions. The valuation movement in a period depends on the balance of those inputs. Where the inputs move in opposite directions (yields decrease and rental values increase), the valuation movement is magnified. If the inputs move in the same direction (yields increase and rental values decrease), they may offset each other.

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.

The investment property reclassified to held for sale assets at the period end has been transferred from Level 3 to Level 2 in the period. The transfer reflects the existence of an observable price for the held for sale asset derived from the contractually agreed price.

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:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

· the interim management report includes a fair review of the information required by:

a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Signed on behalf of the Board who approved the half-yearly report on 12 February 2018.

Rupert Mucklow

Chairman

David Wooldridge

Finance Director

INDEPENDENT REVIEW REPORT TO A & J MUCKLOW GROUP PLC 

Conclusion 

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 2017 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 the related explanatory notes. 

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 2017 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting as adopted by the EU and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

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 UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) 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.

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 DTR of the UK FCA. 

As disclosed in note 1, the annual financial statements of the group are prepared in accordance with International Financial Reporting Standards as adopted by the EU. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 as adopted by the EU. 

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.

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this 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 reached. 

Michael Froom (Senior Statutory Auditor)

for and on behalf of KPMG LLP

Chartered Accountants 

One Snowhill

Snow Hill Queensway

Birmingham

B4 6GH

12 February 2018