Mucklow (A & J) Regulatory News (MKLW)

Mucklow (A & J) Group plc

4 September 2018

Embargoed: 7.00am

Financial Summary

for the year ended 30 June 2018

The ordinary dividend of 22.78p per share (2017: 22.12p) consists of the first and second quarterly dividends totalling 10.18p, a third quarterly dividend of 5.30p and a final dividend of 7.30p.

Chairman's Statement

Rupert Mucklow, Chairman

I am pleased to report another strong performance by the Group for the year ended 30 June 2018.

Letting activity and occupancy rates have been maintained at very high levels during the 12 months, enabling rental and property values to continue to grow, which has resulted in substantial increases in our pre-tax profit and net asset value per share.

Results

Statutory pre-tax profit for the year was £69.5m, which included a revaluation gain of £49.7m (2017: £29.6m - revaluation gain of £13.0m).

The underlying pre-tax profit, which excludes revaluation movements, profit on sale of investment and trading properties and early debt repayment costs was £15.7m (2017: £15.9m). The slight reduction in underlying pre-tax profit was due to a £0.6m increase in property outgoings during the year, following the refurbishment of some vacant properties. EPRA earnings per ordinary share was 25.06p (2017: 25.05p).

EPRA net asset value per ordinary share increased by 18.7% during the year from 471p to 559p. Basic net asset value per share increased by 88p to 557p.

Shareholders' funds rose by £55.7m to £352.4m (2017: £296.7m), while total net borrowings reduced to £71.0m (2017: £78.5m). Net debt to equity gearing had fallen to 20% (2017: 26%) and loan to value was 16% (2017: 20%).

Dividend

The Board is recommending the payment of dividends amounting to 12.60p per ordinary share, an increase of 3% over last year (2017: 12.24p), making a total for the year of 22.78p (2017: 22.12p), up 3%.

A quarterly dividend of 5.30p per ordinary share is to be paid on 15 October 2018 to Shareholders on the register at the close of business on 14 September 2018 and a final dividend of 7.30p per ordinary share, if approved by Shareholders at the AGM, will be paid on 15 January 2019 to Shareholders on the register at the close of business on 14 December 2018.

Both dividends will be paid as Property Income Distributions (PIDs).

Property Review

Our occupancy rate at 30 June 2018 was at a record high of 97.2% (30 June 2017: 95.8%). The occupier market remained strong throughout the year and we continued to benefit from steady rental growth averaging around 12.8% on lease renewals and 12.2% from rent reviews, on approximately 15% of the property portfolio by area.

We completed the refurbishment of our 25,200 sq ft office building at Trinity Central, next to Birmingham International Railway station, in the second half year at a cost of around £3.0m. The building is now let to a single occupier at a rent of £0.57m pa (previous rent £0.45m pa). We also successfully re-let the 110,000 sq ft warehouse at Shire Business Park, Worcester in March 2018, at a rent of £0.59m pa (previous rent £0.55m pa). The property only became vacant in December 2017.

A number of other asset management initiatives were carried out during the year, enhancing rental and capital values, including a substantial refit of a 29,963 sq ft retail warehouse at Birchley Island, Oldbury, at a cost of £1.7m, where we agreed a new 15 year lease with the tenant at a rent of £0.42m pa (previous rent £0.28m pa). We also agreed to extend the lease on a 41,534 sq ft industrial unit at Birchley Island for a further 19 years, expiring in 2042.

We were unable to buy any industrial investments during the year. There were limited opportunities available in the Midlands and prices achieved were considerably higher than we could justify paying. We have continued to focus on creating our own investment properties through development.

Our 44,250 sq ft pre-let industrial development at Mucklow Park i54, Wolverhampton was completed in the second half year and is now leased at £0.28m pa. We have recently agreed terms on a 58,000 sq ft pre-let industrial unit at Mucklow Park, Tyseley, Birmingham. We hope to obtain detailed planning consent for the 58,000 sq ft unit and for a speculative scheme of 7 industrial units totalling 77,000 sq ft next month and start both developments later this year.

We sold two industrial properties in Birmingham during the year for £20.0m (Bull Ring Trading Estate for £13.0m and Camp Hill for £7.0m), with a combined rental income of £0.8m pa. The two properties were sold significantly above their previous valuation at 30 June 2017 of £10.7m. The main tenants of both properties are intending to vacate within 18 months, offering investors some potential for future redevelopment.

We also exchanged contracts to sell another small industrial property in Birmingham for £5.0m. The property comprises an 11,650 sq ft industrial unit on a site area of 0.6 acres and currently generates a rental of £0.06m pa. The value of this investment property 12 months ago was £1.2m.

Property Valuation

Cushman & Wakefield revalued our property portfolio at 30 June 2018. The investment properties and development land were valued at £433.5m, recognising a revaluation gain of £49.7m (12.9%).

The initial yield on the investment properties was 5.6% (30 June 2017: 6.2%). The equivalent yield was 6.4% (30 June 2017: 7.0%).

The largest single valuation gain was £8.0m at Forward Park, Birmingham, where we own a 55,000 sq ft industrial estate on 2.7 acres of land, close to our industrial unit currently under offer for £5.0m. Most of the valuation gain came from our industrial investment properties, which are continuing to show steady rental growth and yield compression.

Cushman & Wakefield also revalued our trading properties at 30 June 2018. The total value was £2.0m, which showed an unrecognised surplus of £1.5m against book cost.

Finance

Net borrowings at 30 June 2018 were £71.0m (30 June 2017: £78.5m), whilst un-utilised banking facilities were £45.0m (30 June 2017: £40.5m). Net debt to equity gearing and LTV at 30 June 2018 was 20% and 16% respectively (30 June 2017: 26% and 20%).

We repaid a £20m, 5.59% fixed rate loan we had with Lloyds Bank in the second half of the year, which was due to expire in 2023, incurring an early debt repayment cost of £3.6m and took out a new £20m term loan facility with Scottish Widows at a fixed rate of 3.4%, expiring in 2031, co-terminus with the £40m facility taken out with Scottish Widows last year.

As such, our weighted average cost of debt has reduced to 3.0% (30 June 2017: 3.1%) or 3.3% on drawn amounts (2017: 3.6%) and our weighted average term remaining on debt is 8.2 years (30 June 2017: 7.7 years).

Non-Executive Director changes

We were delighted to welcome James Retallack to the Board as a Non-Executive Director in June 2018. James is a Lawyer by profession, having previously been Senior Partner at Edge & Ellison in Birmingham and a Director of Aggregate Industries plc. I am sure James will fit in well at Mucklow and maintain the very high standards and level of contribution that we have become accustomed to.

Stephen Gilmore, having completed 9 years service at Mucklow as a Non-Executive Director, the last 6 years as Chairman of the Remuneration Committee, will be stepping down from the Board in June 2019. James Retallack will then become Chairman of the Remuneration Committee. I would like to thank Stephen in advance for his dedication, contribution and sound advice at Board meetings over the years and wish him well continuing to grow his successful legal practice.

Outlook

It is difficult to predict what might happen over the next 12 months in the industrial occupier and investment markets, particularly with Brexit looming. Usually, at this late stage in the property cycle, with occupancy levels at record highs and industrial property yields at all time lows, we would be anticipating a correction in property values and be preparing ourselves to start acquiring attractively priced investment properties again. However, there are currently no signs of the industrial property market weakening, so we intend to continue to focus our activities towards development for the time being, to include a controlled speculative development programme and should circumstances change, we remain well positioned to capitalise on a weaker investment market.

Rupert Mucklow

Chairman

3 September 2018

Property Review

Justin Parker, Managing Director

Overview

The Group has benefited from strong occupational and investment markets for industrial property, with a portfolio revaluation increase of £49.7m to £433.5m, reduction in vacancy rate to 2.8% (2017: 4.2%), rental growth on lettings and reviews and asset sales at a significant premium over their 30 June 2017 valuations.

Underlying profit has decreased slightly, from £15.9m to £15.7m, mainly reflecting the refurbishment of our vacant properties to achieve higher rents and reduced voids.

Key performance indicators

The Group's main objective is the long-term enhancement of shareholder value through dividend and capital appreciation, whilst adopting a conservative financial structure. As a result, the key performance indicators we use to reflect the achievement of that objective on an annual basis are: underlying pre-tax profit; vacant space; dividend growth; and net debt to equity gearing.

+See the table on page 10 for the calculations.

Acquisition and disposal of investment properties

The industrial investment market continued to be very competitive during our financial year, with low yields being paid for quality industrial properties.

We have taken advantage of the strength of the investment market and disposed of £20.0m of investment properties, which were valued at £10.7m at 30 June 2017, and exchanged contracts to sell a further property for £5.0m.

Bull Ring Trading Estate, Birmingham was sold in October 2017 for £13.0m, well ahead of the £5.4m valuation as at 30 June 2017. The industrial estate of 63,828 sq ft occupied 3.4 acres of land and provided an annual income of £0.4m.

Camp Hill, Birmingham (3.8 acres) was sold in April 2018 for £7.0m. The 124,270 sq ft industrial property was valued at £5.3m as at 30 June 2017. The passing rent was £0.4m.

The main tenants of both of the above-named properties were due to vacate within 18 months.

Contracts have been exchanged for the sale of Lancaster Gate, Birmingham for £5.0m, with completion due to take place before 31 December 2018. The rent on the property is currently £0.06m pa and it was valued at £1.2m as at 30 June 2017.

We continue to look for attractively priced investment properties, focusing on the Midlands industrial property market, but have not acquired any properties in the year.

Developing new properties for long-term investment

Mucklow Park i54, Wolverhampton

We entered into an option agreement for a prime 15 acre industrial site with Wolverhampton City Council and Staffordshire County Council in November 2015. The site is adjacent to the new Jaguar Land Rover engine manufacturing facility at i54 in Wolverhampton. The land can accommodate up to 275,000 sq ft of advanced manufacturing space.

A pre-let of a 44,250 sq ft industrial unit for Tentec Limited, a subsidiary of Atlas Copco, was agreed in the prior year. We exercised our option to acquire 6.4 acres of the 15 acre site, including the 3 acres the Tentec unit has been developed on, in the year. The unit completed in April 2018 and now produces an annual rent of £0.28m.

We are marketing the remainder of the site for pre-lets.

Mucklow Park, Tyseley

We have agreed terms for a 58,000 sq ft pre-let industrial unit at our 20 acre site in Tyseley, Birmingham. A planning application has been submitted and we are aiming to start on site later this year.

Given the strength of the occupational market for smaller industrial properties and the lack of supply, we subsequently submitted a planning application for a speculative 77,000 sq ft multi-let industrial scheme of 7 units on the land adjacent to the site of the proposed pre-let unit at Tyseley, which we hope to develop out at the same time.

If the occupational market for industrial property continues to be supportive, our 23 acres of remaining development land at i54, Wolverhampton and Tyseley, Birmingham provides the potential for up to 440,000 sq ft of industrial/warehouse space.

Actively managing our assets to enhance value

The positive trends in the occupational market have continued in the year and our vacancy rate reduced to 2.8% at our year end (2017: 4.2%).

Rent reviews completed in the year, on properties with a previous annual rent totalling £2.6m, were agreed at an average uplift of 12.2%.

Lease renewals have been agreed over 136,386 sq ft of space at a new rent of £0.9m, an increase of 12.8%.

New leases were agreed in the year totalling 278,571 sq ft, producing an annual rent of £2.0m, an increase of 3.0% over our ERV.

The two most significant lettings in the year were the Trinity Central office (25,200 sq ft, close to Birmingham International Railway Station) and the 110,000 sq ft warehouse in Worcester. 

The Trinity Central office was returned to us in July 2016. We completed a substantial refurbishment of the building in March 2018 at a cost of around £3.0m and let it on completion at a rent of £0.57m pa, 28% higher than it was previously let at, on a 10 year lease.

Shire Business Park (Worcester) was returned to us on lease end in December 2017. Refurbishment works costing £0.3m were carried out and the unit was re-let in March 2018 at £0.59m pa on a 10 year lease with a mid-point break.

Lease regearings were carried out over 120,852 sq ft, with a revised annual rental of £1.1m, including the two properties at Birchley referred to in the Chairman's Statement. We also moved the break out by 7 years, to 2026, on a 23,154 sq ft office building, with no incentive being granted to the tenant.

Occupancy

Our year-end vacancy rate was 2.8% (106,735 sq ft).

Valuation

The external valuation of the Group's investment and development portfolio at 30 June 2018 totalled £433.5m (2017: £386.9m) leading to a valuation gain of £49.7m being recognised in the Group's statement of comprehensive income.

The initial yield on the portfolio decreased by 0.6% to 5.6% (2017: 6.2%) and the equivalent yield also decreased by the same amount to 6.4% (2017: 7.0%).

Trading Properties

In April 2018 the Group entered into an option agreement over the Haden Cross land held in trading properties. The option value for the land, held at cost of £0.4m in the balance sheet, is £1.0m. The potential purchaser also entered into an option on the adjacent site, held as an investment property at valuation in the balance sheet at £0.7m, with an option price of £0.7m. The options had not been exercised at the date of this report.

Outlook

Despite the present economic and political uncertainty, our portfolio has continued to perform in terms of both income and capital.

Given investor demand for industrial property, which remains at the core of our portfolio, we expect there to be limited opportunities for us to acquire investment properties in the short-term. However, our quality investment portfolio, development land bank and strong balance sheet provide us with a strong base to pursue opportunities as we enter the next financial year.

Justin Parker

Managing Director

3 September 2018

Finance Review 

David Wooldridge, Finance Director

The Group's underlying business continues to perform well, with growth in gross rental income, occupancy level and an 18.7% increase in EPRA net asset value per share.

The low interest rate environment enabled us to refinance the £20m fixed rate term loan taken out with Lloyds Bank in 2008 at a rate of 5.59%, replacing it with a new tranche of the Scottish Widows facility that was originally taken out in December 2016. This further tranche was fixed at 3.4%, reducing the Group's annual interest costs by £0.4m. A £3.6m early repayment charge was incurred on the refinancing, which impacts on statutory profit, but the charge is not included in the underlying profit measure or in EPRA earnings per share.

We remain conservatively financed, with all of our term debt facilities refinanced in the last two financial years. Almost half of our term debt facilities expire in 2031, our debt to equity gearing is low at 20% and we have undrawn term debt facilities of £44.0m.

Income

Gross rental income increased by £0.4m, from £23.7m to £24.1m. Rent reviews and lettings added £0.5m, acquisitions in the prior year contributed an additional £0.2m, the completed development added £0.1m and the disposals reduced income by £0.4m.

Property costs, net of service charge income, increased from £1.0m to £1.6m as a result of higher levels of refurbishment costs, including the Worcester and Trinity Central properties let in the second half of the financial year.

Administration expenses increased slightly to £3.5m (2017: £3.4m). The main reasons for the increase are agents fees on the letting of vacant space. During the year the vacancy rate moved from 4.2% at 30 June 2017, to 7.5% at 31 December 2017 (including the Worcester property mentioned above, which was returned at lease end in December) and ended the year at just 2.8%. Offsetting that increase was the inclusion of the bonuses in the previous financial year.

Excluding the early repayment costs of £3.6m, underlying finance costs decreased by £0.1m, as we benefited from the lower interest rate on the Scottish Widows loan from December 2016. Completion of the £20m refinance took place on 20 June 2018, so there has been a limited interest saving from the new £20m facility in the period under review.

Underlying pre-tax profit decreased from £15.9m to £15.7m, mainly as a result of the higher level of refurbishment costs noted above.

Statutory pre-tax profit increased from £29.6m to £69.5m, with a revaluation gain of £49.7m (2017: £13.0m) and profit on disposal of investment property of £7.6m (2017: £1.9m). Given the timings of the exchange and completion of the Camp Hill disposal, the movement in the valuation to sale proceeds of that property was recognised as a revaluation movement in both the interim results and the full year figures.

Basic and diluted earnings per share increased from 46.63p to 109.74p and EPRA earnings per share, which excludes the valuation gain, profit on sale of investment property and early repayment costs, was virtually unchanged at 25.06p (2017: 25.05p).

Underlying financial performance

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

Taxation

No current tax charge has been recognised in the year, as the majority of the Group's income is exempt from corporation tax due to our REIT status.

We continue to comfortably meet all of the REIT requirements and maintain our REIT status.

Dividend

An interim dividend of 10.18p per share (2017: 9.88p) was declared in February 2018, with 5.09p per share paid in April 2018 and 5.09p per share paid in July 2018.

Dividends totalling 12.60p per share (2017: 12.24p) are being declared in respect of the 30 June 2018 financial year, making the total in respect of the year ended 30 June 2018 22.78p per share (2017: 22.12p), an increase of 3% over the prior year. The dividends consist of a quarterly dividend of 5.30p and a final dividend of 7.30p. The quarterly dividend and final dividend will both be paid as Property Income Distributions (PIDs).

The quarterly dividend of 5.30p will be paid on 15 October 2018 to Shareholders on the register at the close of business on 14 September 2018.

The final dividend of 7.30p will, if approved by Shareholders at the AGM, be paid on 15 January 2019 to Shareholders on the register at the close of business on 14 December 2018.

The allocation of future dividends between PID and non-PID may vary.

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, quarterly and final dividends paid and proposed in respect of the financial year of 22.78p amount to 91% of the EPRA earnings per share figure of 25.06p, and are covered 1.10 times by that earnings measure.

Net assets

Net assets increased by £55.7m in the year, from £296.7m to £352.4m, mainly due to £15.7m of underlying pre-tax profit, a revaluation gain of £49.7m and profit on disposal of investment property of £7.6m, offset by ordinary dividends of £14.2m and an early repayment interest cost of £3.6m on the refinancing of the Lloyds term loan.

Net asset value per share increased by 88p, from 469p to 557p, and EPRA net asset value per share also increased by 88p, to 559p (2017: 471p).

Financing and cash flow

Operating cash flow was £7.0m lower than the prior year, at £10.1m. The decrease is mainly attributable to the increase in the early repayment costs on the refinancing and the timing of invoicing tenant charges and development costs. Cash outflows in respect of property acquisitions and capital expenditure (including a lease incentive paid to a tenant) amounted to £8.1m and borrowings increased by £4.6m.

Equity dividends paid in the year totalled £14.1m, compared to £16.7m in the prior year, with the decrease due to the introduction of quarterly dividend payments with effect from October 2016 increasing the prior year cash outflow.

As previously disclosed, the majority of the Group's debt facilities were refinanced in the current and prior year. On 31 August 2016 the Group refinanced the HSBC term loan and revolving credit facilities, which now expire in 2021, a new £40m 15 year loan was taken out with Scottish Widows in December 2016 and the 2012 Lloyds term loan (£20m) was repaid in the same month. The £20m 2008 term loan with Lloyds Bank was repaid on 20 June 2018 and a new tranche of the Scottish Widows facility was taken out on the same day. The Group's £1.0m overdraft was renewed for the year to November 2018 and we expect to agree a further twelve month period for the overdraft when it comes up for renewal.

The table below shows the debt facility position as at 30 June 2018.

Analysis of borrowings at 30 June 2018

Of the £80.7m of drawn debt shown in the table above, 75% is at fixed rates.

During the year our average cost of total debt facilities reduced by 0.1%, from 3.1% to 3.0%, or 3.6% to 3.3% on drawn amounts and the weighted average term remaining on total debt facilities increased from 7.7 years to 8.2 years.

David Wooldridge

Finance Director

3 September 2018

Group Statement of Comprehensive Income

for the year ended 30 June 2018

Group Statement of Changes in Equity

for the year ended 30 June 2018

Group Balance Sheet

at 30 June 2018

Rupert Mucklow

David Wooldridge

Group Cash Flow Statement

for the year ended 30 June 2018

NOTES TO THE FINANCIAL STATEMENTS

1 Accounting policies

Basis of preparation of financial information

The Group 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 4 October 2018.

The preliminary announcement was approved by the board of directors on 3 September 2018. The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 30 June 2018 or 2017 as defined under Section 435 of the Companies Act 2006. The financial information previously set out does not constitute the Company's statutory accounts for the years ended 30 June 2018 or 30 June 2017 but is derived from those accounts. Statutory accounts for 2017 have been delivered to the Registrar of Companies, and those for 2018 will be delivered in due course.

The auditors, KPMG LLP, have reported on these respective statutory accounts; their reports were:

i. unqualified;

ii. did not include references to any matters to which the auditor drew attention by way of emphasis without qualifying their report; and

iii. did not contain a statement under Section 498(2) or (3) of the Companies Act 2006.

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

Basis of consolidation

The Group financial statements consolidate the financial statements of the Company and all its subsidiaries. Controls is when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

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

Going concern

As at 30 June 2018 the Group had £45.0m of undrawn banking facilities and had drawn down £nil from its HSBC £44m 2021 Revolving Credit Facility. The Group's £1.0m overdraft, which is due for renewal within 12 months of the date of this document, was undrawn. Given these facilities, the Group's low net debt to equity gearing level of 20% and £112.2m 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 financial statements.

Critical accounting judgements and key sources of estimation uncertainty

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.

For the estimates used in the valuation of properties, which 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, particularly the estimates made in relation to market comparable yield rates and estimated rental value (ERV). The valuation also uses market evidence of transaction prices for similar properties.

Standards endorsed but not yet effective

The following Adopted IFRSs have been endorsed but have not been applied by the Group in these financial statements. Their adoption is not expected to have a material effect on the financial statements unless otherwise indicated:

● IFRS 9 Financial Instruments (effective 1 January 2018)

● IFRS 15 Revenue from Contracts with Customers (effective 1 January 2018)

● Amendments to IFRS 2 Share Based Payments (effective 1 January 2018)

● Annual Improvements to IFRSs - 2014-2016 Cycle (effective 1 January 2018)

● IFRIC 22 Foreign Currency Transactions and Advance Consideration (effective 1 January 2018)

● Amendments to IAS 40 Investment Property (effective 1 January 2018)

● IFRS 16 Leases (effective 1 January 2019)

IFRS 9 Financial Instruments, effective from 1 July 2018, covers the classification, measurement and derecognition of financial assets and liabilities and introduces an impairment model for financial assets. The Directors have identified trade receivables as the significant financial asset that will be impacted by IFRS 9 and have carried out an impact assessment based on actual losses incurred. Based on this assessment, the impact on the Group will not be material.

IFRS 15 Revenue Recognition, effective from 1 July 2018, governs the recognition of revenue. It will be applicable to service charge and other property income (but not rental income arising from leases with tenants), trading property disposals and investment property disposals. There will not be a material change in the amounts and timing of revenue recognised following the adoption of the standard.

IFRS 16 Leases, effective from 1 July 2019, will result in almost all operating leases being brought on balance sheet. The accounting for lessors will not significantly change as we will continue to account for leases under IAS 40. As a result of the adoption of the new standard, these changes will not result in a material change to the Group's reported results.

Significant accounting policies

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.

Revenue and profits on sale of investment, development and trading properties

Revenue and profits on sale of investment, development and trading properties are recognised 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.

Costs associated with properties

Costs associated with properties under the course of development include 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 the original book cost of investment property under development or refurbishment is not included in the calculation of interest. 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 fair value. Where investment properties are being redeveloped the property continues to be treated as an investment property. Gains and deficits attributable to the Group arising from revaluation are recognised in the statement of comprehensive income. Valuation gains reflected in retained earnings are not distributable until realised on sale.

Properties under construction, where the land option is owned but not the land, are valued at fair value, or under the cost model if the fair value cannot be reliably measured as the land option has not yet been exercised. Once the option is exercised the property under construction will be valued at fair value until practical completion, when they are transferred from development properties to investment properties.

Properties under development are valued at fair value until practical completion, when they are transferred to investment properties. Valuation gains reflected in retained earnings are not distributable until realised on sale.

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.

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

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

Held for sale assets

A non-current asset is classified as held for sale if its carrying amount will be recovered principally through sale rather than through continuing use, it is available for immediate sale and sale is highly probable within one year. Non-current assets are stated at the lower of previous carrying amount and fair value less costs to sell.

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 through other comprehensive income, 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 statement of comprehensive income 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 gain 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.

Capital 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 statement of comprehensive income 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.

Taxation

A & J Mucklow Group is a Real Estate Investment Trust (REIT) and does not pay tax on its property income or gains on property sales, provided that at least 90% of the Group's property income is distributed as a dividend to shareholders, which becomes taxable in their hands. In addition, the Group has to meet certain conditions such as ensuring the property rental business represents more than 75% of total profits and assets. Any potential or proposed changes to the REIT legislation are monitored. It is management's intention that the Group will continue as a REIT for the foreseeable future.

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 statement of comprehensive income 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 statement of comprehensive income 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.

Under the Group's previous policy, £0.13m of goodwill has been written off directly to reserves as a matter of accounting policy. This would be credited to the statement of comprehensive income on disposal of the business to which it related.

Investments in subsidiaries

Investments in subsidiaries are included in the parent company 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 statement of comprehensive income 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

Mortgage receivables 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 13 of 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 statement of comprehensive income.

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 were 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 statement of comprehensive income 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.

2. Revenue

3. Property outgoings

4. Segmental analysis

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 Group statement of comprehensive income.

Segmental information on assets and liabilities, including a reconciliation to the results reported in the Group 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

The tax for the year can be reconciled to the profit per the statement of comprehensive income as follows:

Reductions in the UK corporation tax rate from 23% to 21% (effective from 1 April 2014) and 20% (effective from 1 April 2015) were substantively enacted on 2 July 2013. Further reductions to 19% (effective from 1 April 2017) and to 17% (effective 1 April 2020) were substantively enacted on 26 October 2015 and 6 September 2016 respectively. Any deferred tax balance would be calculated based on these rates as at 30 June 2018. 

The Group became a Real Estate Investment Trust (REIT) on 1 July 2007.

7. Dividends

The third quarterly dividend payment of 5.30p (2017: 5.15p) will be paid on 15 October 2018 to shareholders on the register at the close of business on 14 September 2018, totalling £3.4m. As this dividend was not declared at 30 June 2018, it has not been included as a liability in these financial statements.

The directors propose a final dividend for the year ended 30 June 2018 of 7.30p (2017: 7.09p) per ordinary share, totalling £4.6m. Both dividends will be paid as PIDs.

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 15 January 2019 to shareholders on the register at the close of business on 14 December 2018.

8. Earnings per share and net asset value per share

Earnings per share

The basic and diluted earnings per share of 109.74p (2017: 46.63p) has been calculated on the basis of the weighted average of 63,294,833 ordinary shares (2017: 63,294,833 ordinary shares) and profit of £69.5m (2017: £29.6m).

There are no dilutive shares. Options over 108,998 ordinary shares were granted in the year (2017: 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 vested in the period, with no ordinary shares being issued and with 105,418 shares lapsed.

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.

Net asset value per share

The net asset value per share of 557p (2017: 469p) has been calculated on the basis of the number of equity shares in issue of 63,294,833 (2017: 63,294,833) and net assets of £352.4m (2017: £296.7m). The EPRA net asset value per share has been calculated as follows:

9. Investment and development properties

During the year the group exchanged contracts to dispose of a small industrial investment property for £5m. A revaluation gain of £3.8m has been recorded in respect of this property in the year. The disposal is expected to complete within the next 12 months and the asset has been included as an asset held for sale.

The closing book value shown above comprises £398.0m (2017: £364.1m) of freehold and £29.4m (2017: £22.7m) of leasehold properties.

The properties are stated at their 30 June 2018 fair value and are valued by Cushman & Wakefield, professionally qualified external valuers, in accordance with the RICS Valuation Professional Standards published by the Royal Institution of Chartered Surveyors. Cushman & 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 held for sale assets. Included within the Group condensed statement of comprehensive income is £49.7m of valuation gains which represent unrealised movements on investment and development properties. Cushman & Wakefield is the trading name of Cushman & Wakefield Debenham Tie Leung Limited.

Additions to freehold and leasehold properties include capitalised interest of £0.1m (2017: £nil). The total amount of interest capitalised included in freehold and leasehold properties is £5.5m (2017: £5.4m). Properties valued at £321.3m (2017: £285.2m) were subject to a security interest.

During the prior year, the Group commenced construction at i54. The element of the land option relating to the unit developed that was held in other debtors was therefore transferred to Development Properties.

Responsibility statement of the directors

We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and

· the strategic report includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the group's position and performance, business model and strategy.

This responsibility statement was approved by the board of directors on 3 September 2018 and is signed on its behalf by:

DATES:

Annual General Meeting

The Group's Annual General Meeting will be held on Tuesday 13 November 2018 at 11.30a.m. at the Birmingham Botanical Gardens, Westbourne Road, Edgbaston, Birmingham, B15 3TR.

Dividend

Dividends of 12.60p per ordinary share are being declared in respect of the 30 June 2018 financial year, making a total for the year of 22.78p.

The dividends consist of the third quarterly dividend of 5.30p per ordinary share to be paid on 15 October 2018 to Shareholders on the register at the close of business on 14 September 2018 and a final dividend of 7.30p per ordinary share, if approved by shareholders at the AGM, to be paid on 15 January 2019 to Shareholders on the register at the close of business on 14 December 2018.

Report and Accounts

The full report and accounts for the year ended 30 June 2018 will be available on 4 October 2018.

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