Mucklow (A & J) Regulatory News (MKLW)

Mucklow (A & J) Group plc

5 September 2012

Embargoed: 7.00am

Rupert Mucklow, Chairman commented: "I am pleased to report a strong operational performance by the Group for the 12 months ended 30 June 2012. Our vacancy rate has reduced from 7.3% to 6.5% and underlying pre-tax profit has increased by 10%, from £12.2m to £13.4m."

Financial Summary

for the year ended 30 June 2012

Recommended final dividend of 10.55p per share, making the total in respect of the year ended 30 June 2012 19.07p per share (2011: 18.51p). The final dividend will be paid as a Property Income Distribution (PID).

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

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

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

(4) See note 8.

Chairman's Statement

Rupert J Mucklow

I am pleased to report a strong operational performance by the Group for the 12 months ended 30 June 2012. Our vacancy rate has reduced from 7.3% to 6.5% and underlying pre-tax profit has increased by 10%, from £12.2m to £13.4m.

Our robust portfolio of industrial and commercial property principally located in the Midlands has continued to perform well during these difficult economic times, providing a solid income return, with minimal tenant defaults. However, at the same time, regional property values have remained under pressure, due to a cautious investment market and limited transactional evidence.

Rental income collected during the year rose by £1.8m (10%), while our property portfolio fell in value by £15.0m (5.6%). As a consequence, the net asset value per share reduced by 21p, but with underlying pre-tax profit growing by £1.2m, we are proposing a 3% increase in the Ordinary dividend.

Over the last five years, rental income received from our investment properties has increased by 40%, from £14.3m to £20.2m, while the value of our property portfolio has reduced by £85.7m in the same period. The initial yield on our investment portfolio is now 8.1% (2011: 7.5%) and the equivalent yield 8.7% (2011: 8.3%).

Our balance sheet remains in good shape with debt to equity gearing at 39% and a loan to value of 27%.

Results

The underlying pre-tax profit for the year, which excludes revaluation movements and profits from the disposal of investment, development and trading properties, increased by 10% to £13.4m (2011: £12.2m). Gross rental income received also rose by 10%, to £20.2m (2011: £18.3m).

EPRA earnings per share increased by 5.8% to 22.59p (2011: 21.36p). The statutory pre-tax profit for the 12 months ending 30 June 2012 was £0.1m (2011: £12.9m). The reduction was mainly due to a £15.0m deficit on the revaluation of investment properties and development land (2011: negative £0.4m). The trading profit for the year was £1.5m (2011: £0.0m).

EPRA net asset value per share reduced during the year, from 318p to 297p, as a result of the decline in property values. Shareholders' funds were £177.6m (2011: £188.6m), while borrowings net of cash amounted to £69.0m, representing 39% of shareholders' funds (2011: £67.7m and 36%).

The Board is recommending the payment of a final dividend of 10.55p per Ordinary share, an increase of 3% over last year (2011: 10.24p), making a total for the year of 19.07p (2011: 18.51p). Following approval by shareholders, the final dividend will be paid on 2 January 2013, to shareholders on the register at the close of business on 30 November 2012. The final dividend will be paid as a PID.

Property review

The Midlands Industrial property market picked up a little in the second half of the financial year. We secured a number of new lettings to local companies and trade operators. Our void rate at 30 June 2012 was 6.5% (2011: 7.3%), our lowest level for 5 years.

Our tenant retention rate also improved during the year, with 86% of leases renewed on expiry and only 22% of break clauses operated. Rent collection was better than the previous year and we experienced virtually no bad debts.

There is now a shortage of good quality industrial space of all sizes in the Midlands and rental levels and letting incentives are slowly starting to harden. There has been an increase in the number of letting enquiries for larger units (over 20,000 sq ft), particularly from the automotive industry. However, demand is still patchy and while we continue to look at potential opportunities, the market is not strong enough for us to consider carrying out any new speculative developments.

We sold a six acre industrial site in Wakefield, Yorkshire during the year for £1.5m, marginally above book value. Any future developments are likely to be focused on the Midlands.

Our joint planning application with Helical Retail for a mixed use development including our 20 acre site in Tyseley, Birmingham, was approved in the second half of the financial year. As a result, we will benefit from having five acres of industrial land rezoned for non-food retail.

The regional investment market has been very quiet all year, with few quality properties becoming available or transactions being concluded. There are plenty of distressed sellers and secondary properties available, but only a limited number of cash buyers. Most purchasers are looking for discounts, which has an impact on property values.

We acquired two investment properties during the period; a modern 15,800 sq ft office building in Coventry and a prominent 64,300 sq ft industrial unit, close to junction 9, M5 motorway at Tewkesbury. The combined income from both properties was £0.54m per annum and the total cost was £5.8m, including stamp duty.

DTZ Debenham Tie Leung carried out a valuation of our property portfolio as at 30 June 2012. The investment properties and development land were valued at £252.8m, which showed a reduction of £15.1m over the 30 June 2011 book value.

The initial yield on the investment properties was 8.1% (2011: 7.5%) and the equivalent yield 8.7% (2011: 8.3%). Investment properties and development land owned by the Group for the last 5 years, had fallen in value by £91.0m (34%), while £66.3m of subsequent acquisitions and development properties had appreciated in value by £5.3m (8%).

The majority of our investment portfolio comprises Midlands industrial property, built over the last 20 years. The average rent and capital value per square foot for our Midlands industrial properties, at 30 June 2012, was £4.95 and £51 respectively, which compares with £4.82 and £77 per square foot in 2007.

Prime industrial rents in the Midlands are currently around £5.50 per square foot. Industrial rents over the last 5 years have remained stable, while values have declined by 34%. The current cost to procure any new industrial development would be nearer £100 per square foot and require a rental level in excess of £6.50 per square foot, to be profitable.

DTZ Debenham Tie Leung also valued our trading properties at 30 June 2012. The total value was £1.9m, which showed an unrecognised surplus of £1.4m. We sold a farm at Penn, near Wolverhampton in the first half year for £1.7m, realising a trading profit of £1.5m. The property comprised a farm house, barn and approximately 270 acres of land.

Total net borrowings at our year end had risen to £69.0m (2011: £67.7m). Debt to equity gearing was 39% and LTV of 27%. There are no long-term banking facilities due for repayment until 2014 and we still had £19.5m of undrawn facilities at 30 June 2012.

Outlook

An increase in demand for Midlands industrial space and a dwindling supply of modern property would normally be the catalyst for rental growth and an improvement in capital values. However, these are not normal times and although there are supply constraints, the Midlands industrial market is still fragile and property investors remain concerned about future economic prospects.

It is difficult to predict what may happen over the next 12 months and beyond. We are not expecting much change in our vacancy rate. Our property portfolio is well positioned to benefit from income and capital growth, when occupier and investor confidence is restored. However, in the meantime, we shall continue to grow rental income through selective investment acquisitions and actively manage our properties, to maintain occupancy levels.

Rupert J Mucklow

Chairman

4 September 2012

Property and Finance Review

Justin Parker, Managing Director

David Wooldridge, Finance Director

Review

This year has seen us celebrate our 50th Anniversary as a listed company. It has also been 5 years since the peak of the last property cycle.

For the last 5 years, while property values have been declining, we have focused our attention towards improving earnings, by generating as much rental income from our investment portfolio as possible.

The annual rental income received from our investment portfolio has risen by 40% since 30 June 2007, from £14.3m to £20.2m, while the value of our property portfolio has reduced by £85.7m during the same period.

Despite the testing economic conditions, the Group has achieved a strong operational performance over the course of the 2011/2012 financial year. Through a combination of asset management and selective investment purchases we have reduced our vacancy rate to a very encouraging 6.5% and, in turn, increased our rental income by 10%.

As a result of our strong balance sheet, modest gearing level of 39% and quality property portfolio we remain well positioned to continue to perform, during these uncertain times.

Strategy

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

·; Selectively acquiring and disposing of investment properties;

·; Developing new properties for long-term investment; and

·; Actively managing our assets to enhance value.

We continue to be a selective developer of well-located, high quality property and a counter-cyclical investor in investment property. We believe that the precise timing of acquisitions and disposals is crucial in boosting returns from our existing property portfolio. In addition, the proactive approach to the management of our assets allows us additional opportunity to enhance overall value.

Investment

The Midlands region remains the primary geographical focus of our portfolio, which is reflected in our purchasing criteria.

Pricing in the UK commercial property market remains volatile and the investment market cautious. There has been very little investment activity outside London and as a consequence there have been a limited number of buying opportunities for us to consider.

Despite a dearth of opportunities, we have acquired two quality investments during the year. Both are extremely well located in terms of their prominence to the road network and within their respective commercial areas. The total cost of these two properties was £5.8m, producing an average income return of 9.3%.

1. Compton Court, Binley, Coventry

Acquired in February 2012. This 15,800 sq ft office building was built in 2000 to a high specification and is let to a firm of lawyers at a current rent of £237,500 per annum for a further 3 years. The property is located on the Binley Business Park, close to the A46 Coventry By-Pass and adjoins another of our existing holdings, Oak Tree Court. The property was acquired for £1.6m reflecting a net initial yield of 14.7%.

2. 17, Shannon Way, Tewkesbury Business Park

Acquired in April 2012. This is a modern 64,300 sq ft industrial unit located on the front of this established business park next to junction 9 of the M5 motorway. It has recently been let to the printers Chesapeake Ltd on a 15 year lease at an initial rent of £304,779 per annum, increasing to £336,861 per annum at the end of the 5th year. The purchase price was £4.2m, reflecting a net initial yield of 7.3%, with a guaranteed income return of 8.0% at the fifth year review.

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

Disposals

We disposed of our undeveloped industrial land in Wakefield, Yorkshire on 15 May 2012 for £1.5m. This disposal price realised £0.1m above book value.

Development

Our joint planning application with Helical Retail for a 33 acre mixed use development in Tyseley, was approved by Birmingham City Council on 26 April 2012. We will benefit from having 5 acres of industrial land being rezoned for non-food retail and a new 'spine' road, which will greatly improve the prominence of our 20 acre site. However it is unlikely that any development will take place until 2013 at the earliest.

All our main commercial development land, comprising over 30 acres, continues to be actively marketed to prospective tenants. There are signs that the pre-let market is starting to improve as a result of a shortage of good quality industrial accommodation in the Midlands. However given the continued fragility of the occupier market we feel it prudent to put on hold any speculative development until a more confident and stable market returns.

Asset Management

One of the most important elements of our business is that of driving additional capital and rental value through the strong asset management of the existing property portfolio. As a result of a number of lettings, lease renewals, rent reviews and additional income from acquisitions, we have managed to drive our annual rent received up by 10% and the vacancy rate on the portfolio down to 6.5% (2011: 7.3%). This is our lowest level of vacancy for over 5 years and has the additional beneficial effect of mitigating our overheads, particularly void business rates.

We also improved our tenant retention profile during the year, with 86% of leases renewed on expiry and only 22% of break clauses operated. Midlands industrial rental levels have remained stable and we have experienced virtually no tenant failures throughout the year.

Over the course of our financial year there has been a distinguishable rise in the level of letting requirements. We are seeing encouraging evidence that rental levels and letting incentives are starting to harden for better quality properties, as tenant demand picks up and availability of modern space reduces. 

Whilst this rise in the level of requirements has been mainly for properties over 20,000 sq ft we have been successful in securing a number of new lettings to local companies and trade operators including Howdens, Screwfix, Euro Car Parts, Floors 2 Go and City Electrical.

Property Valuation

DTZ Debenham Tie Leung carried out a valuation of our property portfolio as at 30 June 2012. Our investment properties and development land were valued at £252.8m (2011: £261.3m), which showed a deficit of £15.1m over last year's book value.

Industrial property fell in value by 4.3%, offices by 2.5% and retail by 5.8%. The initial yield on our investment properties moved out to 8.1% (2011: 7.5%) and the equivalent yield was 8.7% (2011: 8.3%).

Rental income received during the year increased by £1.8m, from £18.3m to £20.2m at 30 June 2012. Most of the additional rent came from investment properties acquired over the last 2 years.

There was very little activity in the regional investment market over the last 12 months and as a consequence, property yields continued to drift on the back of limited comparable evidence.

In the last 5 years, our retained investment properties and development land have fallen in value by £91.0m (34%), while we have invested £66.3m in subsequent acquisitions and developments, which have appreciated in value by £5.3m (8%).

Industrial rental levels in the Midlands have remained stable over the last 5 years, while values have been declining. Our Midlands industrial property, including the recent additions to the portfolio, is currently valued at £51 per square foot, which is around half the replacement cost.

Trading Property

During the first half of the financial year we disposed of a farm at Penn, near Wolverhampton. This comprised a farm house, barn and 270 acres of agricultural land. The disposal price was £1.7m, realising a trading profit of £1.5m.

The Group's trading properties mainly comprise residential land and were valued by DTZ Debenham Tie Leung as at 30 June 2012 at £1.9m which shows an unrecognised surplus of £1.4m over book value.

Finance review

Although our statutory profit is significantly down on the prior year, due to reductions in the investment values for our regional property portfolio, our operational performance has been robust.

The Group's underlying profit increased by £1.2m (10%) in the year, demonstrating the benefits of our low gearing level. In the past two years we have utilised part of our banking facilities in acquiring seven investment properties, which account for 11% of the Group's investment and development properties as at 30 June 2012.

Gross rental income has increased by £1.8m (10%), mainly as a result of those acquisitions. Two units were surrendered in the year, at a total premium of £0.3m, with both units now re-let.

Property outgoings have increased over the prior year, from 3.5% of rental income to 4.7%, principally due to refurbishment costs on the re-letting of vacant units and the removal of void rate reliefs on smaller industrial units.

Net rental income rose by 8.5% to £19.2m.

Administration expenses were virtually unchanged in the year. No bonuses have been paid or declared to directors or employees in respect of either the 2011 or 2012 financial years.

Net finance costs increased by £0.2m, following the investment acquisitions referred to above, as well as the reduction in the fair value movement on the Group's interest rate caps referred to below.

In addition to the movements in underlying profits, the sale of a trading property added £1.5m to pre-tax profit and the fair value movement on the Group's interest rate caps reduced it by £0.2m.

We also realised a profit of £0.3m on the disposal of non-income producing investment and development properties with a book value of £1.4m.

The Group's investment and development portfolio declined in value by £15.1m during the year, with £15.0m of that non-cash amount being reflected in pre-tax profit. This reduction in value is the primary reason for the reduction in the Group's statutory pre-tax profit from £12.9m to £0.1m.

Although the capital value of the Group's portfolio declined by 5.6% over the year, operationally the portfolio remains strong, with occupancy levels increasing from 92.7% to 93.5%, current passing rent up by £0.7m and bad debt costs reflected in pre-tax profit of only 0.04% of gross rental income. Three tenants vacated during the year due to insolvency in respect of 17,500 sq ft, or 0.5% of the portfolio.

Taxation

The Group continues to operate as a Real Estate Investment Trust, so profits and gains from the property investment business are normally exempt from corporation tax. The tax charge in respect of the current financial year of £0.1m arises from the profit on sale of trading properties, which are outside of the REIT ring fence. This charge has been offset by a £0.2m credit from the release of provisions created in previous years which are no longer required, as the uncertainties have been removed.

Earnings per share

Basic earnings per share, which includes the valuation movement, reduced from 22.43p to 0.28p. EPRA earnings per share, which excludes the non-cash valuation movements, as well as the profit on sale of trading, investment and development properties, increased by 5.8% to 22.59p.

Dividend

The interim dividend of 8.52p per Ordinary share was paid as a Property Income Distribution ("PID"), attracting a 20% withholding tax for shareholders who are not eligible for gross payment.

Reflecting the improvement in underlying profitability, the Directors have proposed a 3% increase in the final dividend to 10.55p, bringing the total in respect of the year to 19.07p, an overall increase of 3%. The final dividend, if approved by shareholders, will also be paid as a PID. The dividend will be paid on 2 January 2013 to shareholders on the register at the close of business on 30 November 2012.

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 and final dividends total £11.5m, amounting to 86% of our underlying pre-tax profit.

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 Group financial statements.

Net assets

Net assets have reduced from £188.6m to £177.6m, a 19p reduction in net asset value per share to 295p. The valuation reduction amounts to 25p per share, with the balance being virtually all profits retained after dividends.

Dividend payments in the year reduced net assets by 19p.

EPRA net asset value per share, which adjusts for the valuation of trading properties and derivatives, has reduced by 21p to 297p. This reflects the above, as well as the reduction in valuation of trading properties following the disposal of our farm at Penn, Wolverhampton, for £1.7m in the year, at a profit of £1.5m over book value.

Gearing (net of cash) has increased from 36% to 39%, with £69.0m of net debt (2011: £67.7m). We remain well within our self-imposed gearing limit of 50% of net assets. This level of debt equates to 27% of the DTZ valuation of our investment and development portfolio, a low level compared to other REITs and property companies. Further scope exists for earnings enhancing investment acquisitions.

All of the Group's properties are wholly owned.

Financing, cash flow and going concern

The Group continues to generate a strong operating cash flow (£15.5m, up from £14.5m in 2011), in line with the growth in our underlying profits. Rent collection rates improved over the year, and £3.4m has been received in respect of trading, investment and development property disposals. A summary of the cash flows for the year is set out below.

Given the maturity profile of the Group's banking facilities, no banking facilities have been entered into or renewed during the financial year, with the exception of the renewal of the Group's £5.0m overdraft in November 2011.

As at the date of this preliminary announcement the Group had drawn £26.5m from the 2014 Revolving Credit Facility and £0.5m from the overdraft, leaving undrawn amounts of £13.5m from the Revolving Credit Facility and £4.5m from the Group's overdraft. The Group's £20.0m 2014 Term Loan remains fully drawn.

Of the remaining borrowings held by the Group at 30 June 2012, only £4.2m of debenture stock expires in less than five years. The £20m Lloyds Bank loan expires in 2023 and the £675,000 of preference share capital has no redemption date.

The Group's available facilities as at 30 June 2012 therefore consisted of:

The weighted average cost of the above borrowings was 4.1%, and the weighted average remaining term (excluding preference shares) was 4.7 years, as at 30 June 2012.

Of the £89.9m, £24.9m is at fixed rates. The Group has entered into interest rate caps in respect of £50.0m (2011: £50.0m) of the HSBC term loan and revolving credit facilities, in order to limit the impact to the Group of increases in LIBOR interest rates.

Only the overdraft, which is due for renewal in November 2012, is due for renewal within twelve months of the date of this document.

At the date of this preliminary announcement the Group had £109.9m of properties that were unencumbered, providing significant capacity to raise additional finance, if required, or to provide additional security for existing facilities, should property values fall. We are complying with our banking covenants and the directors do not expect this position to alter in the forthcoming twelve months. Additional information about the going concern assumption is provided in the accounting policies note. The directors have considered our forecast cash flows, the Group's low gearing, significant portfolio of unencumbered properties and the maturity profile of our borrowings, and have a reasonable expectation that the Group has adequate resources to continue for the foreseeable future. Accordingly, the directors continue to adopt the going concern basis in preparing the annual report and accounts.

Analysis of borrowings at 30 June 2012

Outlook

There are few signs of improving economic conditions over the short term. Both the occupier and property investor markets remain sluggish despite some positive signs of an increasing demand/supply imbalance for quality Midlands industrial property.

We remain focused on maintaining a high occupancy level and maximising our income return. Our average rent and capital value across our industrial portfolio remains well below replacement cost and due to the defensive qualities of the properties in our portfolio, we remain in a strong position to benefit from any upturn in the property market.

We expect to see an increase in the number of suitable investment opportunities over the next 12 months and we are looking to continue the expansion of our Midlands industrial portfolio. 

Justin Parker David Wooldridge

Managing Director Finance Director

4 September 2012 4 September 2012

Group Statement of Comprehensive Income

for the year ended 30 June 2012

Statement of Changes in Equity

for the year ended 30 June 2012

Group Balance Sheet

at 30 June 2012

Rupert J Mucklow

David Wooldridge

Group Cash Flow Statement

for the year ended 30 June 2012

NOTES TO THE ACCOUNTS

1 Accounting policies

Basis of preparation of financial information

The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) adopted for use in the European Union and therefore comply with Article 4 of the EU IAS regulation. Whilst the financial information included in this preliminary announcement has been computed in accordance with IFRSs, this announcement itself does not contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs on 28 September 2012.

The preliminary announcement was approved by the board of directors on 4 September 2012. The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 30 June 2012 or 2011 as defined under Section 434 of the Companies Act 2006. The financial information for the year ended 30 June 2011 is derived from the statutory accounts for that year which has been delivered to the Registrar of Companies and those for 2012 will be delivered following the Company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements 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 deferred tax thereon and certain financial assets, with consistent accounting policies to the prior year.

As at 30 June 2012 the Group had £19.5m of undrawn banking facilities and had drawn down £25.5m from its HSBC £40m 2014 Revolving Credit Facility. The Group's £5.0m overdraft, which is due for renewal within 12 months of the date of this document, was undrawn. Given these facilities, the Group's low gearing level of 39% and £109.9m of unencumbered properties, significant capacity exists to raise additional finance or to provide additional security for existing facilities, should property values fall. Accordingly, the directors continue to adopt the going concern basis in preparing the annual report and accounts.

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

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

Standards in issue but not yet effective

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

In addition, Improvements to IFRSs (issued May 2012) is the 2011 tranche of the Improvements to IFRS project and these have a number of minor amendments to existing IAS and IFRS, which require implementation for the Group from 1 July 2013. 

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

Revenue recognition

Rental income

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

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

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

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

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

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

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

Dividends and interest income

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

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

Cost of properties

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

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

Valuation of properties

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

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

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.

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.

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

Property, plant and equipment

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

Any revaluation increase arising on the revaluation of such land and buildings is credited to the properties revaluation reserve 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 surplus remaining in the properties revaluation reserve is transferred directly to retained earnings.

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

Depreciation

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

Government grants

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

Share-based payments

The cost of granting equity-settled share options and other share-based remuneration is recognised in the 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.

Deferred taxation

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

Taxation

The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the 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.

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

Group undertakings

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

Financial instruments

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

Trade receivables

Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in the 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 12 to the annual report. Gains and losses arising from changes in fair value are recognised directly in equity in the investments revaluation reserve with the exception of impairment losses, which are recognised directly in the 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 are classified as FVTPL.

Cash and cash equivalents

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

Financial liabilities and equity

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

Bank borrowings

Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlements or redemption and direct issue costs, are accounted for on an accrual basis in the 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. 

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.

The tax credit in the current financial year reflects the removal of provisions in respect of prior year liabilities.

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

A reduction in the main rate of corporation tax from 26% to 24% with effect from 1 April 2012 was substantively enacted on 26 March 2012 and as such deferred tax at the balance sheet date has been recognised at the reduced rate and current tax for the year ended 30 June 2012 has been calculated at the blended rate of 25.5%. A reduction in the main rate of corporation tax to 23% with effect from 1 April 2013 was substantively enacted on 3 July 2012 and a proposed further reduction to 22% with effect from 1 April 2014 was announced on 21 March 2012. As these future rate reductions had not been substantively enacted at the balance sheet date, they have not been reflected in these financial statements and their effect will be accounted for in the period they are substantively enacted.

The Group became a Real Estate Investment Trust (REIT) on 1 July 2007. Under the tax rules which apply to REITs properties which are developed and sold within three years of completion do not benefit from the normal REIT tax exemption on disposal gains. The Group currently own £21.0m (2011: £31.2m) of properties which have completed development during the previous three years. If these properties had been disposed of at their 30 June 2012 valuation, then tax of £1.6m (2011: £1.7m) would have become payable. No deferred tax has been provided in respect of this potential tax liability as the Group has no current plans to dispose of these properties.

The directors propose a final dividend for the year ended 30 June 2012 of 10.55p (2011: 10.24p) per Ordinary share, totalling £6.3m.

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 2 January 2013 to shareholders on the register at the close of business on 30 November 2012.

7 Earnings per share and net asset value per share

Earnings per share

The basic and diluted earnings per share of 0.28p (2011: 22.43p) has been calculated on the basis of the weighted average of 60,140,942 Ordinary shares (2011: 60,040,486 Ordinary shares) and profit of £0.2m (2011: £13.5m).

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 137,432 Ordinary shares were granted in the year (2011: 136,172 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 second three year award under the 2007 Performance Share Plan vested in the period, with 93,696 Ordinary shares being issued and with 11,715 shares lapsed.

Net asset value per share

The net asset value per share of 295p (2011: 314p) has been calculated on the basis of the number of equity shares in issue of 60,179,342 (2011: 60,085,646) and net assets of £177.6m (2011: £188.6m). The EPRA net asset value per share has been calculated as follows: 

 The closing book value shown above comprises £234.1m (2011: £243.2m) of freehold and £17.7m (2011: £17.0m) of leasehold properties.

The properties are stated at their 30 June 2012 market value and are valued by DTZ Debenham Tie Leung, professionally qualified external valuers, in accordance with the RICS Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors. DTZ Debenham Tie Leung have recent experience in the relevant location and category of the properties being valued.

Additions to freehold and leasehold properties include capitalised interest of £Nil (2011: £0.1m). The capitalisation rate used in 2011 was 3.59%. The total amount of interest capitalised included in freehold and leasehold properties is £5.3m (2011: £5.3m). Properties valued at £142.9m (2011: £150.3m) were subject to a security interest.

Responsibility statement of the directors on the annual report

The responsibility statement below has been prepared in connection with the company's full annual report for the year ending 30 June 2012. Certain parts thereof are not included within this announcement.

We confirm to the best of our knowledge:

This responsibility statement was approved by the board of directors on 4 September 2012 and is signed on its behalf by:

DATES

Annual General Meeting

The Annual General Meeting will be held on Tuesday 6 November 2012 at 11.30 a.m. at the Birmingham Botanical Gardens, Westbourne Road, Edgbaston, Birmingham, B15 3TR.

Dividend

The final dividend, if approved, will be paid on 2 January 2013 to Ordinary shareholders on the register on 30 November 2012.

Report and Accounts

The full report and accounts for the year ended 30 June 2012 will be available on 28 September 2012.

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