Mucklow (A & J) Regulatory News (MKLW)

Mucklow (A & J) Group plc

4 September 2013

Rupert Mucklow, Chairman commented: "I am pleased to report another solid performance by the Group for the year ended 30 June 2013. Pre-tax profit and net asset value per share have both increased, while our financial position has been further strengthened, by the renewal and extension of our principal banking facilities."

Financial Summary

for the year ended 30 June 2013

Recommended final dividend of 10.86p per share (2012: 10.55p), making the total in respect of the year ended 30 June 2013 19.64p per share (2012: 19.07p). 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 8.

(3) Excludes the fair value of derivative financial instruments and includes the surplus on trading properties. See note 8.

(4) See note 8.

Chairman's Statement

Rupert J Mucklow

I am pleased to report another solid performance by the Group for the year ended 30 June 2013. Pre-tax profit and net asset value per share have both increased, while our financial position has been further strengthened, by the renewal and extension of our principal banking facilities.

Results

Statutory pre-tax profit for the 12 months ended 30 June 2013 was £16.3m, compared with £0.1m for the corresponding period last year. The difference is mainly due to a £2.8m increase in the value of the investment portfolio (2012: negative £15.0m). There was no trading profit during year (2012: £1.5m). EPRA earnings per share was 22.43p (2012: 22.59p).

The underlying pre-tax profit, which excludes revaluation movements and profit on the sale of investment and trading properties, increased marginally from £13.4m to £13.5m. Gross rental income received rose from £20.2m to £20.4m.

EPRA net asset value per share increased by 2.7% during the year from 297p to 305p per share. Shareholders' funds were £182.5m (2012: £177.6m), while borrowings net of cash amounted to £74.9m, representing 41% of shareholders' funds (2012: £69.0m and 39%).

The Board is recommending the payment of a final dividend of 10.86p per Ordinary share, an increase of 3% over last year (2012: 10.55p), making a total for the year of 19.64p (2012: 19.07p). Following approval by shareholders, the final dividend will be paid on 2 January 2014, to shareholders on the register at the close of business on 29 November 2013. The final dividend will be paid as a PID.

Property Review

For the last five years, while the property market has remained fragile, our priority has been to maintain a high occupancy level, in order to maximise revenues from our existing investment properties and reduce costs. At the same time, we have also focused on utilising our strong balance sheet to capitalise on adverse market conditions, to acquire additional income producing properties when suitable opportunities have arisen.

Over the last 12 months, we have continued actively to manage our property portfolio, negotiating a number of lease extensions and securing long term funding to support investment acquisitions. Business confidence appears to be improving in the industrial property sector, which is reflected in a positive valuation uplift for the year. However, provincial offices and retail property are still suffering from weak investor and occupier demand.

Industrial property accounts for approximately two thirds of the value of our investment portfolio. Our average industrial rent and capital value per square foot in the Midlands at 30 June 2013 was £4.94 and £53 respectively (2012: £4.95 and £51), significantly below replacement cost.

Our vacancy rate at 30 June 2013 remained low at 6.7% (2012: 6.5%). This figure included 40,000 sq ft of industrial space (1.1% of total available space) which was returned to us on 25 June 2013, following the expiry of 4 leases.

We have continued to see steady occupier demand for our vacant industrial property. Letting incentives have hardened, but the market is still not strong enough to start aggressively enhancing rental levels, particularly without evidence from any new developments.

There is still a real shortage of good quality industrial space across the Midlands. However, demand is currently being satisfied by the limited supply. There is some interest in pre-let development, which may set higher rental levels, but we need to see rents rise by at least £1 psf before we will start any speculative development.

The regional investment market for better quality industrial property noticeably picked up towards the end of our financial year. An increase in the number of Institutional Investors looking to buy in the Midlands, coupled with a slight improvement in market conditions, has started to compress yields and increase industrial property values. Property yields for offices and retail property with short income are still being penalised.

We acquired two industrial investments towards the end of the financial year at a total cost of £5.71m (excluding stamp duty and purchase costs), with a combined rental income of £0.53m pa and average net yield of 8.8%. They were:-

A prime 51,151 sq ft warehouse, built in 2000 and located close to Junction 13, A42(M) at Ashby-de-la-Zouch. The property has recently been let on a new 10 year lease to a large Italian lighting manufacturer at an initial rent of £0.23m pa (£4.50 psf) and capital value of £50psf.

A prominent Trade Park in Oldbury, West Midlands, built in 1990's and comprising 9 units totalling 61,207 sq ft and currently producing a rent of £0.30m (£5.23 psf), with a capital value of £51psf. There is one vacant unit (4,452 sq ft).

DTZ Debenham Tie Leung Limited revalued our property portfolio at 30 June 2013. The investment properties and development land were valued at £262.7m, which showed a revaluation surplus of £2.8m for the period (1.0%).

The initial yield on the investment properties was 7.8% (2012: 8.1%) and the equivalent yield was 8.5% (2012: 8.7%). Our industrial properties increased in value by 3.5%, while offices and retail properties reduced by 4.2% and 2.0% respectively.

DTZ Debenham Tie Leung Limited also valued our trading properties at 30 June 2013. The total value was £1.9m, which showed an unrecognised surplus of £1.4m. There were no disposals of trading property during the year.

Finance

We completed a new £20m, 10 year term loan with Lloyds TSB Bank Plc in the first half year at a fixed rate of 5.23% and renewed £64m of banking facilities with HSBC Bank Plc for a further 5 years from March 2013. Total net borrowings at our year end had risen to £74.9m (2012: £69.0m). Debt to equity gearing was 41% and loan to value 28%. Undrawn banking facilities amounted to £33.0m and average cost of debt at 30 June 2013 was 4.33%.

Outlook

There are signs that the Midlands industrial property market is slowly improving, but values still remain 30% below 2007 peak levels. We shall continue our strategy of steadily growing income by accumulating and managing our modern portfolio of quality investment properties, which should benefit significantly from capital appreciation in the medium to long term when occupier demand and rental growth resumes.

Rupert J Mucklow

Chairman

3 September 2013

Property and Finance Review

Justin Parker, Managing Director

David Wooldridge, Finance Director

The Group has maintained a healthy operational performance over the course of the 2012/2013 financial year. Through a combination of active management and selective acquisitions, we have kept our vacancy rate low at 6.7% and, in turn, increased our overall net rental income by 3.3% (£0.6m).

Our efforts remain concentrated on generating as much rental income from our existing assets as possible, particularly, while rental levels remain flat and to position the business so that it will benefit in the medium to long term when the occupier and investor markets improve.

With our strong balance sheet, conservative gearing (41%) and focused portfolio we are able selectively to acquire additional investment properties which offer attractive long-term returns to support future dividend growth.

Strategy and Business Model

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 Real Estate Investment Trust, we are committed to distributing 90% of the profits of our tax exempt business. We therefore expect dividends to be an important part of the total shareholder return.

Our long-term objective remains focused on accumulating a portfolio of high quality, modern, income producing properties, with potential for long-term rental and capital growth. Our primary geographic focus is the Midlands region.

The three areas of our strategy are:

We continue to be a counter-cyclical investor in modern, well located, quality investment properties, where we expect to achieve attractive returns. Given the long-term and cyclical nature of the property market, we believe that the precise timing of acquisitions and disposals is crucial in boosting returns from our existing property portfolio.

The core of our business is the investment property portfolio, which represents 96% of the value of the investment and development properties held. The investment portfolio consists of 54 properties/estates, with 334 units, totalling 3.5m sq ft.

We are also a selective developer of well-located, high quality property, developing properties when the occupier market is strong.

In addition, the proactive approach to the management of our assets allows us additional opportunity to enhance overall value.

Our low cost base, including only twelve employees, as well as three non-executive directors, enables us to pay a high proportion of our profits as dividends. In addition, the small size of the team enables us to react quickly to changing market conditions, and the liquidity of our financing provides us with the ability to transact quickly on investment acquisitions.

Review

Towards the end of our financial year, there were signs of greater investor confidence and increased depth and liquidity in the Midlands industrial market. It appears that an increasing number of both domestic and international investors are now beginning to invest outside London and the South East, which is starting to be reflected in capital values.

The Midlands industrial occupier market is also slowly improving, partially on the back of strong demand from the automotive and distribution sectors. Rental incentives are continuing to harden for better quality properties as tenant demand picks up and available space reduces. This is likely to lead to upward pressure on rental levels at some point in the future and stimulate more pre-let and speculative development.

We acquired two quality industrial investments in the Midlands region during the year. Each property is well located in terms of their prominence to the road network and both offer good rental growth prospects. The total cost of these two properties was £5.71m (excluding purchase costs), with a combined rental income of £0.53m per annum producing an average net income return of 8.8%.

1. Redwood Trade Park, Oldbury Road, Oldbury

Acquired in June 2013. This 61,207 sq ft, nine unit industrial /trade park was built in the 1990's and is let to various tenants including: BSS, Rexel Senate, Euro Car Parts and Dulux at a current rent of £297,252 per annum. There is one vacant unit which when let should increase the passing rent to around £320,000 per annum. The property is located in a prominent position fronting the A457 Oldbury Road in an established industrial location close to Junctions 1 & 2 of the M5 motorway approximately 4 miles west of Birmingham city centre. The property was purchased for £3.15 million reflecting a net initial yield of 9.0% and a reversionary yield of 9.7% on the letting of the one vacant unit.

2. Flagstaff 42, Ashby-De-La-Zouch

Acquired in June 2013. This is a modern 51,151 sq ft industrial unit. The property is prominently located on the established Flagstaff 42 Business Park in Ashby-de-la-Zouch which is 0.5 miles west of Junction 13 of the A42(M). It is let to Manfrotto Lighting Ltd on a 10 year term from December 2012 at a rent of £230,265 per annum. The property was acquired for £2.56 million reflecting an income return of 8.5%.

Midlands' industrial property values are still 30% below their pre-recession peak levels, despite the fact that rental levels have remained stable. We continue to believe it is a good time to be purchasing modern investment properties, providing the right opportunities can be found and they can be acquired at a significant discount to replacement cost.

The latest acquisitions are let at an average rent of £4.89 psf and capital value of £51 psf, which is in line with our current industrial values and offer excellent long term growth potential.

There is a shortage of good quality industrial accommodation in the Midlands, however it is not financially viable for us speculatively to develop new space off current rental levels. We continue to look for opportunities for 'risk free' pre-lets on our 30 acres of development land, but there is currently very little development activity in the Midlands, as it remains difficult to secure commitments from potential tenants.

Asset management remains the Group's key focus. Through a proactive programme of lettings, lease renewals, lease extensions and rent reviews along with the additional revenue stream created from investment acquisitions our annual rent roll has risen from £20.6m to £21.2m. Whilst our occupancy levels at the financial year end were 93.3%, down marginally from last year's 93.5%, this was primarily due to 40,000 sq ft of industrial accommodation being returned to us in June 2013 following a number of simultaneous lease expiries.

Our tenant retention profile during the year was good, with 83% of leases renewed on expiry and only 5% of break clauses operated. We have experienced virtually no tenant failures throughout the year. We have also successfully negotiated a number of early lease extensions involving over £1.1m pa in rent, which will provide us with added security of income going forward.

DTZ Debenham Tie Leung Limited carried out a valuation of our property portfolio as at 30 June 2013. Our investment properties and development land were valued at £262.7m (2012: £252.8m), which showed a revaluation surplus of £2.8m for the period (+1%).

Our industrial property increased in value by 3.5%, while offices and retail properties reduced by 4.2% and 2.0% respectively. The initial yield on our investment properties was 7.8% (2012: 8.1%) and the equivalent yield was 8.5% (2012: 8.7%).

The increase in the capital value for our industrial property was due to improvements in the regional occupational market, together with a reduction in available space and better prospects for rental growth for investors.

Industrial property accounts for approximately two thirds of the value of our investment portfolio and provides us with a generous equivalent yield of 8.8%. Our Midlands industrial property, including the recent additions to the portfolio, show a low average base rent of £4.94psf (2012: £4.95psf) and a capital value of £53psf (2012: £51psf).

The Group's trading properties mainly comprise residential land and were valued by DTZ Debenham Tie Leung Limited as at 30 June 2013 at £1.9m (2012: £1.9m) which shows an unrecognised surplus of £1.4m over book value. There were no trading property disposals during the year.

Finance Review 

The Group has used the strength of our balance sheet to increase our financial liquidity, with total debt facilities rising to £109.9m and year-end undrawn amounts from £19.5m to £33.0m, enabling us to continue to pursue further, earnings enhancing, investment opportunities, whilst remaining a conservatively financed REIT.

Two investment property acquisitions (at a total cost of £6.0m) have been completed since the refinancings, leading to a marginal increase in our Loan to Value during the year, from 27% to 28%. Net balance sheet gearing remains low at 41% (2012: 39%).

Our net rental income has increased by 3.3% and EPRA net asset value per share has also increased by 3%, after paying dividends representing 7% of our opening net assets.

Reflecting this performance, the Board proposes a 3% increase in our final dividend, in line with the increase at the half-year stage.

Income

The Group's statutory pre-tax profit has increased by £16.2m on the prior year, from £0.1m to £16.3m, due mainly to a £2.8m revaluation increase in the investment values for our regional property portfolio, compared to a £15.0m decrease in the prior year.

Gross rental income has increased by £0.2m (1%) to £20.4m. Surrender premiums received from tenants reduced from £0.3m to £0.1m, whilst the impact of acquisitions in the current and previous financial year increased rents by £0.4m, compared to 2012.

Two investment acquisitions with a combined annual rent of £0.5m were completed in the year, both taking place in the final month of our financial year, leading to a limited impact on reported revenue in the period under review. Including those acquisitions, year-end annual passing rent roll has increased from £20.6m at 30 June 2012 to £21.2m at 30 June 2013.

Property outgoings have reduced compared to the prior year, from 4.7% of gross rental income to 2.7%, mainly due to decreased net refurbishment costs on the re-letting of units. Occupancy levels at the financial year end were 93.3%, down marginally from last year's 93.5%.

Net rental income rose by 3.3% to £19.8m.

Administration expenses increased by 4.9%, from £2.9m to £3.0m, principally due to the repositioning of our term debt facilities in the year, which is detailed later in this report. Total salary costs, including share based payment charges to the statement of comprehensive income, were unchanged at £1.9m. Bad debt costs recognised in pre-tax profit represent 0.09% of gross rental income for the year. Only 15,516 sq ft (0.4% of the property portfolio) has been returned to us due to insolvency in the twelve months under review.

An additional £0.3m of net finance costs were incurred in the current financial year, as a result of the higher percentage of fixed rate debt held by the Group and an increase in margin on our principal banking facilities, following the two refinancings, as well as a rise in the level of overall drawn debt.

Fair value movements on the Group's interest rate caps increased profit before tax by £0.02m (2012: reduced profit by £0.15m). No break costs have been incurred in respect of the Group's interest rate caps.

As a result of the above, the Group's underlying profit increased by £0.1m (0.5%) in the year.

No trading profit was recognised in the current financial year (2012: £1.5m).

The Group also realised a profit of £0.1m from a non-refundable deposit due to the failure of the proposed purchaser to complete the acquisition of the Golden Cross (Aston) unit just prior to our financial year end.

The value of the Group's investment and development portfolio increased from £252.8m to £262.7m during the year, due to additions of £6.0m, lease incentives of £1.2m and a revaluation gain of £2.8m (1.1%).

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 credit in respect of the current financial year of £0.04m arises from an overprovision in respect of the previous financial year.

Earnings per share

Basic earnings per share, which includes the valuation movement, increased from 0.28p to 27.21p. EPRA earnings per share, which excludes non-cash valuation movements, as well as the profit on sale of trading, investment and development properties, reduced by 0.16p per share (0.7%) to 22.43p, mainly due to tax adjustments in the previous financial year.

Dividend

Our efficient cost base and low gearing enables us to return a high proportion of our gross income to Shareholders, with dividends paid in the year amounting to 57% of our gross rental income (2012: 56%).

The interim dividend of 8.78p 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 10.86p, bringing the total in respect of the year to 19.64p, 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 2014 to shareholders on the register at the close of business on 29 November 2013.

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 £11.8m, amounting to 88% of our underlying pre-tax profit (2012: 86%).

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 increased from £177.6m to £182.5m, leading to an uplift of 8p in net asset value per share to 303p. The investment and development portfolio valuation increase amounts to 5p 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 also increased by 8p per share, from 297p to 305p.

Net debt has risen by £5.9m, from £69.0m to £74.9m (39% to 41% of net assets), reflecting the £6.0m of investment acquisitions in the financial year. We remain well within our self-imposed gearing limit of 50% of net assets. This level of debt equates to 28% of the DTZ valuation of our investment and development portfolio (2012: 27%), a low level compared to other REITs and property companies.

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, with £12.8m in the current financial year. A summary of the cash flows for the year is set out below.

The Group started the financial year with £89.9m of debt facilities, of which £19.5m (22%) was undrawn. Of these facilities, the £5.0m overdraft was due to expire within twelve months and the £60.0m HSBC term loan and revolving credit facility were due to expire in September 2014.

Having spent £26.8m on investment properties (net of disposal proceeds) in the previous two financial years, using our medium term, floating rate, revolving credit facilities, we decided to raise a further £20.0m of longer term fixed rate debt facilities, increasing both the amount of our facilities and the term of those facilities. In October 2012 we raised £20.0m from Lloyds Bank for 10 years at a fixed rate of 5.23%. The funds raised were used to repay existing HSBC revolving credit drawdowns, thereby freeing up capacity within those facilities.

In March 2013 we refinanced our principal bank facilities with HSBC, increasing the term to March 2018. The total level of the facilities - £65.0m - remains unchanged. The breakdown of the facilities has altered slightly, with the £40.0m revolving credit facility increasing by £4.0m to £44.0m, and the £5.0m overdraft reducing by the same amount to £1.0m. We have converted £4m of annually renewable overdraft facility into the five year term facility. The £20.0m term loan amount remains unchanged.

The two financings completed in the year represent 77% of our current total debt facilities.

The Group's available facilities as at 30 June 2013 therefore consisted of:

As a result of increasing the Group's facilities and fixed rate debt, the weighted average cost of the drawn borrowings as at 30 June 2013 was 4.8% (or 4.3% on total facilities), an increase from the 4.1% reported as at 30 June 2012, although the weighted average remaining term (excluding preference shares) also increased, from 4.7 years to 7.1 years.

Less than 5% of the total debt facilities (the £1.0m overdraft and £4.2m of debenture stock) are due to be refinanced within twelve months of the date of approval of these financial statements. The 11.5% debenture stock, with an annual interest cost of £0.5m, is due to be repaid on 1 July 2014. The HSBC term facilities of £64m (58% of the total) expire in more than four years, and the two Lloyds facilities (£40m, 36%) expire in more than 9 years. The preference shares have no redemption date.

Of the total debt facilities of £109.9m, £44.9m (41%) is at fixed rates (2012: £24.9m and 28%).

During the year, the Group has entered into £35.0m of interest rate caps (representing 32% of total debt facilities), at a cost of £0.3m, in respect of the refinanced term loan and revolving credit facilities for the duration of the new facilities, in order to limit the impact to the Group of increases in LIBOR interest rates. As a result of the caps, we continued to benefit from low LIBOR rates on 42% of our drawn debt at our year-end.

Total debt facilities have increased by 22% during the year, from £89.9m to £109.9m.

As at the date of this preliminary announcement the Group had drawn £13.5m from the 2018 Revolving Credit Facility and £0.0m from the overdraft, leaving undrawn amounts of £30.5m from the Revolving Credit Facility and £1.0m from the Group's overdraft. The Group's three term loans remain fully drawn.

At the same date, the Group had £75.3m 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.

Outlook

The Midlands industrial property market is showing encouraging signs of activity both in the occupational and investment arenas, which will hopefully start accelerating growth in rental and capital values.

Meanwhile, we aim to continue to take advantage of the Group's strong financial position, to enhance value for shareholders through steady and prudent acquisitions, actively managing income, whilst keeping voids to a minimum.

We have entered the 2013/14 Financial Year with cautious optimism.

Group Statement of Comprehensive Income

for the year ended 30 June 2013

Statements of Changes in Equity

for the year ended 30 June 2013

Group Balance Sheet

at 30 June 2013

Group Cash Flow Statement

for the year ended 30 June 2013

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 11 October 2013.

The preliminary announcement was approved by the board of directors on 3 September 2013. The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 30 June 2013 or 2012 as defined under Section 434 of the Companies Act 2006. The financial information for the year ended 30 June 2012 is derived from the statutory accounts for that year which has been delivered to the Registrar of Companies and those for 2013 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.

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.

Going concern

As at 30 June 2013 the Group had £33.0m of undrawn banking facilities and had drawn down £12.0m from its HSBC £44m 2018 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 gearing level of 41% and £75.3m 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.

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.

Standards in issue but not yet effective

At the date of authorisation of these financial statements, 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 adoption of these Standards, Amendments and Interpretations will either result in changes to presentation and disclosure, or are not expected to have a material impact on the financial statements.

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.

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.

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.

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 13 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 24% to 23% with effect from 1 April 2013 was substantively enacted on 3 July 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 2013 has been calculated at the blended rate of 23.75%. A reduction in the main rate of corporation tax to 21% with effect from 1 April 2014 and to 20% from 1 April 2015 was substantively enacted on 2 July 2013. 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 £21.3m (2012: £21.0m) of properties which have completed development during the previous three years. If these properties had been disposed of at their 30 June 2013 valuation, then tax of £1.4m (2012: £1.6m) would have become payable. The three year period for those properties expired before the date of approval of these financial statements. No deferred tax has been provided in respect of this potential tax liability as the Group had no plans to dispose of these properties at the balance sheet date.

The directors propose a final dividend for the year ended 30 June 2013 of 10.86p (2012: 10.55p) per Ordinary share, totalling £6.5m.

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 2014 to shareholders on the register at the close of business on 29 November 2013.

Earnings per share

The basic and diluted earnings per share of 27.21p (2012: 0.28p) has been calculated on the basis of the weighted average of 60,218,113 Ordinary shares (2012: 60,140,942 Ordinary shares) and profit of £16.4m (2012: £0.2m).

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 112,583 Ordinary shares were granted in the year (2012: 137,432 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 third three year award under the 2007 Performance Share Plan vested in the period, with 63,176 Ordinary shares being issued and with 22,978 shares lapsed.

Net asset value per share

The net asset value per share of 303p (2012: 295p) has been calculated on the basis of the number of equity shares in issue of 60,242,518 (2012: 60,179,342) and net assets of £182.5m (2011: £177.6m). The EPRA net asset value per share has been calculated as follows:

The closing book value shown above comprises £244.4m (2012: £234.1m) of freehold and £17.4m (2012: £17.7m) of leasehold properties.

The properties are stated at their 30 June 2013 market value and are valued by DTZ Debenham Tie Leung Limited, 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 Limited 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 (2012: £Nil). The total amount of interest capitalised included in freehold and leasehold properties is £5.3m (2012: £5.3m). Properties valued at £187.5m (2012: £142.9m) 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 2013. 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 3 September 2013 and is signed on its behalf by:

DATES

Annual General Meeting

The Annual General Meeting will be held on Tuesday 12 November 2013 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 2014 to Ordinary shareholders on the register on 29 November 2013.

Report and Accounts

The full report and accounts for the year ended 30 June 2013 will be available on 11 October 2013.

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