Last checked at 16 Oct 2008 07:00
16 October 2008
Speymill Deutsche Immobilien Company plc
("SDIC" or "the Company")
Preliminary results for the year ended 30 June 2008
Speymill Deutsche Immobilien Company plc (AIM: SDIC; SDCC), the pan-German residential property investment company listed on AIM, is pleased to announce its preliminary results for the year ended 30 June 2008.
Business Highlights
Ordinary shares
Increase in market value of portfolio over purchase price of 6.3%
Investment of original placing proceeds completed during the financial year
Net operating profit of €4m (30 June 2007: €0.9m)
Loss after tax of €32.5m (30 June 2007: profit of €17.2m)
€32m refurbishment programme is now substantially complete that will have a positive effect on occupancy
C shares
Placing proceeds have now been fully invested post year-end
€569.5m of property either notarised or completed as at 30 June 2008
Increase in market value of portfolio over purchase price of 2.4%
Net operating loss of €30.3m (30 June 2007: €0.5m)
Loss after tax of €34.2m (30 June 2007: profit of €9.5m)
€24m refurbishment programme
Scheduled works due for completion by July 2009
Combined portfolio
The valuation of the combined portfolio of €1,476m* equates to a valuation yield of 6.4% on current net rents as of 30 June 2008
Gross rents of €109.6m for the period
LTV of approximately 80% on the combined portfolio
Cash and cash equivalents of approximately €103.4m as at 30 June 2008. Current cash available of €55.9m as at 6 October 2008 (excluding €24m commitment for refurbishment)
Benefits of merger include:
Enhanced shareholder liquidity
Better strategic positioning for the Company
Reduced management fee for the combined portfolio
Larger resultant Ordinary Share Portfolio
Conversion ratio from C Shares to Ordinary Shares of 0.68977
Future strategy
Potential for main market listing after merger, if market conditions are favourable, further enhancing liquidity and broader exposure to investors
Available profits to be paid out as dividends to investors upon stabilisation
Despite no financing anticipated for at least the next 5 years, the Company is examining all options to deleverage the portfolio
As the portfolio becomes stabilised and occupancy levels increase, material reductions in LTV will be achieved even if no actions are taken to de-lever the portfolio
*Approximately €15m in additional property acquisitions completed immediately after the year-end.
Chairman's Statement
I have pleasure in presenting the results of the company for the year ended 30 June 2008. Speymill Deutsche Immobilien Company plc ("SDIC") is an Isle of Man Company established to invest in a diversified portfolio of residential property throughout Germany and to provide shareholders with an attractive level of income together with long-term capital growth. Following the merger of the two share classes, we expect SDIC to be one of the largest companies investing in German residential property, with leverage around 80% and a comfortable degree of liquidity in its shares. The combined portfolio will include over 26,000 apartment units, a sizeable proportion of which are located in and around the 15 largest German cities.
The 2008 financial year has been a year of advancement for your Company during which the proceeds of both the first and second placings have been invested to a prudent level having due regard to the consequences of the global credit crunch. Our results for 2008 must be viewed in the context of the Company's relative youth and the fact that a great deal of the investment of both the Ordinary and C Share portfolios has taken place during this financial year. These results therefore reflect the significant up-front costs, the positive effect of which can only become clear in future accounting periods.
The vacancy rates for the Ordinary Share portfolio have started to stabilise over the last quarter following the typical unsettling hand-over of management during ownership change. Refurbishments are nearing completion and occupancy levels should improve over the next period. Due to the commencement of the refurbishment program, vacancy related costs increased in the recent period.
Asset Values Increase Marginally
The total combined property portfolio valuation of €1.476bn, as of 30 June 2008, equates to a yield of 6.4% on current net rents. An additional €15m of property was purchased on 1 July 2008. Overall, asset values have increased by 4.8% on their cost at notarisation (excluding capitalised acquisition and refurbishment costs).The merger of Ordinary and C Shares will place SDIC as a leading investor in German residential properties, with amongst the highest free float market capitalisation of any company in the sector.
As at 30 June 2008, the value of the properties in the Ordinary Share Portfolio stood at 6.3% above their cost as at notarisation. In addition, the value of the C share properties had risen by 2.4% on their cost at notarisation. The latter rise is particularly encouraging given that these assets had been held for less than six months. The market value of the Company's hedging instruments rose by €3.7m during the financial year.
The net asset value attributable to the Ordinary Share portfolio decreased, however, by 14.7% during the year ended 30 June 2008 to €207.4m (30 June 2007: €243.1m), giving net assets per share of €1.22 (30 June 2007: €1.43).This fall is largely attributable to the upfront costs that I mentioned earlier.
The net assets attributable to the C Share Portfolio decreased by 14.3% to 206.3m (30 June 2007: €240.6m), giving a net asset per share of €0.85 (30 June 2007: €0.96). In addition to acquisition and other one-off costs overall net assets were also reduced by share buy-backs during the financial year.
During the year ended 30 June 2008, the Company made a loss after taxation of €66.8m (30 June 2007: profit of €26.7m, of which €38.2m was attributable to an unrealised gain in hedging instruments). Of this loss €57m is attributable to the change in fair value of investment property which, in turn, is attributable to the effect of acquisition costs of €29.1m and a charge for refurbishment costs of €50m.
Many of the costs associated with buying investment properties cannot be spread over future accounting periods. This has the effect of front loading charges to the Company's income statement during the accounting period in which the properties are acquired. As I mentioned in our December report, the full cost of the investment properties, as reflected in the books of the Company, includes acquisition costs in the region of 8% of the purchase price of which 3.5 -4.5% relates to real estate transfer tax. As a result of such costs we are obliged to reflect a revaluation loss in our accounts even though the market value of our investments has increased. There are also other direct non-recurring charges such as those related to the cost of acquisitions that adversely impact the income statement.
Ordinary Share Portfolio Refurbishment Substantially Completed
Property acquisitions were completed for the Ordinary Share portfolio in November 2007. Following a disposal of properties on an arm's length basis to the C Share Portfolio on 1 April 2008, the portfolio now contains 543 properties and 16,161 units.
Upon acquisition, a refurbishment programme was instigated that is now substantially complete, although additional units may be added to the programme on an ongoing basis as and when the need for work is identified. While the programme will be both income and value enhancing, the inevitable short-term effect has been an increase in vacancy that peaked at 13.2% during March 2008. Since the newly refurbished apartments have been available to rent, the vacancy rate has steadied and begun to fall.
C Share Portfolio Investment Completed
During May 2007, the Company raised a further €250m through the placing of C Shares.
As at 30 June 2008, €569.5m of investment property was notarised or completed. The completion of some of these transactions since the year-end means that the Company has now completed on the balance of all of these acquisitions. These assets have a net initial yield (based on purchase price including acquisition costs but excluding rental guarantees) of 6.7%, equal to a net annualised rent of €40.8m and a net stabilised yield of 7.1%. The vacancy rate as at notarisation was approximately 9.3% but the economic vacancy rate, that takes into account the effect of rental guarantees, was approximately 4.4%.
The C Share Portfolio will also be subject to an extensive refurbishment programme. Refurbishment costs of €23 million are being borne by the selling entities, with a further €24m being undertaken by the Company. Based on experience gathered from recent refurbishment work, it is anticipated that the scheduled work will be completed by July 2009.
Given the global credit crunch and the particularly adverse effect of this on the share prices of leveraged property companies, the Company is adopting a prudent approach with regard to the overall size and leverage of the C Share portfolio. The Company originally purchased interest rate hedging instruments to cover borrowings of €800m. As part of our defensive strategy, €350m of these were disposed of during the year.
Share Buy Backs
The Company repurchased 7,701,000 C Shares for cancellation during the period but the Board has decided to suspend future share buy backs to address investor concerns over leverage.
Reducing Leverage
The Company has a small amount of financing to complete and once this is completed the overall leverage on the merged portfolio on a loan-to-value basis will be approximately 80%. SDIC has two basic debt covenants, rental interest coverage and LTV. The Company is not presently at risk of breaching these covenants.
Merger of the Ordinary and C Share Portfolios
On 7 July 2008, the Company announced that the conditions had been met in order to bring about a merger of the C and Ordinary Share Portfolios. This is good news for the Company as it creates a larger portfolio, with increased shareholder liquidity and lower overall fees. In addition, it also clears the way for the company to seek a main market listing if the Board decides that it is in the best interests of the Company and subject to market conditions. The merger is discussed in more detail in the Report of the Manager and Investment Adviser but will become effective on 16 October. The result of the merger is that all C Shares will be converted into Ordinary Shares on a NAV to NAV basis. The exchange ratio results in each C Share being converted into 0.68977 Ordinary Shares.
Dividends
On 18 June 2008, the Company paid a dividend of 7.62 Euro cents per share to Ordinary shareholders. The dividend per share was the equivalent of 6 pence, converted at the spot Euro-Sterling exchange rate published on Bloomberg at 5pm (GMT) on the announcement date of £1.00 = €1.27.
It is not intended to pay a final dividend to Ordinary or C shareholders in respect of the financial year to 30 June 2008.
Going forward, the Company will seek to pay out all available profits from its operations as dividends to shareholders. However, the prudent policies adopted in response to the worsening financial environment, of reduced portfolio size and leverage, as well as the increased cost of finance relative to expectations at launch, will result in reduced dividends from recurring rental activities.
Market Outlook
The prices of both the Ordinary and C Shares have been badly affected by the adverse market sentiment affecting property companies. While some concerns exist about German real estate (largely in relation to the commercial sector), we remain confident in the existing SDIC portfolio and are constantly reviewing strategies for further deleveraging of the portfolio, increasing liquidity to shareholders, and enhancing our operational focus.
Raymond Apsey
Chairman
15 October 2008
Report of the Manager and Investment Adviser
Strategically Well Positioned
The Ordinary and C Share merger will create a combined portfolio with an asset valuation of €1,490m, including approximately €15m of additional property acquisitions completed immediately after the year-end. This fiscal year has been one of advancement for the Company, with both the Ordinary and C Shares now fully invested. Significant acquisitions were made in the past 12 months, particularly on the C Share portfolio, and an extensive refurbishment programme was undertaken on both portfolios. The refurbishment programme on the Ordinary Shares is now substantially complete and we anticipate falling vacancies and rising rental incomes as a result. The C Share portfolio refurbishment programme is already underway and scheduled works are expected to be completed by July 2009, with yet further positive effects on vacancies and rental income. The reduction in vacancy is of particular focus to SDIC as it brings with it a two way increase in profitability; increased rents and reduced vacancy costs.
The Company had approximately €103.4m in cash and cash equivalents at the end of the period and has €55.9m (excluding €24m committed to refurbishments) in cash and cash equivalents as of 6 October 2008. Overall, the market values of the Company's properties have appreciated by 4.8% since acquisition, with the Ordinary and C Share portfolios experiencing increases over their acquisition prices of 6.3% and 2.4% respectively.
No Near-term Debt Maturities
The Company's existing debt is fully hedged at an average interest rate of 4.72% for the entire duration of the debt until maturity. With a pro forma debt maturity of 5.7 years, and with no debt maturing until at least 2013, the Company is well positioned in these trying times.
Share class merger
The merger will be carried out with a C Share to Ordinary Share conversion ratio of 0.68977, resulting in the overall issued share capital of the Company being 337,131,236 Ordinary shares post merger. The merger will create what we expect to be one of the largest and most liquid listed companies specialising in German residential property investment. As a consequence of the merger, the management fee will also be reduced to 65bps on the combined portfolio.
Financial Summary
The key financial information for the Company is presented in the following tables:
Combined portfolio
Financial position
| 30 June 2008 €'000 | 30 June 2007 €'000 | |
| Portfolio value | 1,475,693* | 861,805 |
| Purchase price of completed acquisitions (excluding acquisition costs) | 1,408,001 | 841,200 |
| Borrowings | (1,183,448) | (681,139) |
| Net assets | 413,693 | 483,731 |
| Adjusted net assets (NAV excluding provision for deferred taxation) | 419,853 | 485,648 |
| Loan to value (LTV) | 80.2% | 79.0% |
*Approximately €15m in additional property acquisitions completed immediately after the year-end
At 30 June 2008, the combined portfolio value had increased by €67.7m over the acquisition price, representing a valuation uplift of 4.8%. The LTV ratio as of 30 June 2008 is 1.5% higher than as at 31 December 2007 due to financing for further acquisitions in the Ordinary and C share portfolios.
By merging the Ordinary and C Share classes, the overall LTV will be reduced on the Ordinary portfolio. SDIC has two covenants for its debt; rental interest cover and LTV. The current rental coverage ratio is well maintained and LTV is also within allowed limits. We expect property values to continue to rise following completion of our refurbishment programme.
Financial Performance
| Year ended 30 June 2008 €'000 | Year ended 30 June 2007 €'000 | |
| Gross rents received | 109,562 | 35,613 |
| Valuation loss on property portfolio | (56,995)# | (3,799) |
| Net operating (loss)/profit | (26,244) | 448 |
| (Loss)/ profit before tax | ( 62,343) | 28,765 |
| Funds from operations* | (4,518) | (5,762) |
| (Loss)/profit after tax | ( 66,778) | 26,698 |
* Funds from operations ("FFO") is calculated on the basis of profit after tax, adjusted for unrealised movements on hedging instruments and investment properties, movements in the deferred tax provisions, non-recurring expenses and any profits or losses on disposal, and is a measure of the Company's profitability from recurring income streams.
#See analysis of revaluation gain /(loss) below relating to capitalised refurbishment and acquisition costs for further details.
During the year ended 30 June 2008, the net operating loss of the Company was €26.2m (30 June 2007: profit of €0.5m). It made a loss before tax of €62.3m (30 June 2007: profit of €28.7m) and a loss after taxation of €66.8m (30 June 2007: profit of €26.7m, of which €38.2 was attributable to an unrealised gain on hedging investments).
A large part of the losses before and after taxation are due to capitalised acquisition costs on those properties acquired during this financial year, in the region of 8% of the purchase price, that resulted in a valuation loss in the income statement. The Company has also had to recognise a charge of €50m for refurbishments undertaken during the year and refurbishments which are currently underway.
Based on a funds from operations measure ("FFO"), which is achieved by removing the unrealised gain on hedging instruments, the unrealised loss on valuation caused by the absorption of acquisition costs, profits or losses on asset disposals and movements in the deferred tax provision from the loss after tax, the Company returned a loss of €4.5m (30 June 2007: loss of €5.7m).
The overall net assets of the Company decreased by 14.5% to €413.7m (30 June 2007: €483.7m).
The fact that the FFO performance has not significantly improved during the year is explained by the negative effect of vacancies necessarily created by the Ordinary Share refurbishment programme and the handover of properties acquired by the C Share portfolio.
Funds From Operations ("FFO") Analysis for the Combined Portfolio
| Year ended 30 June 2008 €'000 | |
| Net Rents | 70,629 |
| Non-Recoverable Operating Costs | (25,595) |
| Net Operating Income | 45,034 |
| Administrative Expenses | (14,283) |
| EBITDA | 30,751 |
| Interest Expense | (35,077) |
| Tax | (192) |
| FFO | (4,518) |
Reconciliation of Profit After Tax to Funds From Operations for the Year Ended 30 June 2008
| Year ended 30 June 2008 €'000 | |
| Loss after tax | (66,778) |
| Movement in deferred tax provision | 4,243 |
| Loss on revaluation of investment properties | 56,995 |
| Realised/unrealised gains on disposal of hedging instruments | 1,022 |
| Funds from operations | (4,518) |
It should be noted that non-recurring costs have significantly impacted the results in the period ended 30 June 2008. These are one-off costs associated with the refurbishment programme and the acquisition costs attributable to the acquisition of further properties for the Ordinary and C Share portfolios which took place during the 12 months ended 30 June 2008. In addition to the direct costs associated with the refurbishment programme that were mentioned earlier, the construction work has also had the negative effect of increasing the vacancy in the portfolio due to units being taken 'offline' for refurbishment works as well as tenants moving out of neighbouring units to avoid the disturbances created by the works.
Analysis of Current Year Gross Profit
| Year ended 30 June 2008 Consolidated €'000 | |
| Gross Rent and related income | 109,562 |
| Direct costs | |
| Auditing & bookkeeping SPVs | (805) |
| Bad debt / Rent arrears | (3,639) |
| Financing | (2,277) |
| Insurance | (2,042) |
| Irrecoverable VAT | (4,475) |
| Landtax | (3,279) |
| Legal | (907) |
| Maintenance | (5,657) |
| Other | (262) |
| Service charge costs | (41,185) |
| Total direct costs | (64,528) |
| Gross profit | 45,034 |
Analysis of Change in Fair Value of Investment Property
| | | | | | Inception to 30 June 2008 | ||
| | | | | | Combined | "O" | "C" |
| | | | | | € | € | € |
| | | | | | | | |
| Notarised value | | | | 1,397,751 | 925,353 | 472,398 | |
| Portfolio transfer (SDI 16-19) at purchase cost | | | - | (71,140) | 71,140 | ||
| Market value uplift on transfer | | 10,250 | - | 10,250 | |||
| | | | | | 1,408,001 | 854,213 | 553,788 |
| | | | | | | | |
| Portfolio valuation | | | | 1,475,693 | 908,395 | 567,298 | |
| | | | | | | | |
| | | | | | | | |
| Market uplift on notarised value | | 67,692 | 54,182 | 13,510 | |||
| | | | | | | | |
| | | | | | 4.8% | 6.3% | 2.4% |
| Analysis of Gain/(Loss) Excluding Acquisition and Capital Costs | | | | ||||
| | | | | | | | |
| Net Revaluation Loss Shown in Accounts | (56,995) | (24,682) | (32,313) | ||||
| | | | | | | | |
| Less acquisition costs | | | (37,130) | (7,995) | (29,135) | ||
| Less capitalised refurbishment costs | (50,022) | (31,093) | (18,929) | ||||
| Underlying gain on assets | | | 30,157 | 14,406 | 15,7511 | ||
| | | | | | | | |
| Percentage gain on underlying assets over previous price / valuation | 1.95% | 1.53% | 2.62% | ||||
Ordinary Share Portfolio
Ordinary Share Financial Position
| 30 June 2008 €'000 | 30 June 2007 €'000 | |
| Portfolio value | 908,395* | 861,805 |
| Purchase price of completed acquisitions (excluding acquisition costs) | 854,213 | 841,020 |
| Borrowings | (748,263) | (681,139) |
| Loan to value | 82.4% | 79.0% |
| Net assets | 207,409 | 243,140 |
| Net assets per share (cents) | 122.01 | 143.03 |
| Adjusted net assets per share (cents)** | 124.89 | 144.15 |
*Following transfer of property at €81.39m from the Ordinary Share to the C Share Portfolio on 1 April 2008 based on independent market valuation
** Adjusted to exclude deferred tax liability
The drop in the value of Ordinary Share portfolio between 31 December 2007 and 30 June 2008 is due to the transfer of assets from the Ordinary Share to the C Share portfolio. It is important to note that the remaining underlying assets on the Ordinary Share portfolio have actually increased in value by €54.2m on the purchase price, an uplift of 6.3%, according to an independent valuation carried out on the properties on 30 June 2008. The drawdown of some debt relating to purchases in the prior year did not complete until this financial year producing a lower loan to value (LTV) showing on the balance sheet figures in 2007. The underlying LTV has remained constant at 82% over both current and prior years.
Ordinary Share Financial Performance
| Year ended 30 June 2008 €'000 | Year ended 30 June 2007 €'000 | |
| Gross rents received | 92,801 | 35,613 |
| Valuation losses on property portfolio | (24,682) | (3,799) |
| Net operating profit | 4,021 | 909 |
| (Loss)/ profit before tax | (28,887) | 19,234 |
| Funds from operations | (7,308) | (6,339) |
| (Loss)/ profit after tax | (32,959) | 17,167 |
| Basic (loss)/earnings per share (cents) | (19.13) | 10.10 |
The net operating profit for the year ended 30 June 2008 was €4m (30 June 2007: 0.9m). The loss before taxation attributable to the Ordinary Shareholders was €28.9m (30 June 2007: profit of €19.2m) and the loss after taxation was €32.5m (30 June 2007: profit of €17.2m).
On an FFO basis the Ordinary Shares returned a loss of €8.3m (30 June 2007: loss of €6.3m). The reason for this is the refurbishment programme that has caused a one-off elevation in the vacancy rate which not only removes potential revenue, but also creates additional expense as certain costs, that can be recharged to the tenant if the in the case of occupied units, are absorbed by the Company.
The net asset value attributable to the Ordinary Share Portfolio decreased by 14.7% during the year to €207.4m (30 June 2007: €243.1m), giving net assets per share of €1.22 (30 June 2007: €1.43).
C Share Portfolio
C Share Financial Position
| 30 June 2008 €'000 | 30 June 2007 €'000 | |
| Portfolio value | 567,298* | - |
| Purchase price of completed acquisitions (excluding acquisition costs) | 553,788 | - |
| Borrowings | (435,185) | - |
| Loan to value | 76.7% | - |
| Net assets | 206,284 | 240,591 |
| Net assets per share (cents) | 85.14 | 96.23 |
| Adjusted net assets per share (cents)** | 85.65 | 96.23 |
*Excluding approximately €15m in additional property acquisitions completed immediately after the year-end
** Adjusted to exclude deferred tax liability
The asset value of the C Share portfolio has increased by €13.5m over the purchase price, an uplift of 2.4%. This is particularly encouraging as the properties have been held for only a short amount of time.
C Share Financial Performance
| 30 June 2008 €'000 | 30 June 2007 €'000 | |
| Gross rents received | 16,761 | - |
| Valuation losses on property portfolio | (32,313) | - |
| Net operating (loss) | (30,265) | (461) |
| (Loss)/profit before tax | (33,456) | 9,531 |
| Funds from operations | 2,790 | 577 |
| (Loss)/ profit after tax | (34,2549) | 9,531 |
| Basic (loss)/earnings per share (cents) | (13.71) | 3.82 |
The net operating loss for the year was €30.3m (period to 30 June 2007: loss of €0.5m). The loss before taxation attributable to the C Shareholders was €33.5m (period to 30 June 2007: profit of €9.5m). The loss after taxation was €34.2m (30 June 2008: profit of €9.5m). As with the Ordinary Shares, a large part of these losses are attributable to the effect of acquisition costs on the portfolio, of which all properties have been acquired during the financial year.
On an FFO basis the C Shares returned a profit of €3.9m (period to 30 June 2007: €0.6m).
Portfolio Update
Portfolio Key Parameters
| Combined | Ordinary Shares | C Shares | |
| Total # of buildings | 1,148 | 543 | 605 |
| Total # of Units | 26,634 | 16,161 | 10,473 |
| Gross Lettable Area (m²) | 1,732,571 | 1,043,580 | 688,991 |
| Total Purchase Price (€) | 1,408,000,850 | 854,212,830 | 553,788,000* |
| Average purchase Price (€/m²) | 812 | 818 | 827 |
| Current Portfolio DTZ Valuation (€) as at 30.06.08 | 1,475,692,725 | 908,395,000 | 567,297,725 |
| Average current DTZ Valuation (€/m²) | 852 | 870 | 844 |
| % Uplift in Valuation since Purchase | 4.8% | 6.3% | 2.4% |
| Average valuation net yield | 6.4% | 6.4% | 6.3% |
| Average residential net rent (€/m²) | 5.14 | 5.14 | 5.15 |
| Average commercial net rent (€/m²) | 7.47 | 7.78 | 6.95 |
*Excludes approximately €15m in additional property acquisitions completed immediately after the year-end.
Active Asset Management
Following acquisitions, the Manager has embarked upon a refurbishment programme intended to have a positive impact on rents and valuation. The DTZ valuation of €1,476m as at 30 June 2008 equates to a yield on current net rents of 6.4% as of June 2008. The value of the portfolio has increased by €67.7m since acquisition, an uplift of 4.8% on the purchase price. Reducing vacancy is a key factor in increasing the value of the portfolio. Successful marketing of units is of particular importance as newly refurbished units come back onto the market. Several marketing projects have been initiated, alongside general advertising and incentives, to attract potential new tenants. Recent projects of note include high profile advertisements on German rental property websites and targeted local advertising and marketing initiatives.
The Ordinary Share portfolio completed its property acquisitions during November 2007. Following these completions, a major refurbishment programme, intended to have a positive impact on both rental income and property valuations, was embarked on. The programme is now substantially complete, and the positive results of the work are beginning to become apparent.
The market value of the Ordinary Share portfolio has increased 6.3% over the purchase price. The high vacancy rate, was to a large extent due to properties taken out of commission because they were included in the refurbishment programme and also to neighbouring tenants moving out to avoid the disturbances created by the work, has begun to quickly reverse.
A major driver of the valuation methodology employed by our independent valuers is the net present value for future expected rental income. Therefore a further decrease in vacancy, all other relevant factors remaining equal, would be very good news for the valuation of the portfolio.
In addition to this, a reduction of vacancy has the effect of increasing rents and lowering vacant costs, both of which would positively impact the FFO.
The Company completed its acquisitions for the C Share Portfolio during July 2008 that resulted in the creation of a portfolio worth €581.7m*. The size of the portfolio is smaller than originally anticipated and is in keeping with the prudent approach being taken by the Company that dictates lower levels of borrowing. The Company has purchased 10,473 units at an average price of €827 per sqm.
*Including approximately €15m in additional property acquisitions completed immediately after the year-end.
The C Share Portfolio has set aside cash in order to embark upon a refurbishment programme. Refurbishment costs of approximately €24m will be borne by the C Share Portfolio. Additional refurbishment costs of €23m are being borne by the selling entities.
Merger of the Share Classes
On 7 July 2008, the Company announced to the market that the conditions had been satisfied in order to trigger the merger of the Ordinary and C Share classes. The effect of the merger will be to create a single enlarged portfolio that combines the assets and liabilities of Ordinary and C Share classes.
Under the merger process the C Shares will be cancelled and new Ordinary Shares will be issued on the basis of the relative net asset value of the two portfolios known as the "Conversion Ratio". The date on which the Conversion Ratio is calculated is known as the "Conversion Date" and, to avoid additional expense and complication, this will be 30 June 2008, resulting in the Conversion Ratio being based on the net asset values of the two portfolios as at this date.
The conversion of the C Shares into new Ordinary Shares takes place on 16 October 2008, the announcement date of the Company's preliminary results.
Current market conditions make the merger of the share classes desirable and should benefit the shareholders of the Company as follows:
enhanced shareholder liquidity;
better strategic positioning for the Company;
reduced management fee for the combined portfolio; and
larger resultant Portfolio.
Future Performance
As previously announced, the inevitable consequence of the prudent approach adopted by the Company in terms of the overall size of the combined portfolio, the reduction in its leverage and the increased cost of finance, compared to the time of conception, is that the dividends from recurring rental activities will be reduced. Taking all these factors into account, the stabilised dividend yield from recurring rental activities will be reduced.
The Company has identified and acquired properties with the potential for rental increases, as shown in the table below. The portfolio has a relatively low number of units with significant rental restrictions, allowing the Company to realise this opportunity for rental upside.
The Company will actively pursue other methods of enhancing shareholder value that may include selective privatisations or other disposals. The Ordinary and C Share portfolios generally consist of smaller sized buildings, at around 25 apartment units per building, which makes privatisations or sales of assets easier.
Potential Valuation and Rental Uplift in Key Markets
| 6 largest Cities by Value | Number of Units | Value / Sqm (€) | Retail Value Range (€/sqm)* | SDIC Rent (€/sqm) | DTZ Market Rents (€/sqm) | Rental upside |
| Berlin | 2,039 | 989 | 1,250 - 1,900 | 5.85 | 5.76 | - |
| Leipzig | 1,191 | 1,114 | 1,000 - 1,400 | 4.58 | 4.86 | 6.1% |
| Hamburg | 487 | 1,691 | 900 - 2,200 | 6.47 | 6.71 | 3.7% |
| Düsseldorf | 683 | 1,204 | 1,600 - 2,250 | 6.47 | 6.91 | 6.8% |
| Frankfurt | 423 | 809 | 1,350 - 2,300 | 7.71 | 8.84 | 14.7% |
| Munich | 324 | 2,150 | 2,500 - 4,000 | 9.60 | 10.24 | 6.7% |
| Total/Average | 5,147 | 1,171 | 1,292 - 2,024 | 6.09 | n/a | n/a |
*Means the value which an owner-occupier or buy-to-let investor would be expected to pay based on the purchase of a single unit.
The current asset valuations in our 6 largest markets are below the average retail value range. The weighted average value of €1,171/sqm for the Ordinary and C Share portfolios compares to the weighted average retail value of €1,658/sqm, implying a potential upside of 42% on current value before disposal and privatisation costs.
With the refurbishment programme on the Ordinary Share portfolio nearing completion, a large number of units will soon be returning to the market. This is a positive factor for the Company as these units are anticipated to have substantial income generating capacity. In addition, the letting of these completed units will have the effect of reducing the vacancy costs of the portfolio as well as having a positive upside effect on the valuation of the assets.
The Manager and Investment Adviser have indicated that, assuming valuations based on a multiple of net rents that is consistent with that which has been used in the past, coupled with modest inflationary increases in net rents per square metre, the absolute returns on NAV, after payment of dividends, should be attractive.
Valuation Methodology
The valuation principles adopted are based on the discounted cash flow and market rent methodologies - which is in accordance with IVSC (International Valuation Standards). The independent appraiser, DTZ Zadelhoff Tie Leung GmbH, determines the fair market value of all of our properties based on the results of these two methods. Furthermore, the resulting valuations are cross-checked against the initial yield and the fair market values per square metre.
Market Update and Outlook
The current turmoil in capital markets caused by the global debt crisis has adversely affected share prices, particularly those of companies operating in the property sector. While the current market sentiment regarding the German economy may be cautious, the Company's residential investment strategy remains good. The effect of demographic trends on the value of German residential property is still compelling as the values of properties continue to lag replacement cost and construction levels remain below both current and future predicted demand.
Germany's population over the age of 50 is set to rise from 31 million to 38 million (from 38% to just under 50% of the population) by the year 2020, with an additional 2 million household formations. (Empirica Research). In order to keep up with the current demand, an additional 280,000 new residential units are needed per year. In 2007, only 70,000 new units were built with an estimated 50,000 homes being demolished annually. The shortfall of new supply suggests future upward pressure on rents. (DEGI)
Germany's building activity has fallen to its lowest level since 1949 (Landesbausparkassen). Due to low interest rates and an improved employment trends in Germany, the demand for new homes will substantially increase over the next few years. The Federal office for Construction and Planning has also reported that the current demand for new homes exceeds the actual supply by more than 50%.
The German economy grew by a solid 2.5% last year, slightly better than the government prediction, with exports growing at 8.3% (ahead of China). Respectable GDP growth of 2.0% is forecasted for 2008. Due to this positive economic development, unemployment reached a 16-year low of 9.0% in March 2008. Outlook for growth has dimmed but Germany's GDP growth is expected to be higher than the average Euro-zone growth. (Morgan Stanley research)
The German economy is better positioned in the current global slowdown than other European economies, as construction investment as a percentage of GDP is at a record low (Eurostat), reducing Germany's exposure to the global cooling in construction activity. And despite the current environment of higher interest rates and elevated inflation, domestic demand has remained unaffected in Germany, implying solid domestic economic conditions.
Germany has the largest housing stock in Europe and, historically, nominal residential rents and house prices have remained very stable. Since the mid-1990s, residential prices have decreased slightly and the national average monthly rent per square metre has increased marginally from €6.00 to €6.25. (Bulwien Gesa AG) The German housing stock comprises over 39 million dwellings, of which 43% are owner occupied, well below the European average of 63%.
We believe that the future structure of the German housing market will change with the emergence of more financially motivated investors. These owners (many of whom are buying buildings and units from local government and municipalities), who want to achieve economic returns, will result in greater investment, improved management and increased rents. Moreover, we believe that the prices of German residential properties in our portfolio, which are now 40% below the building replacement cost (excluding any value for land), will converge with the cost of construction in the medium to long term.
| Paul Smith For the Manager Speymill Property Group Limited 15 October 2008 | Andrew Wallis For the Investment Adviser Goal Service GmbH |
Consolidated Income Statement
| Note | For the year ended 30 June 2008 | For the year ended 30 June 2007 | |
| €'000 | €'000 | ||
| Rent and related income | 109,562 | 35,613 | |
| Direct costs | (64,528) | (21,118) | |
| Gross profit | 45,034 | 14,495 | |
| Change in fair value of investment property | 4 | (56,995) | (3,799) |
| Manager's fees | (11,014) | (5,467) | |
| Professional fees | (1,850) | (3,523) | |
| Audit fees | (262) | (205) | |
| Other expenses | (1,157) | (1,053) | |
| Administrative expenses | (14,283) | (10,248) | |
| Net operating (loss)/profit before net financing (expense)/income | (26,244) | 448 | |
| Financial income | 17,706 | 41,399 | |
| Financial expenses | (53,805) | (13,082) | |
| Net financing (expense) /income | 3 | (36,099) | 28,317 |
| (Loss)/profit before taxation | (62,343) | 28,765 | |
| Income tax expense: | |||
| Current | (192) | (150) | |
| Deferred | (4,243) | (1,917) | |
| Retained (loss)/profit for the year | (66,778) | 26,698 | |
| Basic (loss)/earnings per ordinary share (cents) | 9 | (19.13) | 10.10 |
| Diluted (loss)/earnings per ordinary share (cents) | 9 | (19.13) | 10.09 |
| Basic (loss)/earnings per C share (cents) | 9 | (13.71) | 3.82 |
| Diluted (loss)/earnings per C share (cents) | 9 | (13.71) | 3.82 |
Consolidated Balance Sheet
| Note | At 30 June 2008 | At 30 June 2007 | |
| €'000 | €'000 | ||
| Investment property | 4 | 1,475,693 | 861,805 |
| Total non-current assets | 1,475,693 | 861,805 | |
| Derivative financial instruments | 5 | 61,238 | 61,541 |
| Trade and other receivables | 74,062 | 33,439 | |
| Cash and cash equivalents | 103,350 | 244,239 | |
| Total current assets | 238,650 | 339,219 | |
| Total assets | 1,714,343 | 1,201,024 | |
| Issued share capital | 10 | 69,075 | 203,774 |
| Share premium | 132,774 | 54,248 | |
| Distributable reserves | 208,893 | 224,683 | |
| Other reserves | 2,951 | 1,026 | |
| Total equity | 413,693 | 483,731 | |
| Trade and other payables | 75,627 | 34,122 | |
| Provisions for refurbishments | 7 | 35,124 | - |
| Interest bearing loans | 6 | 20,826 | 2,524 |
| Income tax payable | 291 | 115 | |
| Total current liabilities | 131,868 | 36,761 | |
| Interest bearing loans | 6 | 1,162,622 | 678,615 |
| Deferred tax liability | 6,160 | 1,917 | |
| Total non-current liabilities | 1,168,782 | 680,532 | |
| Total liabilities | 1,300,650 | 717,293 | |
| Total equity & liabilities | 1,714,343 | 1,201,024 | |
| Net asset value per ordinary share (cent) | 8 | 122.01 | 143.03 |
| Net asset value per C share (cent) | 8 | 85.14 | 96.23 |
Consolidated Statement of Changes in Equity
| Share capital | Share premium | Retained earnings | Other reserves (note 17) | 2008 | 2007 | |
| €'000 | €'000 | €000 | €'000 | €'000 | €'000 | |
| Balance at beginning of period | 203,774 | 54,248 | 224,683 | 1,026 | 483,731 | 232,255 |
| Shares issued in the year | 71,000 | (71,000) | - | - | - | 243,872 |
| Share issue expenses | - | - | - | - | - | (10,245) |
| Shares cancelled in year | (203,774) | 203,774 | - | - | - | - |
| Shares cancelled following market purchases | (1,925) | (6,074) | 1,925 | (6,074) | - | |
| Cancellation of share premium | - | (54,248) | 54,248 | - | - | - |
| Foreign exchange translation differences | - | - | 16,958 | - | 16,958 | (8,849) |
| Dividend paid | - | - | (14,144) | - | (14,144) | |
| Retained (loss)/profit for the year | - | - | (66,778) | - | (66,778) | 26,698 |
| Balance at end of period | 69,075 | 132,774 | 208,893 | 2,951 | 413,693 | 483,731 |
| Analysis by share | ||||||
| Ordinary shares | 8,500 | 15,895 | 181,988 | 1,026 | 207,409 | 243,140 |
| C shares | 60,575 | 116,879 | 26,905 | 1,925 | 206,284 | 240,591 |
| Balance at end of period | 69,075 | 132,774 | 208,893 | 2,951 | 413,693 | 483,731 |
On 9 October 2007 the Company was granted an order from the High Court of Justice of the Isle of Man giving the Company approval to cancel its share premium account arising on the issue of its C Shares and for such amount to be credited as a distributable reserve.
The Company was granted a further order from the High Court of Justice of the Isle of Man on 9 October 2007 confirming that it may cancel its entire share capital by extinguishing and cancelling all of the issued and unissued ordinary shares of 10 pence each and C shares of 50 pence each in the Company for the purposes of redenominating the shares of the Company from Sterling into Euros. In the place of ordinary shares of 10 pence each the Company allotted and issued paid up new ordinary shares with a nominal value of 5 euro cents each and in place of the C shares of 50 pence each the Company allotted and issued new C Shares with a nominal value of 25 euro cents each.
During the period the Company purchased a total of 7,701,000 shares C Shares of 25 euro cents each for a total consideration of €5,709,000 and cancelled these shares.
Consolidated Cash Flow Statement
| For the year ended 30 June 2008 | For the year ended 30 June 2007 | ||
| €'000 | €'000 | ||
| Operating activities | |||
| Group (loss)/profit for the year | (62,343) | 28,765 | |
| Adjustments for: | |||
| Financial income | (17,706) | (41,399) | |
| Financial expenses | 53,805 | 13,081 | |
| Change in fair value of investment property | 56,995 | 3,799 | |
| Operating profit before changes in working capital and provisions | 30,751 | 4,246 | |
| Increase in trade and other receivables | (58,863) | (14,309) | |
| Increase in trade and other payables | 33,641 | 30,628 | |
| Cash flow from operations | 5,529 | 20,565 | |
| Interest paid | (49,071) | (13,082) | |
| Interest received | 13,994 | 3,198 | |
| Income tax paid | (16) | - | |
| Cash flow from operating activities | (29,564) | 10,681 | |
| Investing activities | |||
| Acquisition of investment property | (578,323) | (831,497) | |
| Deposits relating to property acquisitions | - | (18,241) | |
| Effect of exchange rate fluctuations to date of redenomination | (33,569) | - | |
| Acquisitions/Disposals of investments | 1,518 | (23,339) | |
| Cash flow from investing activities | (610,374) | (873,077) | |
| Financing activities | |||
| Proceeds from the issue of share capital | - | 243,872 | |
| Purchase of C Shares | (6,074) | - | |
| Dividends paid | (14,144) | - | |
| Effect of exchange rate fluctuations to date redenomination | 24,763 | ||
| Share issue expenses | - | (10,245) | |
| New interest bearing loans | 477,546 | 681,139 | |
| Cash flow from financing activities | 482,091 | 914,766 | |
| Net (decrease) / increase in cash and cash equivalents | (157,847) | 52,370 | |
| Effect of exchange rate fluctuations to date of redenomination Effect of exchange rate fluctuations on cash held | 16,958 - | - (8,884) | |
| Cash and cash equivalents at beginning of period | 244,239 | 200,753 | |
| Cash and cash equivalents at end of year | 103,350 | 244,239 |
Notes to the Interim Consolidated Financial Statements
1. The Company
Speymill Deutsche Immobilien Company plc (the "Company") was incorporated and registered in the Isle of Man under the Isle of Man Companies Act 1931-2004 on 1 March 2006 as a public company with registered number 115746C.
Pursuant to an admission document dated 13 March 2006 there was a placing of up to 170 million Ordinary Shares. The Shares of the Company were admitted to trading on AIM following the close of the placing on 17 March 2006. In total, 170 million Shares were issued.
Pursuant to an admission document dated 17 April 2007 there was a placing of up to 250 million C Shares. The Shares of the Company were admitted to trading on the AIM following the close of the placing on 10 May 2007. In total, 250 million Shares were issued.
The Company was granted an Order from the High Court of Justice of the Isle of Man on 9 October 2007 confirming that it may cancel its entire share capital by extinguishing and cancelling all of the issued and unissued Ordinary Shares of 10 pence each and C shares of 50 pence each in the Company for the purposes of redenominating the shares of the Company from sterling into euro. Following the granting of this Order, with effect from close of trading on Tuesday 16 October 2007, the Company cancelled all of the Ordinary shares of 10 pence each and C shares of 50 pence each and in the place of the Ordinary 10 pence shares so cancelled, allotted and issued new paid up euro ordinary shares with a nominal value of 5 euro cents each and in the place of the 50 pence C shares so cancelled, allotted and issued new paid up euro C shares with a nominal value of 25 euro cents each; the effective date of redenomination of all shares into Euros was 16 October 2007.
2. Significant Accounting Policies
Please refer to the report and accounts for the year ended 30 June 2008 for a summary of the Group's significant accounting policies.
3. Net financing (expense)/income
| For the year ended 30 June 2008 | For the year ended 30 June 2007 | |
| €'000 | €'000 | |
| Interest income on bank balances | 13,994 | 3,197 |
| Unrealised gain on derivative financial instruments | 3,712 | 38,202 |
| Financial income | 17,706 | 41,399 |
| Interest charges on bank balances Realised loss on derivative financial instruments | (49,062) (4,734) | (13,075) - |
| Bank charges | (9) | (7) |
| Financial expenses | (53,805) | (13,082) |
| Net financing (expense)/income | (36,099) | 28,317 |
4. Investment property
| 30 June 2008 | 30 June 2007 | |
| €'000 | €'000 | |
| Brought forward | 861,805 | - |
| Additions | 670,883 | 865,604 |
| Net revaluation deficit | (56,995) | (3,799) |
| Value of investment property at end of year | 1,475,693 | 861,805 |
The fair value of the Group's investment property at 30 June 2008 has been arrived at on the basis of a valuation carried out at that date by DTZ Zadelhoff Tie Leung GmbH, independent valuers that are not related to the Group. DTZ Zadelhoff Tie Leung GmbH have appropriate qualifications and recent experience in the valuation of properties in the relevant locations. The valuation, which conforms to International Valuation Standards, was arrived at by primarily applying a discounted cash-flow analysis to an assessment of the current rental income as well as an estimate of the future potential net income generated by use of the properties supported by comparable recent portfolio transactions on arm's length terms
Property and property related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations may be subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. The performance of the Group would be adversely affected by a downturn in the property market in terms of higher capitalisation rates/yields or a weakening of rent levels. Any future property market recession could materially adversely affect the value of properties.
Security
At 30 June 2008, there was a first ranking mortgage on the above properties securing the bank loan of €1,183,448.
5. Derivative financial instruments
| Group | ||
| 30 June 2008 | 30 June 2007 | |
| €'000 | €'000 | |
| Fair value of interest rate swap contracts | 61,238 | 61,541 |
The fair value of the interest rate swap contracts comprises 89 contracts as follows:-
| Notional amount | Premium | Maturity | Fixed rate % | Variable rate | Fair value at 30 June 2008 |
| €'000 | €'000 | €'000 | |||
| 450,000 | 7,250 | 31.12.2014 | 4.1963 | Euribor | 14,907 |
| 191,650 | 2,225 | 30.09.2013 | 3.7 | Euribor | 10,934 |
| 214,293 | 3,133 | 30.09.2013 | 3.7325 | Euribor | 11,967 |
| 405,746 | 6,603 | 02.04.2014 | 3.745 | Euribor | 23,430 |
| 1,201,688 | 61,238 |
6. Interest-bearing loans
| 30 June 2008 | 30 June 2007 | |
| €'000 | €'000 | |
| The interest bearing loans are repayable as follows: | ||
| On demand or within one year | 20,826 | 2,524 |
| In the second year | - | 6,530 |
| In the third to fifth years inclusive | - | 35,873 |
| After five years | 1,162,622 | 636,212 |
| 1,183,448 | 681,139 | |
| Less: amount due for settlement within 12 months (shown under current liabilities) | (20,826) | (2,524) |
| Amount due for settlement over the remaining period of the loans | 1,162,622 | 678,615 |
The Group has pledged properties and the rental income of the properties to secure related interest bearing facilities granted to the Group for the purchase of such properties. The average effective rate is 4.72%.
7. Provisions for refurbishments
| 30 June 2008 €'000 | 30 June 2007 €'000 | |
| Provisions for refurbishments | 35,124 | - |
The Group has provided for refurbishment capital expenditure which was underway at the balance sheet date and for which it is contractually obliged to pay.
8. Net Asset Value per Share
| 30 June 2008 | 30 June 2007 | |
| Ordinary Shares | ||
| Net assets attributable to ordinary shareholders (€'000) | 207,409 | 243,140 |
| Ordinary Shares in issue at 30 June 2008 (thousands) | 170,000 | 170,000 |
| Net asset value per ordinary share (in cents) | 122.01 | 143.03 |
| C Shares | ||
| Net assets attributable to C shareholders (€'000) | 206,284 | 240,591 |
| C Shares in issue at 30 June 2008 (thousand) | 242,299 | 250,000 |
| Net asset value per C Share (in cents) | 85.14 | 96.23 |
The net proceeds received from the Company's ordinary share issue and C share issue are accounted for as two separate pools of funds. The C shares will convert into ordinary shares on 16 October 2008 on the basis of the Conversion Ratio set out in the C Share admission document, which will reflect the proportion of the Group's fully diluted net asset values attributable to each C Share compared with that attributable to each Ordinary Share at the Calculation Date. For the calculation of the Conversion Ratio please refer to note 13.
9. Basic and Diluted (loss)/earnings per Share
Basic and diluted (loss)/earnings per ordinary share and C share are calculated by dividing the (loss)/profit attributable to the ordinary shareholders and the (loss)/profit attributable to the C shareholders by the number of ordinary shares and the number of C shares respectively in issue during the year.
| Basic (loss)/earnings per Share | ||
| 2008 | 2007 | |
| Ordinary Shares | ||
| (Loss)/Profit attributable to ordinary shareholders (€'000) | (32,529) | 17,167 |
| Ordinary Shares in issue at 30 June 2008 (thousands) | 170,000 | 170,000 |
| Basic and diluted (loss)/earnings per ordinary Share (cents per share) | (19.13) | 10.10 |
| C Shares | ||
| (Loss)/Profit attributable to C shareholders (€'000) | (34,249) | 9,531 |
| Weighted average C Shares in issue for year ended 30 June 2008 (thousands) | 249,756 | 250,000 |
| Basic and fully diluted (loss)/earnings per C Share (cents per share) | (13.71) | 3.82 |
There is no difference in the current year between basic and diluted loss per share as the exercise of options would be anti dilutive. The conversion of C shares into ordinary shares (note 13) is not considered to be dilutive.
10. Capital and Reserves
| Share capital | ||
| Ordinary Shares of €0.05each | Number | €'000 |
| In issue at the start of the year | 170,000,000 | 24,395 |
| Cancelled during the year | (170,000,000) | (24,395) |
| Re-issued during the year | 170,000,000 | 8,500 |
| In issue at 30 June 2008 | 170,000,000 | 8,500 |
| Share capital | ||
| C Ordinary Shares of €0.25 each | Number | €'000 |
| In issue at the start of the year | 250,000,000 | 179,379 |
| Cancelled during the year | (250,000,000) | (179,379) |
| Re-issued during the year | 250,000,000 | 62,500 |
| Cancelled in the year following open market buy back | (7,701,000) | (1,925) |
| In issue at 30 June 2008 | 242,299,000 | 60,575 |
At incorporation the authorised share capital of the Company was £30 million divided into 300 million Ordinary Shares of £0.10 each. On 9 May 2007 the authorised share capital of the Company was increased to £180 million divided into 300 million Ordinary Shares of £0.10 each and 300 million C Shares of £0.50 each.
The net proceeds received from the Company's Ordinary Share issue and C Share issue are accounted for as two separate pools of funds. All issued shares are fully paid, and each share carries one vote. The C shares have the same rights as the ordinary shares.
The holders of Ordinary Shares and C Shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All shares rank equally with regards to the Company's assets.
11. Currency redenomination
On 15 October 2007, the Company cancelled all the existing Ordinary Shares and existing C Shares and issued new euro Ordinary and C Shares for the purposes of redenominating the shares of the Company from sterling to euro.
The new Ordinary Shares have a nominal value of 5 euro cents each and the new C Shares have a nominal value of 25 euro cents each.
As at that date the presentational currency of the Company was converted into euro from sterling using the sterling/euro exchange rate of 0.69685.
The comparative figures within this financial information have been converted into euro at the rate stated at the date of the conversion. A schedule of the conversion of the comparative balances is set out in the report and accounts for the year ended 30 June 2008.
12. Contingent Liabilities
At the balance sheet date the Group had entered into contracts for the purchase of properties totalling €16,695,000.
These contracts were contingent on the sellers meeting certain criteria which had not been met by June 2008. Subsequently, the sellers have met their obligations and the properties have been purchased. There were no other contingent liabilities or commitments at the balance sheet date.
13. Post balance sheet events
On 7 July 2008 the Company announced that the conditions that are set out in its Articles of Association and that demand a conversion of the C Shares of €0.25 each in the Capital of the Company into Ordinary Shares of €0.05 had been satisfied.
The number of Ordinary Shares to be issued to the holders of the C Shares (the "new Ordinary Shares") is based on the relative net asset values of the two classes of shares (the "Conversion Ratio") on the set accounting reference date (the "Calculation Date"), subject to any material adjustments, in order to ensure fairness between the existing holders of the C and Ordinary Shares.
The Calculation Date, the date on which the Conversion Ratio is determined, is the date to which this report and accounts was prepared, being 30 June 2008, and the date of the conversion of the C Shares into Ordinary Shares (the "Conversion Date") is the date on which the annual results announcement is to be made, being 16 October 2008.
The Conversion Ratio is calculated using the following formula:
| A |
| B |
where;
| A = | C - D |
| E |
where 'C' is the aggregate of,
The value of the real estate assets of the Company and its subsidiaries attributable to the C Shares calculated by reference to a valuation carried out by a valuer appointed by the Directors
The value of all other investments of the Company and its subsidiaries attributable to the C Shares at their respective acquisition costs , subject to such adjustments as the Directors may deem appropriate to be made for any variations in the value of such investments between the date of acquisition and the Calculation Date; and
The amount which in the Directors' opinion fairly reflects at the Calculation Date the value of all the other assets of the Company and its subsidiaries attributable to the C Shares (including current assets and cash and deposits with or balances at bank and including any income and other items of a revenue nature);
'D' is the amount (to the extent not otherwise deducted in the calculation of 'C') which in the Directors' opinion fairly reflects the amount of the liabilities attributable to the C Shares at the Calculation Date including any declared but unpaid dividend in respect of the C Shares; and,
'E' is the number of C Shares in issue at the Calculation Date;
Provided that the Directors shall be entitled to make such adjustments to the value or amount of 'A' as the Auditors shall confirm to be appropriate having regard, inter alia, to the assets attributable to the C Shares on the Issue Date and to the reasons for the issue of the C Shares as contained in the Admission Document dated 17 April 2007;
And where:
| B = | (F - G) - (C - D) |
| H |
where 'F' is the aggregate of:
The value of all the real estate assets of the Company and its subsidiaries calculated by reference to a valuation carried out by a valuer appointed by the Directors; and
The value of all other investments of the Company at the valuations adopted by the Directors as at the Calculation Date; and
The amount which, in the Directors' opinion, fairly reflects at the Calculation Date the value of all the other assets of the Company and its subsidiaries (including current assets and cash and deposits with or balances at bank and including any income or other items of a revenue nature);
'G' is the amount which (to the extent not otherwise deducted in the calculation of 'F') in the directors opinion reflects the amount of the liabilities of the Company at the Calculation Date including any declared but unpaid dividend; and
'H' is the aggregate of the number of Ordinary Shares in issue at the Calculation Date;
Provided that the Directors shall be entitled to make such adjustments to the value or amount of 'B' as the Auditors shall confirm to be appropriate having regard, inter alia, to the reasons for the issue of the C Shares set out in the admission document dated 17 April 2008.
The Directors have determined that:
As at the Conversion Date of 16 October 2008, 242,299,000 C Shares will be cancelled and 167,131,236 New Ordinary Shares will be issued in their place giving a revised total of Ordinary Shares in issue of 337,131,236
The Conversion Ratio used to calculate the number of new Ordinary Shares was 0.68977 meaning that for every C Share cancelled 0.68977 new Ordinary Shares should be issued
The arithmetical calculation of the Conversion Ratio is set out below:
The conversion ratio is
| A | = | 0.85008069 |
| B | 1.23240699 |
Where
| A = | C - D | = | €205,973,703 |
| E | 242,299,000 |
C= the total gross assets attributable to the C Share portfolio = €688,051,475
D = the total liabilities attributable to the C Share Portfolio adjusted for provisions for future acquisition costs on properties notarised but not completed as at 30 June 2008 (€310,304) = €482,077,772
E = 242,299,000
Where
| B = | (F - G) - (C - D) | = | €209,509,188 |
| H | 170,000,000 |
F= the total gross assets attributable to the Company
G = the total liabilities attributable to the Company adjusted for provisions for future acquisition costs on properties notarised but not completed as at 30 June 2008 (€310,304)= €1,300,959,719
H = 170,000,000
The adjustments to the net asset values of the C Share Portfolio and the Company, which are required to take account of acquisition costs to be incurred on properties notarised but not yet fully completed on 30 June 2008, have been made by the Directors.