Last checked at 24 Mar 2009 07:00
Speymill Deutsche Immobilien Company plc
("the Company")
Speymill Deutsche Immobilien Company plc (SDIC.L), the pan-German residential property investment company listed on AIM, is pleased to announce its interim results for the six months to 31 December 2008.
Highlights
For more information, please visit http://www.speymilldeutsche.com or contact:
| Speymill Property Group (UK) Limited | Speymill Property Group Limited |
| (Adviser) | (Manager) |
| Floris van Dijkum, Global Chief Investment Officer | Nigel Caine, CFO Funds |
| +44 20 7659 0763 | +44 1624 640 860 |
| Smith & Williamson Corporate Finance Limited | Fairfax I.S. PLC |
| (Nomad) | (Brokers) |
| Azhic Basirov | James King |
| Joanne Royden-Turner | Andrew Cox |
| +44 20 7131 4000 | +44 20 7598 5368 |
| Tavistock Communications Limited | |
| (Media & Investor Relations) | |
| Jeremy Carey | |
| Simon Hudson | |
| Gemma Bradley | |
| +44 20 7920 3150 |
Chairman's statement
The six months to 31 December 2008 were a busy period for the Company. Our refurbishment programme has continued apace, we merged the Company's C Shares with the Ordinary Shares to create a unified (and simplified) structure - trading on AIM under SDIC. Whilst within our banking covenants, we are nevertheless examining ways of decreasing our leverage.
Investment positioning and objectives
Speymill Deutsche Immobilien Company plc ("SDIC") was established to invest in a diversified portfolio of high quality residential property throughout Germany, providing shareholders with exposure to high yielding and stable German residential assets with the potential for moderate income and long-term capital growth.
I am pleased to report that the investment characteristics identified at launch have been demonstrated in the period under review - stability through the very slight reduction in asset values and quality through the increased rental income resulting from our refurbishment programme.
SDIC is one of the largest companies investing in German residential property. The number of units in the merged portfolio is now 26,647, spread across Germany's principal urban regions and valued at €1,482 million as at 31 December 2008.
Results
Despite the fact that the past six months have seen unprecedented turmoil in global financial markets, and specifically in the real estate sector, SDIC valuations have remained relatively stable.
Valuation decrease of 0.7%
The total property portfolio valuation of €1,482 million (€1,492 million at 30 June 2008, including €16.7 million of additional property acquisitions post 30 June 2008) equates to a yield of 6.54% on current net rents, an increase from 6.40% at 30 June 2008. However, the rise in the yield, which decreases the valuation, has been partially offset by an increase in overall rental income in the period to €76.0 million (€51.6 million for the period to 31 December 2007) as refurbished units are let out.
Refurbishment continues - vacancies increase marginally
The period-end valuation includes the impact of a rise in vacancy on a square metre basis from 12.6% at the end of June 2008 to 14.0% - a result of additional units being taken offline for refurbishment work more quickly than the fully refurbished units are being let out. The programme was 66% complete as of 31 December 2008, and the Manager expects substantial completion by July 2009. Details, and costs, of the refurbishment programme are contained in the Report of the Manager and Investment Adviser below.
NAV affected by interest rate swaps revaluations
The value of interest rate swaps held by the Company has suffered a significant mark-down in the period due to the dramatic reduction in interest rates. Consequently, the net asset value (NAV) per share has fallen by 28% under IFRS. However, on an EPRA NAV* basis the decline in NAV per share was only 3%. The Board believes that excluding the non-cash interest rate swaps revaluations more accurately reflects the true underlying value of the portfolio.
* "EPRA (European Public Real Estate Association) NAV is the balance sheet net assets including mark to market adjustments on the property portfolio, excluding fair value adjustments on the debt and related derivatives, deferred taxation on revaluations and capital allowances and the effect of those shares potentially issuable under employee share schemes"
Funds from operations
During the period under review, the Company recorded a net operating profit of €15.6 million (31 December 2007: €1.6 million) on gross rents of €76.0 million (31 December 2007: €51.6 million). Gross rents on an annualised basis were €152 million, a significant increase compared to the €109 million at the last year-end on 30 June 2008. This reflects the effect of the larger portfolio following full investment towards the end of the financial year ended 30 June 2008. Direct costs increased to €42.3 million from €33.5 million in the comparable period primarily as a result of the expanded portfolio.
Net financing expenses - principally interest rate swaps mark-downs - were €129.1 million (31 December 2007: €37.6 million). Interest expense for the period was €27.7 million (31 December 2007: €21.1 million) reflecting a full period of debt outstanding. The loss before taxation was €113.5 million (31 December 2007: €35.9 million), again mainly driven by the interest rate swaps mark-down of €102 million as well as the €10 million decrease in the portfolio valuation.
Funds from operations (FFO) stood at a loss of €335,000, as of 31 December 2008. FFO should improve as the refurbishment programme completes and increases in occupancy rates reduce irrecoverable service charge costs. In addition, the Company will benefit from the lower investment management fee (down from 85bps to 65bps following the merger of the two share classes), which will produce an estimated annual saving of €1.8 million.
Reducing leverage
Interest bearing loans were €1,163 million at 31 December 2008 (€1,183 million at 30 June 2008). Loan to value (LTV), excluding all cash, stood at 78.4% as of 31 December 2008, and including cash, LTV was 74.2%. The Company's existing debt is fully hedged at an average fixed interest rate of 4.72% for the entire duration of the debt until maturity. Average debt maturity stands at 5.4 years, with the earliest debt maturing in late 2013. The Board and Manager believe that this places SDIC in a favourable and relatively secure position in these challenging times.
Given the global credit crunch and the particularly adverse effect of this on the share prices of leveraged property investment companies, we are reviewing ways to de-lever the portfolio whilst maintaining maximum shareholder value. In line with the terms of the original loan agreements, the Company has begun to amortise a proportion of its debt which will have the effect of reducing leverage. The first amortisation payment of €1.7m was made in January 2009. The Company will review opportunities for selective disposals if conditions are favourable. The Company has not breached any of its banking covenants.
Share price
As I have mentioned before, it is unfortunate that, given the current turmoil in primary capital markets caused by the global debt crisis, the Company's share price does not adequately reflect its current NAV, nor its growth potential. Companies with a connection to the property market have been badly affected by market sentiment. For SDIC, as for certain other well-performing companies operating in the property sector, the market sentiment appears to be particularly unjustified given that the Company is well capitalised and continues to demonstrate sound fundamentals in a sector that has performed strongly and does not appear to be as badly affected as other European countries by the general trends that impact upon the global property markets.
The Board believes in the Company's ability to generate further shareholder value through active management of the fully invested portfolio and that this will be reflected in its share price in the medium to long-term.
Dividend
In light of the current portfolio refurbishment expenditure, the Board feels it is prudent to refrain from making dividend payments in the short term in favour of preserving cash and ensuring that the Company retains some liquidity. When economic conditions permit, it is the Board's intention, post the optimisation of the portfolio, to pay dividends to shareholders, equivalent to substantially all of its surplus profits. In the current environment it is not possible to indicate when the next dividend will be paid.
Manager and Investment Adviser
The Company's Manager, Speymill Property Group Limited, and Investment Adviser, (GOAL service GmbH), are both wholly owned subsidiaries of Speymill plc. On 26th January 2009, Speymill plc announced to the market that following the realisation of further losses by a subsidiary company, Speymill Contracts Limited, it had requested the suspension of trading in its shares. The purpose of the suspension was to allow time for the Group to carry out an accurate assessment of the impact on the financial position of the Group.
Neither the Company's Manager nor Investment Adviser have any trading relationships with Speymill Contracts Limited. The Board of the Company has been assured by the Manager that the Company's Manager and Investment Adviser continue to trade profitably and operate as normal.
The Board commends and thanks the Manager and the Investment Adviser for their excellent performance and guidance during a period of unprecedented financial turmoil in global markets.
Outlook
The Company is now fully invested, with a portfolio consisting of 26,647 units across Germany. This scale gives us the opportunity, through active asset management, to refine the portfolio, mainly through refurbishment, to create clusters of uniformly high quality assets. Any proceeds from such rationalisation will be used to further deleverage the portfolio, increasing liquidity to shareholders, and enhancing operational focus.
The Manager considers German residential property to be one of the most favourably positioned sectors for 2009 and that the German residential property market should hold its value well over the coming months. Valuations should also benefit from the completion of the refurbishment programme and the reduction in vacancies occasioned by this. The Board, its Manager and Investment Adviser will continue to work towards achieving the Company's investment objectives on behalf of shareholders.
Raymond Apsey
Chairman
23 March 2009
Report of the Manager and Investment Adviser
Macroeconomic climate
The past six months have seen unprecedented turmoil in the global financial markets as well as in the real estate sector as a whole. While the credit crisis in the banks has been somewhat tempered by the massive capital injections provided by governments worldwide, the effects have spread to the wider economy.
In the short term, weak sentiment, together with reduced consumer spending and general risk aversion will increase deflationary pressures, which is negative news for real estate valuations and rental growth. As more companies run into difficulties and redundancies increase, rising vacancy rates in office and retail space are expected to drive down valuations even further in these sectors.
It is with these factors in mind that German residential property was voted the best bet in the real estate sector for the coming year, according to the Emerging Trends in Real Estate report by ULI. Germany remains one of the safest investments in Europe mainly due to the fact it did not undergo a period of over-heating like its European peers. With four cities making the shortlist, Germany is the only country with more than one city ranked within ULI's top ten best European cities in 2009 for investments, with the top two spots occupied by Munich and Hamburg, respectively.
Additionally, German residential real estate proved more stable and less risky during a turbulent 2008 compared to offices, retail space, hotels and warehouses, according to property consultants King Sturge.
The population of over 50s in Germany is set to rise from 31 million to 38 million by the year 2020; an increase from 38% to just under 50% of the total population. An additional two million household formations are predicted in that time, according to Empirica Research, and to keep up with the demand, approximately 400,000 new residential units will be needed each year. Less than 200,000 new units were built in 2008, and with an estimated 50,000 homes being demolished annually, shortfall on demand in 2008 alone was approximately 250,000 units.
In a separate study by the IMF on house price gaps, which is defined by the IMF as the "increase in the period (1997 - 2007) that is not accounted for by economic fundamentals", German house prices were found to be undervalued by 5%, the most undervalued among developed countries with the exception of Austria.
In addition, economists believe the huge monetary and fiscal measures being deployed by governments and central banks worldwide to boost growth and lending could hail a new period of significant inflation further down the road, which would benefit real estate prices.
The current undervaluation and undersupply of homes, together with changing demographics and a culture of renting mean that German residential property offers attractive defensive qualities for investors. Factoring in the potential upside in rental and capital growth in the medium to long-term, Germany could provide some of the best opportunities over the coming months.
Portfolio overview
SDIC valuations remain stable
The portfolio valuation for SDIC, as of 31 December 2008, stood at €1,482 million - a fall of €10 million, or 0.7%, from the June 2008 valuation (including €16.7 million of additional property acquisitions post 30 June 2008). The Company's portfolio should be well positioned to retain its value in the face of heavy write-downs worldwide.
Having not experienced a property boom as seen in many other European countries in recent years, Germany remains an attractive market in Europe today, according to the ULI. The asset profile of the Company benefits from a large exposure to apartments, which are regarded as "possibly the most resilient property type in the current economic conditions", according to the Emerging Trends report by the ULI.
| Portfolio update | Period ended 31 December 2008 | Full year ended 30 June 2008* |
| Total number of buildings† | 1,146 | 1,148 |
| Total number of units† | 26,647 | 26,634 |
| Gross lettable area (m²) | 1,727,828 | 1,732,571 |
| Total purchase price (€'000) | 1,423,890 | 1,423,890 |
| Average purchase price (€/m²) | 824 | 822 |
| DTZ valuation (€'000) | 1,482,131 | 1,492,456 |
| Average valuation (€/m²) | 858 | 861 |
| % uplift since purchase | 4.1% | 4.8% |
| Average valuation yield | 6.5% | 6.4% |
| Average residential net rent (€/m²) | 5.11 | 5.14 |
| Average commercial net rent (€/m²) | 7.50 | 7.47 |
* Figures are including €16.7m of additional properties acquired post 30 June 2008
† The number of buildings and units fluctuates between periods based on classifications and remeasurements
Overall, valuations on the portion of the portfolio which has undergone refurbishment have remained stable, whilst valuations on the remaining portion of the portfolio now undergoing the refurbishment programme have declined by €10 million. SDIC is currently valued at €858/m² compared to a valuation of €861/m² in June.
Vacancy increases due to refurbishment
With the first part of the overall refurbishment programme completed recently, the last six months have seen the start of the remaining programme which is now well underway. Overall vacancy on a square metre basis has risen from 12.6% in June 2008 to 14.0% as of December 2008, as a result of units being taken offline for refurbishment work more quickly than the fully refurbished units are being let.
Continued progress is being made in regards to the lettings of refurbished units, with 71% of units from the first part of the refurbishment programme now let, and a further 79% of completed units from the second part of the refurbishment (33% complete as of 31 December 2008) already let. Overall, 73% of completed units have been let, with 3 to 4 months being the average time between completion of refurbishment work on a unit and the unit being let.
Due to the increased vacancy, the valuation yield as of 31 December 2008 now stands at 6.54%, a 14 bps yield expansion compared to the June 2008 figure. Increases in the yield rate have the effect of decreasing the valuation. However, it is important to note that this valuation yield expansion has been partially offset by an increase in overall rental income as refurbished units are let.
Management believes that in the face of the current economic conditions, a 0.7% drop in the portfolio value is a reflection of the underlying strength of the German residential market and is further evidence that the strategies employed are well founded.
Zero cash impact from interest rate swaps revaluations
Due to the dramatic reduction in interest rates over the past few months, the value of swaps held by the Company has suffered a significant mark-down in the period. In the interim period ended 31 December 2008, the swaps were marked-down by €102 million. Consequently, the net asset value per share (NAV per share) of the Company has fallen by 27.6% to €0.89 from €1.23 in June 2008. This is mainly due to the €102 million swaps mark-down and also the €10 million reduction in the portfolio valuation. Under IFRS, the swaps have to be marked to market but it should be noted that this loss is a non-cash accounting movement and has no effect on the business or the Company's debt covenants. Cash and cash equivalents at period-end amounted to €62.9 million, of which €38.2 million is operationally available to the Company.
EPRA (European Public Real Estate Association) defines NAV differently from IFRS as shown in the interim results, in that movements in derivatives and deferred tax provisions are excluded from EPRA NAV calculations. Consequently, EPRA NAV considers only the underlying property values and cash of the Company, stripping away any financial accounting effects. The EPRA NAV can thus be considered to better reflect the underlying real estate NAV.
The Company's EPRA NAV experienced a 3% decline, as of 31 December 2008, compared to the June 2008 figure. Management believes that the EPRA NAV more accurately reflects the underlying value of the portfolio. As the interest rate swaps will be held until maturity, the losses on the swaps mark-down are a non-cash accounting movement only. The only significant EPRA NAV reduction therefore comes from the €10 million fall in the portfolio valuation.
No debt refinancing due
The Company's existing debt is fully hedged at an average fixed interest rate of 4.72% for the entire duration of the debt until maturity. Average debt maturity stands at 5.4 years as of 31 December 2008, with the earliest debt maturing in late 2013. The Manager believes that this places SDIC in a favourable and relatively secure position in these challenging times. In line with the terms of the original agreements, the Company has begun to amortise a proportion of its debt in order to decrease leverage. The first amortisation payment of €1.7 million was made on 15 January 2009. Long term amortisation requirements may be facilitated by selective disposals.
Financial summary
| Financial position | Period ended 31 December 2008 | Full year ended 30 June 2008 |
| Portfolio value (€'000) | 1,482,131 | 1,492,456* |
| Borrowings (€'000) | (1,162,623) | (1,183,448) |
| Net assets (€'000) | 299,317 | 413,693 |
| Adjusted NAV** (€'000) | 306,716 | 419,853 |
| Loan-to-value (LTV) † | 78.4% | 79.3% |
* Figures are including €16.8 million of additional properties acquired post 30 June 2008
** The adjusted NAV excludes deferred tax liabilities
† LTV indicated here does not include cash
The portfolio valuation for the year ended 30 June 2008 stood as €1.49 billion, including an additional €16.7 million of purchased property and acquisition costs processed post 30 June 2008. As of 31 December 2008, the valuation of the Company's portfolio stood at €1.48 billion, representing an overall valuation loss of €10 million. This loss relates to the part of the portfolio currently undergoing refurbishment. The valuation on the portion of the portfolio for which the refurbishment work was completed during the period has remained unchanged, reinforcing the fact that the refurbishment programme undertaken by the Company will ultimately be value enhancing.
LTV, excluding all cash, stood at 78.4% as of 31 December 2008. Including cash, the Company's LTV was 74.2%. Management recognises current investor apprehension towards highly levered companies and is reviewing ways to de-lever the portfolio, such as selective disposals, whilst simultaneously maximising shareholder value.
NAV for the period declined by 27.6%, mainly as a result of the swaps mark-down of €101.6 million and the valuation decrease on the portfolio of €10.3 million. It is important to note that the swaps mark-down has no impact on the cash flows of the Company nor does it in anyway impact upon the Company's debt covenants.
| Financial performance | Period ended 31 December 2008 (€'000) | Full year ended 30 June 2008 (€'000) |
| Gross rents received | 75,994 | 109,562 |
| Valuation losses on property portfolio | (10,325) | (56,995) |
| Net operating profit/(loss) | 15,597 | (26,244) |
| Loss before tax | (113,514) | (62,343) |
| Funds from operations† | (335) | (4,518) |
| Loss after tax | (114,376) | (66,778) |
† Funds from operations (FFO) is equivalent to the recurring cash flow of the Company, as it is adjusted for unrealised movements on hedging instruments, investment properties, deferred tax provisions and any non-recurring expenses.
During the six months to 31 December 2008, the Company made a net operating profit of €15.6 million. On an annualised basis, the net operating profit stands at €31.2 million compared to a net operating loss of €26.2 million for the year ended 30 June 2008. Similarly, gross rent, on an annualised basis, for the period ended 31 December 2008 amounted to €152 million, a significant increase compared to the figure of €109 million for the year ended 30 June 2008. This reflects the full impact of the completion of the investment programme towards the end of the last financial year. As the portfolio progresses towards a stabilised basis of full refurbishment and the resulting increased occupancy rates, the funds from operation (FFO) should improve as the short term negative effects of the ongoing refurbishment programme, such as high vacancy rates start to diminish.
| FFO analysis | Period ended 31 December 2008 (€'000) | Full year ended 30 June 2008 (€'000) |
| Net rents | 47,433 | 70,629 |
| Non-recoverable operating costs | (13,738) | (25,595) |
| Net operating income | 33,695 | 45,034 |
| Administrative expenses | (7,772) | (14,283) |
| EBITDA | 25,923 | 30,751 |
| Net interest expense | (26,635) | (35,077) |
| Tax | 377 | (192) |
| FFO | (335) | (4,518) |
The FFO for the six months ended 31 December 2008 stood at a loss of €335,000. On an annualised basis, the FFO would amount to a loss of €670,000. This is a marked improvement over the FFO loss of €4.5 million for the year ended 30 June 2008. EBITDA has improved significantly due to increased rental income and management expects the FFO to improve significantly as the refurbishment approaches completion and vacancy rates start to decline. Through optimising the portfolio, management hope to further improve the FFO by reducing operational inefficiencies and non-recoverable operating costs.
| Reconciliation of retained loss for the period to FFO | Period ended 31 December 2008 (€'000) | Full year ended 30 June 2008 (€'000) |
| Retained loss for the period | (114,376) | (66,778) |
| Loss on revaluation of property portfolio* | 10,325 | 56,995 |
| Realised/unrealised losses on disposal of hedging instruments | 102,477 | 1,022 |
| Movement on deferred tax provision | 1,239 | 4,243 |
| FFO | (335) | (4,518) |
* Includes acquisition costs written off
Positive effects of the share merger
The Company's C Shares were converted into Ordinary Shares on 16 October 2008 on a NAV to NAV basis and the expanded, unified share class will increase liquidity for shareholders.
Both the Company and the Manager continue to actively evaluate a main market listing with the view of starting the process when market conditions are more favourable.
Following the merger, the investment management fee fell from 85bps to 65bps, an estimated cost saving for SDIC of €1.8 million per year.
Strategic objectives
SDIC is now fully invested, with a portfolio consisting of 26,647 units across Germany, 90% of which are residential. The Company will continue to focus on optimising these properties through active asset management to improve the overall quality of portfolio.
Unlike many German property portfolios, SDIC does not own large blocks of local authority council flats, generally focussing instead on smaller, higher quality buildings as evidenced by the Company's portfolio of 1,146 buildings, with the average building consisting of 23 units. Although it is not in the Company's strategy to sell a large proportion of units, the Manager will continue to monitor market conditions and seek to exploit opportunities advantageous to the Company.
The Company's portfolio valuation is undertaken by DTZ Zadelhoff Tie Leung GmbH, an independent third-party valuer, on a semi-annual basis. The Manager feels that using a conservative approach to valuations is crucial and SDIC is valued conservatively relative to most of its peers, many of whom carry out internal valuations.
It is a core focus of management to reduce the vacancy in the portfolio in order to maximise value for the Company's shareholders.
Positive impact of refurbishment programme
While the occupancy has fallen marginally as of 31 December 2008, this was expected due to the ongoing refurbishment programme being carried out. Some tenants have to be vacated in order for the works to proceed, and others choose to leave due to disturbances caused by such works or in anticipation of higher rents. However, management believes that the refurbishment programme will ultimately create a higher quality portfolio whilst also preserving value in these difficult times, as evidenced by the portion of the portfolio already refurbished maintaining its valuations.
As part of the Manager's drive to create a better portfolio, new tenants are vetted to ensure that the properties are occupied by higher quality tenants, creating a better tenant profile and more secure income streams. To date, the average time between completion of refurbishment works of a unit to the time that the unit is let is between 3 to 4 months.
| Refurbishment and letting progress | Units completed | Completed units let |
| First phase | 100% | 71% |
| Second phase | 33% | 79% |
| Overall | 66% | 73% |
As of the period ended 31 December 2008, 73% of completed units have been successfully let, of which 47% were units with minor works done, with the remaining having undergone more general refurbishment work.
No breach of covenants
The LTV ratio is determined by the property valuation over the debt, not on the NAV. Hence, movements in the value of the interest rate swaps do not affect the Company's LTV covenants. Similarly, as the swaps movements are a non-cash movement, they have no bearing on the Company's Interest Service Cover Ratio (ISCR) covenants.
The Company has not breached any of its banking covenants. The amortisation of a fixed proportion of the debt annually together with projected increases in occupancy rates will create additional headroom for its covenants. With average debt maturity of 5.4 years and no debt maturing until late 2013, the Company remains in a strong and relatively secure position for the foreseeable future.
Optimisation
Through active asset management on multiple fronts, SDIC is currently working to refine its portfolio to create uniformly high quality assets. As mentioned above, the primary means by which this is being achieved is through a targeted refurbishment programme. The portfolio currently shows a vacancy rate of 14% overall. According to the valuation methodology, vacant units are effectively attributed a lower value as they currently produce no rental income. This means that as well as increasing rental levels, the refurbishment programme should also increase the number of units contributing towards the valuation, due to newly refurbished units coming back online. The valuation therefore has the potential to increase above the current level, in the medium to long-term, even if property values throughout Germany come under some pressure. This potential for growth is a considerable strategic advantage.
As SDIC has become more established, Goal service GmbH ("Goal") has increased the number of property and asset management personnel in place across Germany. These additional resources have allowed Goal to bring more of the outsourced property management in-house (to be performed by GOAL property management GmbH). This progression has further aligned the interest of the Company and the property managers to ensure effective operations in all areas.
Going forward, SDIC may consider select sales or privatisations in order to further streamline the portfolio and increase operational efficiencies. Properties with the potential for disposal are those which are the least operationally efficient, such as geographic outliers.
Outlook
Whilst deterioration in the 'real' economy, poor sentiment, reduced consumer spending and general risk aversion will continue to exert deflationary pressures in the short term, and hence impair valuations and rental growth, management continues to believe that Germany remains a unique market. It is our belief that the German residential property market will outperform over the coming months as it continues to hold its value amidst growing write-downs globally.
Having avoided the boom in real estate that engulfed its European peers, German real estate and, in particular, German residential real estate is less exposed to the softening of property values across the world. Valued, on average, significantly below replacement cost, German residential property should benefit from a lack of new supply that is unlikely to ease in the foreseeable future, helping to put upward pressure on future rent and property values.
As the refurbishment programme nears completion over the next six months, the Company's portfolio will continue to progress towards a stabilised basis as one-off costs and the short-term negative effects of the refurbishment programme diminish. We believe rental income and FFO should increase as a result of decreasing vacancies over the coming year whilst the portfolio value should at least remain stable.
In light of the vast monetary and fiscal measures that are currently underway across the world in an effort to kick-start growth and lending, an era of significant inflation could be expected in the future; a key positive driver to real estate rents and values.
Already, signs of growing interest have begun to filter through; with Allianz publicly stating it will double its real estate assets under management from just over 3% to just under 7% by 2013 - an increase of €20 billion - of which 60% will be allocated in Germany.
Currently undervalued and undersupplied, German residential apartments, according to the ULI, look to offer a secure option for many investors in 2009. With the potential upside in rental and capital growth in the medium to long-term, combined with increased investor interest, the coming months should prove to be an interesting and rewarding time for the Company.
| Nigel Caine For the Manager Speymill Property Group | Andrew Wallis For the Investment Adviser GOAL service GmbH |
23 March 2009 Consolidated income statement
| | Note | (Unaudited) For the period 1 July 2008 to 31 December 2008 | (Unaudited) For the period 1 July 2007 to 31 December 2007 |
| | | €’000 | €'000 |
| Rent and related income | | 75,994 | 51,573 |
| Direct costs | | (42,300) | (33,508) |
| Gross profit | | 33,694 | 18,065 |
| Change in fair value of investment property | 7 | (10,325) | (9,529) |
| | | | |
| Manager's fees | 16 | (5,410) | (5,087) |
| Professional fees | | (1,562) | (1,254) |
| Audit fees | | (42) | (120) |
| Other expenses | | (758) | (426) |
| Administrative expenses | | (7,772) | (6,887) |
| Net operating profit before net financing expenses | | 15,597 | 1,649 |
| | | | |
| Financial income | | 1,069 | 6,543 |
| Financial expenses | | (130,180) | (44,118) |
| Net financing expenses | 5 | (129,111) | (37,575) |
| | | | |
| Loss before taxation | | (113,514) | (35,926) |
| | | | |
| Income tax expense | | | |
| Current | | 377 | (132) |
| Deferred | | (1,239) | (124) |
| | | | |
| Retained loss for the period | | (114,376) | (36,182) |
| Basic and diluted loss per Ordinary Share (cents) | 11 | (33.93) | (12.97) |
| Basic and diluted loss per C Share (cents) | 11 | - | (5.66) |
The Directors consider that all results derive from continuing activities.
Consolidated balance sheet
(unaudited)
| Note | (Unaudited) At 31 December 2008 | (Audited) At 30 June 2008 | |
| €'000 | €'000 | ||
| Investment property | 7 | 1,482,131 | 1,475,693 |
| Total non-current assets | 1,482,131 | 1,475,693 | |
| Derivative financial instruments | 8 | - | 61,238 |
| Trade and other receivables | 22,553 | 36,136 | |
| Income tax recoverable | 122 | - | |
| Cash and cash equivalents | 6 | 62,914 | 103,350 |
| Total current assets | 85,589 | 200,724 | |
| Total assets | 1,567,720 | 1,676,417 | |
| Issued share capital | 12 | 16,857 | 69,075 |
| Share premium | 184,992 | 132,774 | |
| Retained earnings | 94,517 | 208,893 | |
| Other reserves | 2,951 | 2,951 | |
| Total equity | 299,317 | 413,693 | |
| Trade and other payables | 33,703 | 37,701 | |
| Interest bearing loans | 9 | 9,794 | 20,826 |
| Refurbishment provision | 23,039 | 35,124 | |
| Income tax payable | - | 291 | |
| Total current liabilities | 66,536 | 93,942 | |
| Interest bearing loans | 9 | 1,152,829 | 1,162,622 |
| Deferred tax liability | 7,399 | 6,160 | |
| Derivative financial instruments | 8 | 41,639 | - |
| Total non-current liabilities | 1,201,867 | 1,168,782 | |
| Total liabilities | 1,268,403 | 1,262,724 | |
| Total equity & liabilities | 1,567,720 | 1,676,417 | |
| Net asset value per Ordinary Share (cents) | 10 | 88.78 | 122.01 |
| Net asset value C Share (cents) | 10 | - | 85.14 |
Consolidated statement of changes in equity
(unaudited)
| Share capital | Share premium | Retained earnings | Other reserves | 31 December 2008 | 31 December 2007 | |
| €'000 | €'000 | €'000 | €'000 | €'000 | €'000 | |
| Balance at 1 July 2008 | 69,075 | 132,774 | 208,893 | 2,951 | 413,693 | 483,731 |
| Shares issued in the year | 8,357 | (8,357) | - | - | - | - |
| Shares cancelled in the year | (60,575) | 60,575 | - | - | - | - |
| Shares cancelled following market | ||||||
| purchases/transfer to capital | - | - | - | - | - | - |
| redemption reserve | - | - | - | - | - | (3,429) |
| Foreign exchange translation differences | - | - | - | - | - | 18,135 |
| Dividend paid | - | - | - | - | - | (1,190) |
| Retained loss for the year | - | - | (114,376) | - | (114,376) | (36,182) |
| Balance at 31 December 2008 | 16,857 | 184,992 | 94,517 | 2,951 | 299,317 | 461,065 |
| Analysis by share | ||||||
| Ordinary Shares | 16,857 | 184,992 | 94,517 | 2,951 | 299,317 | 228,907 |
| C Shares | - | - | - | - | - | 232,158 |
| Balance at 31 December 2008 | 16,857 | 184,992 | 94,517 | 2,951 | 299,317 | 461,065 |
Consolidated cash flow statement
(unaudited)
| For the period 1 July 2008 to 31 December 2008 | For the period 1 July 2007 to 31 December 2007 | |
| €'000 | €'000 | |
| Operating activities | ||
| Group loss before tax for the period | (113,514) | (35,926) |
| Adjustments for: | ||
| Financial income | (1,069) | (6,543) |
| Financial expenses | 130,180 | 44,118 |
| Change in fair value of investment property | 10,325 | 9,529 |
| Operating profit before changes in working capital and provisions | 25,922 | 11,178 |
| Decrease/(increase) in trade and other receivables | 13,583 | (16,572) |
| (Decrease)/increase in trade and other payables | (3,998) | 12,435 |
| Cash flow from operations | 35,507 | 7,041 |
| Interest paid | (27,704) | (21,109) |
| Interest received | 1,069 | 6,543 |
| Income tax paid | (35) | (201) |
| Cash flow from operating activities | 8,837 | (7,726) |
| Investing activities | ||
| Acquisition of investment property | (16,763) | (211,936) |
| Movement in refurbishment provision | (12,085) | - |
| Deposits relating to property acquisitions | - | (24,403) |
| Disposal of derivative financial instruments | 401 | 1,589 |
| Cash flow investing activities | (28,447) | (234,750) |
| Financing activities | ||
| Purchase of C Shares | - | (3,429) |
| Dividend paid | - | (1,190) |
| (Repayment of)/new interest-bearing loans | (20,826) | 126,684 |
| Cash flow from financing activities | (20,826) | 122,065 |
| Net decrease in cash and cash equivalents | (40,436) | (120,411) |
| Effect of exchange rate fluctuations to date of redenomination | - | 8,967 |
| Effect of exchange rate fluctuations on cash held | - | (88) |
| Cash and cash equivalents at beginning of period | 103,350 | 244,239 |
| Cash and cash equivalents at end of period | 62,914 | 132,707 |
Notes to the 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 170 million Ordinary Shares which were admitted to trading on AIM following the close of the placing on 17 March 2006. Pursuant to an admission document dated 17 April 2007 there was a placing of 250 million C Shares which were admitted to trading on AIM following the close of the placing on 10 May 2007.
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.
On 16 October 2008 the C Shares were converted into Ordinary Shares on the basis of the conversion ratio set out in the C Share admission document. The conversion ratio applied was 0.68977 Ordinary Shares for each C Share and as a result of the conversion, the 242,299,000 C Shares which were in issue were converted into a total of 167,130,528 new Ordinary Shares. The total number of the Ordinary Shares in the Company in issue subsequent to the conversion was 337,130,528.
2. The subsidiaries
At the end of the period the Company owns 100% of the shares in 100 Isle of Man incorporated property owning companies and 1 Cayman incorporated intermediate holding company.
3. Significant accounting policies
The interim report of the Company for the period ended 31 December 2008 comprises the Company and its subsidiaries (together referred to as the "Group"). The interim consolidated financial statements are unaudited.
The same accounting policies, presentation and methods of computation are followed in these interim financial statements as were applied in the preparation of the Group's financial statements for the year ended 30 June 2008.
3.1 Basis of presentation
These interim consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) IAS34; Interim Financial Reporting. They are prepared on the historical cost basis except for derivative financial instruments and investment properties, which are stated at fair value.
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.
Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected.
4. Segment reporting
The Group has one segment focusing on achieving rental income and the potential for capital growth investing in the residential property market in Germany. No additional disclosure is included in relation to segment reporting, as the Group's activities are limited to one business and geographic segment.
5. Net financing expenses
| Unaudited For the period ended 31 December 2008 | Unaudited For the period ended 31 December 2007 | |
| €'000 | €'000 | |
| Interest income | 1,069 | 6,543 |
| Financial income | 1,069 | 6,543 |
| Interest charges | (27,704) | (21,107) |
| Realised loss on derivative financial instruments | (869) | (2,046) |
| Unrealised loss on derivative financial instruments | (101,607) | (20,963) |
| Bank charges | - | (2) |
| Financial expenses | (130,180) | (44,118) |
| Net financing costs | (129,111) | (37,575) |
6. Cash and cash equivalents
Cash and cash equivalents of €62,914,000 (30 June 2008: €103,350,000) include €22 million held on deposit at NIBC Bank (30 June 2008: €24 million), which, under the terms of the bank loans is required to be used solely for property refurbishments.
7. Investment property
| Unaudited 31 December 2008 | Audited 30 June 2008 | |
| €'000 | €'000 | |
| Brought forward | 1,475,693 | 861,805 |
| Additions | 16,763 | 670,883 |
| Net revaluation deficit | (10,325) | (56,995) |
| Value of investment property at end of year | 1,482,131 | 1,475,693 |
The fair value of the Group's investment property at 31 December 2008 has been arrived at on the basis of a valuation carried out at that date by DTZ Zadelhoff Tie Leung GmbH ("DTZ"), independent valuers that are not related to the Group. DTZ 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 31 December 2008, there was a first rank mortgage on the above properties securing the bank loan of €1,162,623 (30 June 2008: €1,183,448).
8. Derivative financial instruments
| Unaudited 31 December 2008 | Audited 30 June 2008 | |
| €'000 | €'000 | |
| Fair value of interest rate swaps contracts | (41,639) | 61,238 |
9. Interest-bearing loans
| Unaudited 31 December 2008 | Audited 30 June 2008 | |
| €'000 | €'000 | |
| The interest bearing loans are repayable as follows: | ||
| On demand or within one year | 9,794 | 20,826 |
| In the second to fifth years inclusive | 83,494 | - |
| After five years | 1,069,335 | 1,162,622 |
| 1,162,623 | 1,183,448 | |
| Less: amount due for settlement within 12 months (shown under current liabilities) | (9,794) | (20,826) |
| Amount due for settlement over the remaining period of the loans | 1,152,829 | 1,162,622 |
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%.
10. Net asset value per share
| Unaudited 31 December 2008 | Audited 30 June 2008 | |
| Ordinary Shares: | ||
| Net assets attributable to Ordinary shareholders (€'000) | 299,317 | 207,409 |
| Ordinary Shares in issue (thousands) | 337,131 | 170,000 |
| Net asset value per Ordinary Share (in cents) | 88.78 | 122.01 |
| C Shares: | ||
| Net assets attributable to C shareholders (€'000) | - | 206,284 |
| C Shares in issue (thousand) | - | 242,299 |
| Net asset value per C Share (in cents) | - | 85.14 |
The C Shares converted into Ordinary Shares on 16 October 2008.
11. Basic and diluted loss per share
Basic and diluted loss per Ordinary Share and C Share are calculated by dividing the loss attributable to the Ordinary shareholders and the loss attributable to the C shareholders by the number of Ordinary Shares and the number of C Shares respectively in issue during the period.
| Basic and diluted loss per share | 31 December 2008 | 31 December 2007 |
| Ordinary Shares (note 12): | ||
| Loss attributable to Ordinary shareholders (€'000) | (114,376) | (22,051) |
| Weighted average Ordinary Shares in issue for the period to 31 December (thousands) | 337,131 | 170,000 |
| Basic and fully diluted loss per Ordinary Share (cents per share) | (33.93) | (12.97) |
| Basic and diluted loss per share | 31 December 2008 | 31 December 2007 |
| C Shares (note 12): | ||
| Loss attributable to C shareholders (€'000) | - | (14,129) |
| Weighted average C Shares in issue for the period to 31 December (thousands) | - | 249,756 |
| Basic and fully diluted loss per C Share (cents per share) | - | (5.66) |
12. Capital and reserves
Share capital
| Ordinary Shares of €0.05 each | Number | €'000 |
| In issue at the start of the period | 170,000,000 | 8,500 |
| Issued during the period | 167,130,528 | 8,357 |
| In issue at 31 December 2008 | 337,130,528 | 16,857 |
| C Shares of €0.25 each | Number | €'000 |
| In issue at the start of the period | 242,299,000 | 60,575 |
| Cancelled in the period | (242,299,000) | (60,575) |
| In issue at 31 December 2008 | - | - |
On 16 October 2008, the Company converted the existing C Shares in issue to Ordinary Shares at a ratio of 0.68977 Ordinary Shares per C Share. As a result of the conversion a total of 167,130,528 new Ordinary Shares were created and admitted to trading on AIM.
The holders of Ordinary 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.
13. Dividends
No dividend was declared or paid during the period (during the period ended 31 December 2007: an interim dividend of £800,161 (€1,190,000) was declared and paid to holders of Ordinary Shares).
14. Contingent liabilities and Commitments
As at 31 December 2008, property purchases of €nil (30 June 2008: €16.7m) were notarised (committed to be purchased).
GOAL service GmbH ("Goal") has been served with a claim for agents' commissions by Marktblick in respect of certain property transactions that were carried out as part of a larger portfolio transaction subsequent to their initial introduction by Marktblick. The claim is being defended based on the information available and Goal believes it is without merit. In the event that Marktblick is successful, then commission of up to €200,000 could be payable by Goal which would be rechargeable to the Company.
15. Post balance sheet events
There have been no material events since the balance sheet date that require disclosure in the accounts.
16. Related party transactions
Parties are considered to be related if one party has the ability to control the other party or to exercise significant influence over the other party in making financial or operational decisions.
The Manager is considered a related party. Management fees payable to the Manager during the period amounted to €4,549,661 (31 December 2007: €4,381,642).
GOAL service GmbH ("Goal") (the Investment Adviser) is related to the Manager and performs property management services. Management fees payable to Goal for the period amounted to €860,691 (31 December 2007: €705,354). In addition, property management fees payable to Goal for the period amounted to €4,994,100 (31 December 2007: €2,741,304).
GOAL construction GmbH ("Goal construction") is also related to the Manager and performs project management services. Construction project management fees payable to Goal construction for the period amounted to €947,899 (31 December 2007: €1,278,991).