UAI.L Regulatory News (UAI)

19 October 2016

U and I Group PLC ("U+I" or "the Company" or "the Group")

INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 AUGUST 2016

Encouraging progress despite challenging environment

Financial performance

· £11.5 million development and trading gains in the first half, ahead of guidance of £8 million (HY2015: £12.5 million).

· £11.0 million additional development and trading gains secured since August taking total gains year to date to £22.5 million.

· EPRA NAV per share of 272 pence (FY2016: 291 pence) after payment of 11.5 pence per share FY2016 supplemental and final dividends; incorporating a 6.3 pence per share reduction in the value of investment properties.

· Investment portfolio performance impacted by uncertainty following the UK's decision to leave the European Union (EU) in June 2016, however market conditions have stabilised in recent weeks. Our H1 relative capital value decline of -5.2% compares to the decrease in the IPD Shopping Centre Monthly Index of -6.6% and that of the IPD All Property Monthly Index of -4.1%.

· Interim dividend maintained at 2.4 pence per share.

Outlook

· Notwithstanding challenging market backdrop, FY2017 development and trading gains expected to be in the range of £35-40 million.

· Medium-term target remains delivering annual development and trading gains in excess of £50 million and achieving a 12% (post tax) total return through a mix of both trading and larger regeneration projects.

· Over £1.5 billion GDV added to the development and trading pipeline with significant project wins in the London City Region and Manchester; potential to realise profits in excess of £90 million beyond FY2020 in line with the Group's stated return on equity metrics.

· Targeting a contribution of £2 million in FY2018 through a reduction in recurring overhead and from net management fees from specialist platforms.

Update on strategic initiatives

· Fewer, larger projects: U+I appointed to deliver mixed-use regeneration projects at Cockpit Yard, 8 Albert Embankment and the Westminster Industrial Estate, Charlton in the London City Region and, as development partner at Mayfield in Manchester.

· Investment portfolio: Management continues to reposition the investment portfolio to better align to the Group's focus on regeneration, including the disposal of assets in the period for £17.0 million.

· Specialist platforms: recently signed a £200 million joint venture with Proprium Capital Partners to secure income generating assets in the London City Region; continue to evaluate other opportunities to create platforms for growth and efficiency, including the development of a Build to Rent platform.

Matthew Weiner, Chief Executive, commented:

"We are two years into our business plan, post our merger, and have achieved some considerable momentum. The success that we've had in securing larger regeneration projects in the London City Region and Manchester adds significantly to our development pipeline; this reflects both U+I's focus on fewer, larger projects and our expertise in partnering with the public sector to create new mixed-use projects for the communities in which we work.

We continue to explore the opportunity to create a specialist platform to meet the growing need for affordable rental housing across our portfolio of sites in key regions and are advancing other partnerships to leverage the expertise we have in specific sectors of the market. These platforms should, alongside our targeted reduction in overheads, lead to cost savings and productivity gains.

These results reaffirm our commitment to the strategic initiatives we announced a year ago and, alongside our strengthened management team, we are encouraged by the progress that we've made and confident that we will maintain positive momentum into 2017."

Financial summary (unaudited for the six months ended 31 August 2016)

1. After payment of supplemental dividend (£10.0 million) - declared for FY2016 and paid in June 2016

2. The development portfolio is reported at the lower of cost and net realisable value at the end of August; a full EPRA NAV will be reported at the end of the financial year to value the development and trading assets at fair value.

Conference call for analysts and investors

U+I's management team will host a conference call for investors and analysts at 9:15am (UK) today. The live audio webcast and presentation slides can be accessed via http://www.uandiplc.com/investors (from 9am) with conference call details as below. A recording of the conference call and archive version will be made available later in the day.

Conference call:

Participant dial in number: +44 (0)20 3059 8125

Participant password: Please quote U+I to the operator

Replay dial in number: +44 (0)121 260 4861

PIN: 4411771#

For further information, please contact: 

Jessica Stalley, Interim Head of Investor Relations

Tel: +44 20 7828 4777

E-mail: ir@uandiplc.com

Tulchan Communications

Peter Hewer / Will Smith

Tel: +44 20 7353 4200

E-mail: uandi@tulchangroup.com

This announcement contains inside information as defined in Article 7 of the Market Abuse Regulation No. 596/2014 and is disclosed in accordance with the Company's obligations under Article 17 of those Regulations.

Chief Executive's Statement

Overview

I am encouraged by the progress that we have made in the first half of our 2017 financial year and to date, a period which has been subject to unusual levels of economic and political uncertainty both in the UK and global markets.

We have reinforced our position as a leading regeneration developer and the public sector's preferred partner, winning significant Public Private Partnership (PPP) projects in the current financial year, strengthening our position in our core markets and sustaining our pipeline of projects that will be developed over the medium-term.

Following the EU referendum, we have reassessed our development and trading portfolio and therefore restate our full year guidance to be within a range of £35-40 million (from £42 million) in FY2017 to allow for the increased uncertainty in project delivery. Guidance in FY2018 is restated to between £65-70 million (from £72 million) and £55-65 million (from £63 million) in FY2019.

Shareholder funds decreased to £340.5 million equivalent to 272 pence per share (FY2016: £363.3 million, 291 pence per share) after payment of 11.5 pence per share FY2016 supplemental and final dividends and, a £7.9 million (including share of JVs) reduction in the valuation of the investment portfolio. The development and trading portfolio is reported at the lower of cost and net realisable value at the end of August, a full EPRA NAV will be reported at the end of the financial year to reflect the market valuations of these assets. A loss before tax is reported of £11.7 million (HY2016: £1.4 million profit).

The Board has declared an interim dividend of 2.4 pence per share payable on 25 November 2016 to shareholders on the register on 28 October 2016.

Development and trading portfolio

We realised £11.5 million of development and trading gains in the period reported, ahead of our interim guidance of £8 million (HY2015: £12.5 million). These gains were principally generated from the sale of the former Powergen site in Ashford and the disposal of our mixed-use development at Percy Place in Dublin.

Since the period end, we have delivered a further £11.0 million of development and trading gains from the sale of sites at Birmingham International Park, Maidstone (Kent) and Beacon and Nutgrove (Dublin). U+I secured planning permission for up to 310,000 sq. ft. of development at Birmingham International Park earlier this year; today we confirm that contracts have been exchanged for the sale of the 26.5-acre site, realising a profit of £8m (in excess of previous guidance).

Gains in the year to date total £22.5 million. We have good visibility on trading in the months ahead and remain confident that we will maintain positive momentum through into 2017.

Strategic initiatives

We continue to progress the strategic initiatives we outlined a year ago. These initiatives are designed to deliver over £50 million in development and trading gains per annum as well as an improved performance from the investment portfolio to deliver a target post-tax total return of 12% within the next three to five years.

Fewer, larger projects

In March 2016, U+I was appointed to deliver a £100 million mixed-use project at Cockpit Yard in Holborn and a £380 million regeneration project in partnership with the London Fire and Emergency Planning Authority at  8 Albert Embankment. In September, U+I was selected by the Mayfield Partnership to develop a £850 million urban regeneration project in Manchester that will leave a lasting legacy for the city. We were most recently selected by Royal London, in conjunction with Galliard Homes, to develop a £175 million GDV project on part of the Westminster Industrial Estate, in Charlton. These wins are a testament to our focus on quality of place, design and vision to create and deliver financial, economic and social benefit.

Investment portfolio

During the period, the investment portfolio decreased to £180.1 million as at 31 August (FY2016: 203.3 million) due to both disposals of £17.0 million and a reduced valuation of £8.6 million (excluding share of JVs); the initial yield was maintained at c7%. The reduction in valuation is mainly a reflection of the outward yield movement across the portfolio in line with market conditions following the EU referendum and, the 1% increase in SDLT in March. In certain cases, we have also seen a decline in estimated rental values. These reductions do not affect our intention to transition the portfolio to more closely reflect the core regeneration themes of the business.

Specialist platforms

U+I is well positioned, given our diverse pipeline of opportunities, to aggregate product across our sites within specific asset classes from within our development and trading portfolio. To this end, a £200 million joint venture has been signed with Proprium Capital Partners to secure income generating assets in the London City Region. We have the expertise to create further specialist platforms, including a Build to Rent platform to meet the growing need for affordable rental housing, and are currently evaluating how best to work with potential capital partners. We have also identified opportunities in the office refurbishment space where we can leverage our expertise to deliver a quality product where there are limited options for new build development.

Management team 

Peter Williams succeeded David Jenkins as Chairman at the Annual General Meeting (AGM) in July 2016 and Lynn Krige replaced Sarah Bates as Chair of the Audit and Risk Committee.

Mark Richardson joined the Executive Committee in September to oversee the delivery of our regeneration portfolio and manage engagement with key stakeholders. Mark was most recently the Pre-Construction Director at Laing O'Rourke and has worked on some of the capital's most recognisable projects, including One Hyde Park, The Francis Crick Institute and, the Ascot Grandstand.

Outlook

We have made significant progress this year in a challenging environment and are firmly positioned as a leading regeneration developer, achieving four major project wins in the past eight months to add over £1.5 billion GDV to our development pipeline. We are forecast to deliver development and trading profits in a range of £155-175 million in the next three financial years with the potential to realise a further £90 million to our existing pipeline beyond this period as a result of these project wins (in line with the company's stated return on equity metrics).

I am confident that U+I's transactional activity will continue to improve in the months ahead and that we will retain the focus of advancing our strategic initiatives within a context of continuing widespread economic, social and cultural change. We are committed to creating sustainable value for all of our stakeholders, from shareholders, to local authorities, to our capital partners, tenants and suppliers, and ultimately, the communities in which we develop.

Matthew Weiner, Chief Executive

19 October 2016

Financial review

Net assets attributable to shareholders decreased by £22.8 million to £340.5 million (29 February 2016: £363.3 million) reflecting the result for the period and the payment of £14.4 million of dividends declared in the previous financial year (£10.0 million supplemental dividend and £4.4 million final dividend).

The result for the six months to 31 August 2016 was a loss before tax of £11.7 million (31 August 2015: £1.4 million profit). In the period, the Group delivered development and trading gains of £11.5 million, slightly ahead of previous guidance, however this was offset by a reduction in the valuation of our investment portfolio of £8.6 million, reflecting an outward yield movement across the market post the result of the EU referendum in June 2016 and also changes to rates of SDLT.

The principal gains in the period arose from the disposal of our scheme at the former Powergen site in Ashford (£3.9 million) and the disposal of our mixed-use development at Percy Place, Dublin (£2.8 million). Since 31 August 2016 we have realised further gains of £11.0 million from disposals at Birmingham International Park, Maidstone (Kent) and Beacon and Nutgrove (Dublin).

Our guidance for development and trading gains for the financial year has been amended to a range of £35-40 million as a result of a slowdown in business investment decision making by tenants and investors impacting upon transaction levels post May 2016. As ever, we have a number of other projects where we are seeking to realise profits in the second half of the financial year to ensure we meet the revised guidance range.

As at 31 August 2016 our net debt stood at £128.0 million representing gearing of 37.6% (29 February 2016: £161.4 million and 44.4%). Gearing has reduced in the period following the disposal of the Deptford and Percy Place developments and the subsequent repayment of associated debt.

Of our gross borrowings of £177.3 million, £38.3 million is repayable within one year (29 February 2016; £213.3 million, £65.5 million). Of the £38.3 million repayable, £27.9 million relates to the debt facility charged against our shopping centres at Ringwood and Thatcham which expires in December 2016. Terms have been agreed for the refinancing of this facility which will be completed prior to the existing expiry.

Overall the weighted average maturity of our debt is 4.8 years with a weighted average interest rate of 5.0%, excluding joint ventures.

In respect of our Euro denominated exposure, we maintain a policy of hedging the majority of our foreign exchange exposure by the use of currency hedging instruments and seeking to match Euro denominated assets and liabilities. During the period, the value of Sterling against the Euro fell significantly as a result of the outcome of the EU referendum in June 2016. The impact on net asset value during the period was a reduction of £0.5 million, which is the net result of a loss of £3.4 million recorded in finance costs in the profit and loss account and a gain through reserves of £2.9 million.

The Group presents a number of key performance indicators in accordance with the guidance criteria issued by the European Public Real Estate Association ('EPRA') in order to provide a consistent reporting platform across the property sector. A reconciliation from IFRS to EPRA is disclosed in note 6 of these condensed consolidated financial statements.

As has previously been disclosed, the Group intends to publish an EPRA NAV for February 2017 which includes a fair value estimate of development and trading assets carried at the lower of cost and net realisable value in the Balance Sheet. This project is now underway in conjunction with our valuers.

The Group considers its risk profile to have changed since February 2016. The result of the EU referendum in June 2016 has in particular increased the Group's principal external risks being market risk, scarcity of viable business opportunities, counterparty and bank funding risk. The main business risks are construction and planning risk. The Risk Management Committee continually reviews the Group's risk profile, reporting to the Audit and Risk Committee and the Board. Principal risks are categorised either as external risks, whose occurrence is beyond the control of the Group, or business risks which the Board manage as part of the Group's operations. Further details can be found in the U and I Group PLC 2016 Annual Report.

Portfolio analysis

Income generating properties as at 31 August 2016

Investment property - key statistics

* Based on the core investment property assets only.

Consolidated statement of comprehensive income

unaudited for the six months ended 31 August 2016

All amounts in the Consolidated statement of comprehensive income relate to continuing operations.

Notes 1 to 18 form an integral part of these condensed consolidated set of financial statements

Consolidated balance sheet

unaudited as at 31 August 2016

Notes 1 to 18 form an integral part of these condensed consolidated set of financial statements.

Consolidated statement of changes in equity

unaudited as at 31 August 2016

Notes 1 to 18 form an integral part of these condensed consolidated set of financial statements.

Consolidated cash flow statement

unaudited for the six months ended 31 August 2016

Notes 1 to 18 form an integral part of these condensed consolidated set of financial statements.

Notes to the interim financial information

unaudited for the six months ended 31 August 2016

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES

a) General information

The principal activity of U and I Group PLC and its subsidiaries is property investment and development in the UK and Republic of Ireland.

The condensed consolidated financial statements for the six months ended 31 August 2016 comprise the results of the Company and its subsidiaries and were authorised by the Board for issue on 19 October 2016.

The Company is a public limited company which is listed on the London Stock Exchange and is incorporated and domiciled in the UK. The address of its registered office is 7A Howick Place, London, SW1P 1DZ.

The condensed consolidated financial statements do not comprise statutory accounts within the meaning of section 434 of the Companies Act 2006. Statutory accounts for the year ended 29 February 2016, which were prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union, were approved by the Board of Directors on 28 April 2016 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

These condensed consolidated financial statements have been reviewed, not audited.

b) Basis of preparation of half-year report

These condensed consolidated financial statements for the six months ended 31 August 2016 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, 'Interim financial reporting'. The condensed consolidated financial statements should be read in conjunction with the Group's financial statements for the year ended 29 February 2016, which have been prepared in accordance with IFRS, as adopted by the European Union.

Going concern basis

The Group has considerable financial resources. Rental income continues to be robust, with the risk of significant default assessed by the Directors as low. Development and trading activities are well diversified across regions and sectors. Debt finance is secured for appropriate periods and the Group is comfortable with its covenant positions. As a result the Directors believe that the Group is well placed to manage its business risks successfully. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for at least twelve months from the date of approval of the financial statements. Thus they continue to adopt the going concern basis of accounting in preparing the interim financial statements.

c) Judgements and key sources of estimation uncertainty

The preparation of financial statements requires management to make judgements, assumptions and estimates that affect the application of accounting policies and reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing the condensed consolidated financial statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 29 February 2016.

d) Accounting policies

The accounting policies applied in these condensed consolidated financial statements are consistent with those of the Group's financial statements for the year ended 29 February 2016, as described in those financial statements.

New and amended standards and interpretations need to be adopted in the first interim financial statements issued after their effective date (or date of early adoption). There are no additional standards or interpretations, other than those disclosed in the Group's financial statements for the year ended 29 February 2016, which are expected to have a material impact on the Group.

The accounting policies adopted are consistent with those of the previous financial year.

e) Financial risk management

Financial risk factors

The Group's activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk.

The condensed consolidated financial statements do not include all financial risk management information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's financial statements as at 29 February 2016.

There have been no changes in risk management or in any risk management policies since the year end.

Liquidity risk

Compared to the year end, there was no material change in the contractual undiscounted cash out flows for financial liabilities.

Currency risk

During the period the Group has continued to invest in the Republic of Ireland. Following the UK's vote to exit from the European Union and the subsequent weakening of Sterling, the Directors have continued to closely monitor its exposure to its Euro denominated assets and liabilities. The Group continues to operate its policy to manage currency exposure whereby any assets acquired in Euros will have associated borrowing also denominated in Euros to limit the exposure. In addition the Board will also require the foreign exchange risk to be hedged if appropriate.

Fair value estimation

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

· Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1).

· Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2).

· Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (level 3).

The following table presents the Group's assets and liabilities that are measured at fair value at 31 August 2016:

The following table presents the Group's assets and liabilities that are measured at fair value at 31 August 2015:

Derivative financial instruments at fair value through profit or loss of £0.2 million gain (31 August 2015: loss of £0.1 million and 29 February 2016: gain of £0.3 million) are recorded in Finance income or Finance costs as appropriate in the condensed consolidated financial statements.

There have been no reclassifications of financial assets during the period.

Level 2 derivative financial instruments comprise of a number of interest rate swaps and caps and a forward foreign exchange contract. Interest rate swaps and caps are valued using forward interest rates extracted from observable yield curves taking account of the risk of default of either counterparty to the financial instrument. The effects of discounting are generally insignificant for level 2 derivatives.

Fair value measurement using significant unobservable inputs (level 3)

A review of the fair value of financial assets is performed at each reporting date with any significant changes in value reported to the Board and Audit and Risk Committee. Level 3 assets consist of loans to associates or joint ventures. Each receivable is reviewed as to its recoverability. If recoverability is in doubt an appropriate provision for impairment would be made based on the best estimate of the loan recoverable. The Board have concluded that there are no financial assets recognised where the loan amount is not the best evidence of fair value.

Contingent consideration in a business combination

The Group had no contingent consideration liabilities at 31 August 2016, 31 August 2015 or 29 February 2016.

Group's valuation processes

The Group engages external, independent and qualified valuers to determine the fair value of Level 3 investment property assets (refer note 7). The valuation process involves the Investment Team, our asset service provider and valuers. Every six months, prior to the valuation date, full tenancy information, verified by both the Investment Team and asset service provider is provided to the valuers. New lettings, completed and pending lease events and asset management proposals are provided by the Investment Team on an asset by asset basis. The valuers assimilated income information is checked by the Investment Team before the valuers report numbers.

The fair value of Level 3 assets is also determined by utilising the valuers own internal databases and propriety/external resources for both rental and capital evidence/yield evidence. In addition they will review local sales data or, where the assets are held for the purpose of extending an existing retail asset, by reviewing appraisals relating to the proposed scheme.

The key unobservable assumptions used in the valuations are:

More information relating to valuation methodology is contained within the Group's financial statements as at 29 February 2016.

The carrying value of the following financial assets and liabilities approximate to their fair value:

· Trade and other receivables

· Other current financial assets

· Cash and cash equivalents

· Trade and other payables

· Borrowing costs

2. SEGMENTAL ANALYSIS

For management purposes, the Group is organised into three operating divisions, whose principal activities are as follows:

These divisions are the basis on which the Group reports its primary segmental information. All operations occur and all assets are located in the United Kingdom or the Republic of Ireland. All revenue arises from continuing operations.

3. FINANCE INCOME AND COSTS

4. INCOME TAX

Income tax charge is recognised based on management's estimate of the weighted average annual income tax rate expected for the full financial year. The estimated average annual tax rate used for the year to 28 February 2017 is 20.0% (the estimated tax rate for 29 February 2016 was 20.1%).

5. DIVIDENDS