To:
RNS
Date:
28 September 2018
From:
F&C UK Real Estate Investments Limited
- Portfolio ungeared total return* of 11.7 per cent for the
year
- NAV total return* of 13.6 per cent for the year
- Dividend of 5.0 pence per share
for the year, giving a yield* of 5.0 per cent on the year-end share
price
- Dividend cover* increased to 95.7 per cent for the year from
94.4 per cent
* See Alternative Performance Measures
Chairman’s Statement
The Group’s net asset value (‘NAV’) total return* for the year
was 13.6 per cent with a NAV per share as at 30 June 2018 of 108.5
pence, up from 100.1 pence per
share at the prior year-end.
Despite the strong underlying performance, the share price
reflects continued market uncertainty. The share price total
return* for the year was -1.9 per cent with the shares trading at
99.8 pence per share at the year-end,
a discount* of 8.0 per cent to the NAV. It is disappointing that
the share price has fallen but it is not believed that this is a
reflection of the underlying portfolio when compared against the
peer group.
Property Market
The UK commercial property market delivered a total return of
9.4 per cent as measured by the Investment Property Databank
(‘IPD’) UK Quarterly Index for all assets in the year to
30 June 2018. Performance was
positive throughout the year, although the latter part of the year
saw some moderation in total returns. Capital values recorded 4.7
per cent annual growth and the annual income return was 4.5 per
cent. As in the previous year, performance was driven by Industrial
and Distribution property and by Alternative assets, which included
student accommodation, healthcare and hotels. Compared with a year
earlier, most parts of the market recorded an improved performance,
with Industrials pulling further ahead, but Retail did encounter
headwinds, and shopping centres delivered a negative total
return.
In the year to 30 June 2018, open
market rental value growth at the all-property level was 1.7 per
cent, led by a 7.3 per cent increase for South East Industrials,
but the structural weakness of regional Retail persisted and rental
growth for this segment remained negative. Yields edged slightly
lower over the year, helped by stronger investment demand.
Portfolio
The Group’s property portfolio produced an ungeared return* of
11.7 per cent over the year to 30 June
2018, outperforming the IPD Quarterly Index by 210bps.
Performance was driven by a combination of capital growth of 6.1
per cent and an above market income return of 5.3 per cent.
Continuing the main theme from the last reporting period, positive
sentiment for the Industrial sector led to the portfolio’s
Industrial and Distribution assets again being the key contributors
to Company performance. Encouragingly, performance of the portfolio
was more consistently broad based than in previous periods with the
Company’s Retail and Office assets outperforming their benchmark
peers at the sector level, although the South-East Retail assets
struggled on a relative basis. Retail Warehousing was a particular
bright spot although the Manager continues to monitor this
sub-sector closely, with significant time being devoted to the
management of the assets in light of specific tenant risk.
The portfolio continues to deliver an above market income yield,
with the void rate reducing to 4.6 per cent following the
successful completion of asset management initiatives. There has
been minimal impact upon the portfolio from Company Voluntary
Arrangements (‘CVA’s’) and administrations widely reported in the
Retail market place as at 30 June
2018, however post period there will be some impact from the
CVA of Homebase, recently approved by creditors. As detailed in the
Manager’s Review, plans are already in place to mitigate any
potential negative impact and to realise opportunity where
appropriate. Average unexpired lease length has fallen over the
period to approximately 6 years on a weighted basis.
The Company’s strategy continues to be the retention of an
overweight position to Industrial and Warehouse property with the
Company’s Retail portfolio under continual review given the
difficulties currently being experienced by this sector. There was
a further sale from the High Street portfolio of 100a Princes
Street, Edinburgh and also an
Office building at The Clock Tower, Brookwood. The Company’s
sole purchase was an Industrial asset in Basingstoke.
Despite the Company’s shares trading at a premium to NAV for a
proportion of the year the Board has maintained a cautious approach
to raising new equity. This policy is complemented by the Manager’s
measured approach to the purchase of property in what is a highly
competitive marketplace. Therefore, the primary focus has been on
the disposal of non-core and secondary assets and the active
management of retained assets.
Cash Resources
The Group had £15.0 million of cash available and an undrawn
facility of £7 million at 30 June
2018 and acquisition opportunities are constantly under
review. There is no undue pressure to invest with the near-term
focus being to concentrate available capital on worthwhile, cost
effective asset management initiatives within the standing
portfolio. Opportunistic sales may also be considered, with
disposals in the reporting year offering a valuable aggregate
premium to valuations.
Borrowings
The Group currently has in place a secured £90 million
non-amortising term loan facility with Canada Life Investments,
repayable in November 2026 and a £20
million 5-year revolving credit facility agreement with Barclays
Bank plc, £13 million of which was drawn down at the year-end. This
facility is available until November
2020.
The Group’s gearing* level, net of cash, represented 26.2 per
cent of investment properties at 30 June
2018. The weighted average interest rate (including
amortisation of refinancing costs) on the Group’s total current
borrowings was 3.2 per cent. The Company continues to maintain a
prudent attitude to gearing.
Dividends and Dividend Cover
Three interim dividends of 1.25
pence per share were paid during the year with a fourth
interim dividend of 1.25 pence per
share to be paid on 28 September
2018. This gives a total dividend for the year ended
30 June 2018 of 5.0 pence per share, a yield* of 5.0 per cent on
the year-end share price. In the absence of unforeseen
circumstances, it is the intention of the Group to continue to pay
quarterly interim dividends at this rate.
The level of dividend cover* for the year was 95.7 per cent,
compared to 94.4 per cent for the previous year. There
was exceptional income received of £4.4 million relating to a
surrender premium received from a tenant and when adjusted for
this, dividend cover was 132.0 per cent.
Responsible Property Investment
The Company has continued to take measures to strengthen its
approach to responsible property investment. An outline of the main
milestones reached and further actions is included in the Manager’s
Review.
Change of Company Name
In 2014 the Company’s investment manager, F&C Investment
Business Limited, was acquired by BMO (‘Bank of Montreal’). BMO has
recently announced its intention to transition all remaining
F&C branded products and funds to BMO later in the year. Its
savings plans, through which many of our shareholders invest, will
also align to the BMO brand. The Board is therefore recommending
that the Company changes its name from F&C UK Real Estate
Investments Limited to BMO Real Estate Investments Limited and is
seeking shareholder approval at the Annual General Meeting.
If approved, it is anticipated that this renaming will take effect
early in 2019.
Outlook
The outlook continues to be dominated by the political and
economic uncertainties surrounding Brexit, and this is likely to
become even more pronounced as the March
2019 deadline approaches. Economic growth has been positive,
but modest, and consensus forecasts have been revised lower. The
Bank of England raised interest
rates after the end of this reporting period, and further gradual
increases are anticipated. However, the property yield premium
remains attractive against the risk-free rate.
The difficulties affecting the Retail sector are an area of
concern, as is pricing in some areas of the market. We believe that
in an environment of low growth and of market uncertainty,
investors will prioritise income protection and the security of a
long-term contracted income stream. We expect property to continue
to deliver positive total returns, underpinned by the income
return.
Whilst remaining cautious in these uncertain times, we believe
that the Company’s balanced portfolio offers relatively attractive
defensive characteristics, a strong income return, combined with
some value enhancement opportunities.
Vikram
Lall
Chairman
* See Alternative Performance
Measures
Manager’s Review
Property Highlights over the year
- Outperformance of the MSCI IPD Quarterly Index (the benchmark)
of 210 bps over the year to June 2018
driven by a relatively high weighting to Industrials. The portfolio
has now outperformed the index over 1, 3, 5, 10 and 14 years since
inception.
- Outperformance in both Capital and Income, with an income
return* of 5.3 per cent over the period.
- Selective sales strategy has delivered a positive contribution
to returns.
- Acquisition of further Industrial exposure in the South East in
the form of Unit K60 Lister Road, Basingstoke, let to Bunzl, for £9.56
million.
- Low void rate of 4.6 per cent well below the IPD Quarterly
Index rate of 7.2 per cent.
Property Market
The UK commercial property market delivered a total return of
9.4 per cent in the year to 30 June
2018 as measured by the Investment Property Databank (“IPD”)
all Quarterly and Monthly Funds Index (‘IPD Quarterly Index’).
Performance was driven by an annual income return of 4.5 per cent,
with capital values rising by 4.7 per cent.
The market recorded consistently positive total returns at the
all-property level throughout the year but with a slight
deceleration in pace in the second half of the reporting period.
The income return reduced from 4.7 per cent a year earlier,
reflecting higher capital values, with capital growth consistently
positive during the reporting period.
The UK economy has continued to see modest positive GDP growth.
Inflation remains above target, in part reflecting the lagged
effect of the depreciation of sterling and higher oil prices.
Despite an improving labour market, wage growth remains modest. The
Bank of England raised its
official rate in November 2017 and
again after the end of the reporting period. Gilt yields edged up
marginally in the reporting year, but with ten-year yields at 1.38
per cent, they remain at very low levels by historic standards. The
Brexit negotiations and the consequent economic and political
ramifications remain a major concern for investors with progress at
the time of writing seemingly having stalled. The growth of
protectionism globally and concern about tariff wars has been a
further factor affecting sentiment though it has not to this point
fed through in to pricing.
Against this backdrop, property investment activity has been
resilient, helped by strong investment flows from overseas and by
purchases from local authorities taking advantage of low borrowing
costs. Institutions were net investors in property taking the year
as a whole, while the open-ended Retail funds saw net inflows
resume following the outflows experienced in the aftermath of the
vote to leave the European Union in June
2016. The year to June 2018
saw more than £64 billion invested in property versus £52 billion
in the previous year. The increase was most marked for non-London
Offices, Industrials and Alternatives but investment in town centre
Retail moved out of favour. Central
London was resilient with some very large transactions
concluding towards the period end. The banks have remained
restrained in their new lending to commercial property, both for
standing investments and development.
There has been sustained depth of demand in the market, with
investors generally favouring core product benefitting from
long-term secure income. Initial yields compressed further, to 4.5
per cent at the end of the reporting period, compared with 4.8 per
cent a year earlier. The hardening of yields was seen across
most parts of the market but was most marked for provincial Offices
and Industrials.
Performance by segment broadly maintained the pattern seen after
the referendum. Industrial and distribution property
delivered significant returns of 20.4 per cent driven by both yield
compression and rental growth, which were prevalent in London, particularly for multi let terraces
inside the M25. The logistics and distribution market, as distinct
from certain manufacturing and production supply chains is seen as
being more resilient to Brexit related risks and for the right
stock, a beneficiary of both technological change and a structural
change in retailing. Offices recorded a 7.9 per cent total return.
Rest of UK Offices and City Offices out-performed South East
Offices and West End Offices but all segments under-performed the
all-property average. Risks undoubtedly remain, however to date the
central London Office market continues to defy dour post referendum
predictions with take up close to the 15-year average and vacancy
rates stable, despite a recent slow-down in the pace of rental
growth. While serviced Office occupiers are a larger proportion of
take up than was historically the case, the occupier base remains
broad. There has been an uptick in South-East availability, though
regional Office markets showed solid leasing activity over the
period, buoyed by a number of large corporate and government
acquisitions and grade A availability falling.
The Retail segment has had a difficult year, buffeted by
significant and much documented structural headwinds, and marked by
Company Voluntary Arrangements (“CVAs”), administrations and store
portfolio rationalisation, particularly in the second half of the
period. Total returns were 4.5 per cent and all the IPD Retail
segments under-performed the all-property average while total
returns for shopping centres were negative. Sentiment towards the
sector, alongside the continued appetite for Industrials, has had
the effect of reversing the traditional yield hierarchy, with
Industrials (5.4 per cent) now offering lower equivalent yields
than both Offices (5.7 per cent) and Retail (5.5 per cent) at the
standing investment level. Despite relatively robust consumer
spending, rental growth has now remained weak over a prolonged
period, save for London and the
South East, a disconnection with trend. Similarly, low vacancy
rates within the Retail Warehouse sector have not been enough to
generate meaningful rental growth. Alternatives, including
healthcare, hotels and hospitality and student accommodation,
out-performed the all-property average and are now a growing part
of the IPD data set, reflecting the weight of capital pursuing the
sector and delivering a 9.9 per cent total return.
Open market rental growth was 1.7 per cent at the all-property
level, representing a slight deceleration from the pace seen in the
previous reporting period. Rental growth eased for Retail and
Offices but improved for Industrials and Alternatives.
The property market has stabilised following the EU referendum
result but there is polarisation both by sector and within sectors,
and considerable uncertainty remains with both investors and
occupiers displaying caution. The yield premium over gilts remains
attractive and an all-property annual income return of 4.5 per cent
on relatively long-term contracted income may continue to look
appealing when compared against other asset classes.
Portfolio
Total Portfolio
Performance |
|
June 2018 |
June 2017 |
No of properties |
42 |
43 |
Valuation (£’000) |
353,625 |
335,350 |
Average Lot Size (£’m) |
8.4 |
7.8 |
Net Initial Yield |
4.74% |
5.36% |
|
Portfolio
(%) |
Benchmark
(%) |
Portfolio Capital Return* |
6.1 |
4.7 |
Portfolio Income Return* |
5.3 |
4.5 |
Portfolio Total Return* |
11.7 |
9.4 |
Source: BMO REP Property Management Limited, MSCI Inc
The Company’s property portfolio produced an ungeared total
return* of 11.7 per cent over the year to June 2018 versus the IPD Quarterly Index of 9.4
per cent, outperformance of 210 basis points. Performance was
driven by both an above market income return* and above market
capital growth of 5.3 per cent and 6.1 per cent respectively. The
portfolio has delivered an annualised ungeared total return* of 8.4
per cent per annum over three years and 11.3 per cent over five
years. The portfolio has outperformed the IPD quarterly Index over
one, three, five, ten and fourteen years since inception.
The market remains competitive for quality assets, driving
yields to historic lows. Despite cash availability at the Company
level, the Manager continues to be selective in deployment. One
asset was acquired over the year, a single let Industrial asset
located in Basingstoke, for £9.56
million, a yield of 5.2 per cent.
Whilst the portfolio has not required any wholesale
repositioning, the priority has been to continue the success of the
recent sales programme. Six assets have been disposed of over the
previous two years to address the non-core tail of legacy,
predominantly Retail assets, selling into a well bid investment
market at a net premium to valuation. Two further assets were sold
over the reporting period. The high street Retail asset at 100a
Princes Street, Edinburgh was
disposed of to crystallise the recent asset management plan and
pursue a continued down weighting to the subsector. There was also
the disposal of an Office asset known as The Clock Tower,
Brookwood. The sale was completed in advance of the lease expiry,
where we considered there to be not inconsequential re-letting
risk, to a special purchaser at a significant premium to
valuation.
The portfolio’s above market income yield of 5.3 per cent, low
void rate of 4.6 per cent (reduced further since the end of the
reporting period by completion of additional asset management
initiatives), and a weighted average unexpired lease term of
approximately 6 years remain the bedrock of the portfolio identity.
The strategic decision to maintain a comparatively high exposure to
the South East by geography and the Industrial and Logistics market
by sector have been key factors in portfolio performance. As in the
previous period, portfolio turnover and the burden of associated
transaction costs were relatively low, as were the non-recoverable
costs linked to below benchmark property voids.
Retail
Retail Portfolio
Performance |
|
June 2018 |
June 2017 |
No of properties |
23 |
24 |
Valuation (£’000) |
134,775 |
139,840 |
Net Initial Yield |
5.01% |
5.54% |
|
Portfolio
(%) |
Benchmark
(%) |
Retails Capital Return* |
1.8 |
-0.4 |
Retails Income Return* |
5.2 |
5.0 |
Retails Total Return* |
7.1 |
4.5 |
Source: BMO REP Property Management Limited, MSCI Inc
The Retail portfolio outperformed the IPD Index over the year
delivering 7.1 per cent. Performance was driven by a particularly
strong showing from the Retail Warehouse assets which delivered 9.8
per cent. A further factor in the relative outperformance against
IPD was the lack of any shopping centres within the portfolio.
Some headwinds remain for the sector with rental values falling
and a series of structural developments continuing to negatively
impact sentiment. Strategically, the Company’s direction of travel
has been clear, with disposals from the High Street portfolio
leaving the Company better placed structurally to tackle the
challenges from reduced store portfolios and prospects for falling
rents in off prime, over-shopped or marginalised locations.
Opportunistic sales are likely to continue; however, a higher
proportion of the portfolio’s high street assets are now located
amongst the primer towns in the more established shopping locations
which continue to benefit from more defendable tenant demand.
The portfolio itself is subject to some tenant specific
considerations, in the form of Homebase, which requires further
attention. Following on from Wesfarmers sale of the business
earlier this year to restructuring specialists Hilco, the directors
of Homebase have now received approval from creditors to place the
business into a CVA. Given recent sales performance and a number of
well publicised management and operational issues this is not
entirely surprising and had been anticipated for some time. Under
these proposals none of the Company’s assets are earmarked for
closure, however there will be some disruption to near term income.
Longer term, business plans are in place to address potential
consequences at the three Retail Warehouse assets affected and the
Manager remains confident in successfully negotiating a
satisfactory outcome.
Offices
Offices Portfolio
Performance |
|
June 2018 |
June 2017 |
No of properties |
10 |
11 |
Valuation (£’000) |
89,200 |
89,545 |
Net Initial Yield |
4.93% |
5.76% |
|
Portfolio
(%) |
Benchmark
(%) |
Offices Capital Return* |
5.0 |
3.9 |
Offices Income Return* |
5.9 |
3.9 |
Offices Total Return* |
11.2 |
7.9 |
Source: BMO REP Property Management Limited, MSCI Inc
Office assets outperformed the IPD Index over the year returning
11.2 per cent. Pleasingly given underperformance in previous
periods, Offices made a valuable contribution to portfolio returns
over the period and this was broadly spread, with all subsectors in
which the Company has representation, West End, South East Offices
and Rest of UK Offices, delivering in excess of IPD.
Stand out assets were Edinburgh Park, where the removal of the
tenant break to HSBC delivered notable capital uplift, and The
Clock Tower, Brookwood, where an opportunistic sale in advance of
lease expiry was conducted to a special purchaser in excess of
valuation. Furthermore, the Company’s largest asset at
Berkeley Street, W1, delivered 11.6 per cent over the year, ahead
of both the market as a whole and the West End Offices sub sector.
This was attributable to continued positive investor sentiment and
encouraging leasing activity. The low yielding nature of this asset
does leave its prospects more muted in the short term given a
moderation of rental growth expectations. Nevertheless, the
multi-let, mixed use nature of the property continues to offer
opportunity for active management through the cycle, particularly
on the retail element which has yet to be fully realised on timing
grounds. The portfolio retains a weighting of c.10 per cent of
assets to central London.
Vacancy remains at both Standard Hill, Nottingham and 14
Berkeley Street, London but at the
time of writing terms are agreed to let all 28,000 sq ft at
Nottingham and the 1,350 sq ft 5th
floor suite at Berkeley Street. Completion of these initiatives
would make a meaningful impact upon portfolio income.
Industrial and Logistics
Industrial &
Logistics Portfolio Performance |
|
June 2018 |
June 2017 |
No of properties |
9 |
8 |
Valuation (£’000) |
129,650 |
105,965 |
Net Initial Yield |
4.33% |
4.76% |
|
Portfolio
(%) |
Benchmark
(%) |
Industrials Capital Return* |
11.9 |
15.1 |
Industrials Income Return* |
5.0 |
4.6 |
Industrials Total Return* |
17.3 |
20.4 |
Source: BMO REP Property Management Limited, MSCI Inc
The Industrial and logistics properties returned 17.3 per cent
during the year, which lagged the IPD index. However, the
portfolio’s overweight position continued to deliver meaningful
contribution to the outperformance. This is the fifth year in a row
that industrial holdings have led the portfolio’s returns, being
exclusively located in the supply constrained South East where
tenant demand remains strong, and competition for land alongside a
restrictive planning regime and a relatively inelastic supply
response continues to drive rents. The fact that the Company’s sole
purchase over the year hails from both this sector and geography
shows a continued commitment to this space, however we remain wary
of the compressing of yields for all Industrial assets, with stock
selection, as ever, key. The Manager continues to focus on mid box
clusters as the basis for the portfolio exposure, located in the
key distribution locations and infrastructure hubs with both the
site and the accommodation built for purpose but flexible enough to
allow for long term ownership.
The portfolio has limited exposure to the multi-let Greater London terraces which we observe have
been a major driver of market performance for the sector, with
London Industrials delivering 26.7 per cent over the year. Key
contributions to performance from the Industrial sector came from
the two multi-let assets at Eastleigh where rental growth in the open
market was combined with successful asset management to crystallise
income growth. Further returns came from Echo Park, Banbury, reflecting the strength of
sentiment towards South East logistics, and Lakeside Industrial
Estate, Colnbrook where both
leasing success and investor appetite for south east multi-lets
located close to infrastructure and population centres delivered
capital value growth.
Much focus remains on unlocking the growth potential from the
Industrial portfolio. Despite traditionally elastic supply, there
is suggestion that even in light of rising construction starts,
Industrial developers are struggling to keep up with active tenant
demand. Even allowing for an improvement in supply pipeline, much
of this promise relates to the ‘last mile’ conundrum for delivery
and distribution businesses. For these occupier’s location is king,
particularly the proximity to market or end user. Weightings
towards key urban centres, particularly London and the South East should continue to
deliver attractive risk adjusted returns for the portfolio.
Borrowings
The Company refinanced in 2015 to secure a new £90 million 11
year non-amortising term loan facility agreement with Canada Life
Investments and a £20 million 5 year revolving credit facility
agreement with Barclays Bank plc. The fixed interest rate
applicable to the loan with Canada Life Investments is at the
all-in rate of 3.36 per cent per annum and the rate payable in
respect of the revolving credit facility with Barclays Bank plc is
1.45 per cent per annum over 3-month LIBOR.
The Company continues to adopt a prudent approach to borrowing,
with net gearing* of 26.2 per cent at 30
June 2018.
Outlook
Despite headwinds for the Retail portfolio in particular, and a
period likely to be characterised by mid to low single digit
returns, the Manager believes that the portfolio is well placed to
deliver solid relative performance, led by exposure to desirable
areas of the market, the completion of selected asset management
initiatives and a dependable income return. Given the level of
competition for core, defensive assets, the objective remains to
approach both acquisitions and disposals on an opportunistic basis,
but to continue to prioritise exiting the diminishing tail of
smaller non-core assets that are less likely to offer attractive
risk adjusted contributions to the Company objective. Plenty of
value-add opportunities exist amongst the Company’s held assets
which may well prove a more appropriate use of the Company’s cash
resources at this time than new purchases, with the associated drag
of acquisition costs.
Brexit and its economic and political repercussions will
inevitably be a major factor influencing investors for several
years. The consensus economic outlook is for sustained but fairly
modest economic growth and some moderation in inflation. In this
environment, we would expect investors to continue to favour core
product and prioritise the longevity of a secure income stream. The
other major factor is the likely path of interest rates. The Bank
of England has indicated that long
term central bank interest rates may be lower than in the past and
while some further rate increases are anticipated by the market,
this may act to reduce upward pressure on property yields as rates
rise, though a weakening of rental growth may justify a softening
of capital values for selected sub markets. Despite
marginally higher yields in UK core markets than comparable
European counterparts, the scope for further yield compression to
drive performance looks to be limited. We would therefore continue
to expect income to be the major driver of performance over the
coming years.
Peter
Lowe
BMO Rep Property Management Limited
* See Alternative Performance Measures
F&C UK Real Estate Investments Limited
Consolidated
Statement of Comprehensive Income
|
Year ended 30 June 2018 |
Year ended
30 June 2017 |
|
£‘000 |
£‘000 |
|
|
|
Revenue |
|
|
Rental income |
19,134 |
19,191 |
Other income |
4,375 |
- |
Total revenue |
23,509 |
19,191 |
|
|
|
Gains on investment
properties |
|
|
Gains on sale of investment
properties realised |
1,568 |
781 |
Unrealised gains on revaluation of
investment properties |
14,851 |
2,008 |
|
39,928 |
21,980 |
|
|
|
Expenditure |
|
|
Investment management fee |
(2,156) |
(2,013) |
Other expenses |
(1,619) |
(1,966) |
Total expenditure |
(3,775) |
(3,979) |
Net operating profit before
finance costs and taxation |
36,153 |
18,001 |
|
|
|
Net finance costs |
|
|
Interest receivable |
2 |
4 |
Finance costs |
(3,550) |
(3,598) |
|
(3,548) |
(3,594) |
|
|
|
Net profit from
ordinary activities before taxation |
32,605 |
14,407 |
Taxation on profit on ordinary
activities |
(295) |
(306) |
Profit for the year |
32,310 |
14,101 |
|
|
|
|
|
|
Basic and diluted earnings per
share |
13.4p |
5.9p |
|
|
|
|
|
|
All items in the above statement derive from continuing
operations.
All of the profit for the year is attributable to the owners of
the Company.
F&C UK Real Estate Investments Limited
Consolidated
Balance Sheet
|
30 June 2018
£‘000 |
30 June 2017
£‘000 |
Non-current assets |
|
|
Investment properties |
349,268 |
330,834 |
Trade and other receivables |
3,692 |
3,894 |
|
352,960 |
334,728 |
Current assets |
|
|
Trade and other receivables |
1,282 |
1,291 |
Cash and cash equivalents |
15,037 |
16,565 |
|
16,319 |
17,856 |
|
|
|
Total assets |
369,279 |
352,584 |
|
|
|
|
|
|
Non-current liabilities |
|
|
Interest-bearing bank loans |
(102,299) |
(105,061) |
Trade and other payables |
(291) |
(352) |
|
(102,590) |
(105,413) |
|
|
|
Current liabilities |
|
|
Trade and other payables |
(5,279) |
(6,023) |
Tax payable |
(294) |
(306) |
|
(5,573) |
(6,329) |
|
|
|
Total liabilities |
(108,163) |
(111,742) |
|
|
|
Net assets |
261,116 |
240,842 |
|
|
|
|
|
|
Represented by: |
|
|
Share capital |
2,407 |
2,407 |
Special distributable reserve |
177,161 |
177,161 |
Capital reserve |
77,693 |
61,274 |
Revenue reserve |
3,855 |
- |
|
|
|
Equity shareholders’
funds |
261,116 |
240,842 |
|
|
|
Net asset value per
share |
108.5p |
100.1p |
F&C UK Real Estate Investments Limited
Consolidated Statement of Changes in Equity
For the year ended 30 June
2018
|
Share Capital
£’000 |
Special Distributable Reserve
£’000 |
Capital Reserve
£’000 |
Revenue
Reserve
£’000 |
Total
£’000 |
At 1 July 2017 |
2,407 |
177,161 |
61,274 |
- |
240,842 |
|
|
|
|
|
|
Profit for the year |
- |
- |
- |
32,310 |
32,310 |
|
|
|
|
|
|
Total comprehensive income for the
year |
- |
- |
- |
32,310 |
32,310 |
|
|
|
|
|
|
Dividends paid |
- |
- |
- |
(12,036) |
(12,036) |
|
|
|
|
|
|
Transfer in respect of gains on
investment properties |
- |
- |
16,419 |
(16,419) |
- |
|
|
|
|
|
|
At 30 June 2018 |
2,407 |
177,161 |
77,693 |
3,855 |
261,116 |
For the year ended 30 June 2017
|
Share Capital
£’000 |
Special Distributable Reserve
£’000 |
Capital Reserve
£’000 |
Revenue
Reserve
£’000 |
Total
£’000 |
At 1 July 2016 |
2,387 |
175,367 |
58,485 |
503 |
236,742 |
|
|
|
|
|
|
Profit for the year |
- |
- |
- |
14,101 |
14,101 |
|
|
|
|
|
|
Total comprehensive
income for the year |
- |
- |
- |
14,101 |
14,101 |
Issue of ordinary
shares |
20 |
1,965 |
- |
- |
1,985 |
Dividends paid |
- |
- |
- |
(11,986) |
(11,986) |
Transfer in respect of gains on
investment properties |
- |
- |
2,789 |
(2,789) |
- |
|
|
|
|
|
|
Transfer to revenue reserve |
- |
(171) |
- |
171 |
- |
|
|
|
|
|
|
At 30 June 2017 |
2,407 |
177,161 |
61,274 |
- |
240,842 |
F&C UK Real Estate Investments Limited
Consolidated
Statement of Cash Flows
|
Year ended
30 June 2018 |
Year ended
30 June 2017 |
|
£’000 |
£’000 |
|
|
|
Cash flows from operating
activities |
|
|
Net profit for the year before
taxation |
32,605 |
14,407 |
Adjustments for: |
|
|
Gains on
sale of investment properties realised |
(1,568) |
(781) |
Unrealised
gains on revaluation of investment properties |
(14,851) |
(2,008) |
Decrease in
operating trade and other receivables |
211 |
1,829 |
Decrease in
operating trade and other payables |
(805) |
(497) |
Interest
received |
(2) |
(4) |
Finance
costs |
3,550 |
3,598 |
|
19,140 |
16,544 |
|
|
|
Taxation
paid |
(306) |
(284) |
Net cash inflow from operating
activities |
18,834 |
16,260 |
|
|
|
Cash flows from investing
activities |
|
|
Purchase of investment
properties |
(10,190) |
(450) |
Capital expenditure |
(1,067) |
(1,257) |
Sale of investment properties |
9,242 |
7,460 |
Interest received |
2 |
4 |
Net cash (outflow)/inflow from
investing activities |
(2,013) |
5,757 |
|
|
|
Cash flows from financing
activities |
|
|
Shares issued (net of
costs) |
- |
1,985 |
Dividends paid |
(12,036) |
(11,986) |
Bank loan interest paid |
(3,313) |
(3,382) |
Bank loan repaid, net of costs –
Barclays Loan |
(3,000) |
(4,000) |
Net cash outflow from financing
activities |
(18,349) |
(17,383) |
|
|
|
Net (decrease)/ increase in cash and
cash equivalents |
(1,528) |
4,634 |
Opening cash and cash
equivalents |
16,565 |
11,931 |
Closing cash and cash
equivalents |
15,037 |
16,565 |
F&C UK Real Estate Investments Limited
Principal Risks
and Risk Management
The Group’s assets consist of direct investments in UK
commercial property. Its principal risks are therefore
related to the commercial property market in general, but also the
particular circumstances of the properties in which it is invested
and their tenants. More detailed explanations of these risks
and the way in which they are managed are contained under the
headings of Credit Risk, Liquidity Risk, Interest Rate Risk and
Market Price Risk. The Manager also seeks to mitigate these
risks through active asset management initiatives and carrying out
due diligence work on potential tenants before entering into any
new lease agreements. All of the properties in the portfolio are
insured.
Other risks faced by the Group include the following:
- Market – the Group’s assets comprise of direct investments in
UK commercial property and it is therefore exposed to movements and
changes in the market.
- Investment and strategic – poor investment processes and
incorrect strategy, including sector and geographic allocations and
use of gearing, could lead to poor returns for shareholders.
- Regulatory – breach of regulatory rules could lead to
suspension of the Company’s Stock Exchange listing, financial
penalties or a qualified audit report.
- Tax structuring and compliance – changes to the management and
control of the Group or changes in legislation could result in the
Group no longer being a tax efficient investment vehicle for
shareholders.
- Financial – inadequate controls by the Manager or third party
service providers could lead to misappropriation of assets.
Inappropriate accounting policies or failure to comply with
accounting standards could lead to misreporting or breaches of
regulations. Breaching Guernsey solvency test requirements or loan
covenants could lead to a loss of shareholders’ confidence and
financial loss for shareholders.
- Reporting – valuations of the investment property portfolio
require significant judgement by valuers which could lead to a
material impact on the net asset value. Incomplete or
inaccurate income recognition could have an adverse effect on the
Group’s net asset value, earnings per share and dividend
cover.
- Credit – an issuer or counterparty could be unable or unwilling
to meet a commitment that it has entered into with the Group.
This may cause the Group’s access to cash to be delayed or
limited.
- Operational – failure of the Manager’s accounting systems or
disruption to the Manager’s business, or that of third party
service providers through error, fraud, cyber attack or
business continuity failure could lead to an inability to provide
accurate reporting and monitoring, leading to a loss of
shareholders’ confidence.
- Environmental – inadequate attendance to environmental factors
by the Manager, including those of a regulatory and market nature
and particularly those relating to energy performance, flood risk
and environmental liabilities, leading to the reputational damage
of the Company, reduced liquidity in the portfolio, and/or negative
asset value impacts.
The Board seeks to mitigate and manage these risks through
continual review, policy-setting and enforcement of contractual
obligations. It also regularly monitors the investment environment
and the management of the Group’s property portfolio.
The Manager seeks to mitigate these risks through active asset
management initiatives and carrying out due diligence work on
potential tenants before entering into any new lease
agreements.
The principal risks encountered
during the year, how they are mitigated and actions taken to
address these are set out in the table below.
Principal Risk |
Mitigation |
Actions taken in the year |
Valuers
have difficulty in valuing the property assets due to lack of
market evidence or market uncertainty. Error in the calculation/
application of the Company Net Asset Value ('NAV') leads to a
material misstatement.
Risk unchanged throughout the year under review. |
Professional external
valuers are appointed to value the portfolio on a quarterly basis.
There is regular liaison with the valuers regarding all elements of
the portfolio. There is attendance by one or more Directors at the
valuation meetings and the Auditors attend the year end valuation
meeting. |
Valuing properties
was challenging in the aftermath of the Brexit vote in June 2016.
There has been more transactional based market evidence this year
which the valuers have used to assist them in producing the
quarterly valuations. There was attendance by one or more Directors
at the valuation meetings throughout the year. |
Unfavourable markets, poor stock selection, inappropriate asset
allocation and under-performance against benchmark and/or peer
group.
This risk may be exacerbated by gearing levels.
Risk unchanged throughout the year under review. |
The underlying
investment strategy, performance, gearing and income forecasts are
reviewed with the Investment Manager at each Board Meeting. The
Company's portfolio is well diversified and of a high quality.
Gearing is kept at modest levels. |
The Board review the
Manager's performance at quarterly Board Meetings against key
performance indicators and is satisfied that the Manager's
long-term performance is in line with expectations. |
The
retail market has witnessed a number of company voluntary
arrangements, profit warning announcements and administrations in
recent months. There is an increased risk of tenant defaults in
this sector which could put the level of dividend cover at
risk.
Risk increased in the year under review. |
The Manager provides
regular information on the expected level of rental income that
will be generated from the underlying properties. The Portfolio is
well diversified by geography and sector and the exposure to
individual tenants is monitored and managed to ensure there is no
over exposure. |
The
portfolio was lightly impacted as at 30 June 2018. Post year-end
Homebase, a tenant in three of the portfolio’s properties, placed
the business into a CVA. Business plans are in place to
address potential consequences on the assets affected and the
Manager remains confident in successfully negotiating a
satisfactory outcome. |
Viability Assessment and Statement
The Board conducted this review over a 5 year time horizon, a
period thought to be appropriate for a commercial property
Investment Company with a long-term investment outlook; borrowings
secured over an extended period and a portfolio with a weighted
average unexpired lease length of 5.9 years. The assessment has
been undertaken taking into account the principal risks and
uncertainties faced by the Group which could threaten its
objective, strategy, future performance, liquidity and
solvency.
The major risks identified as relevant to the viability
assessment were those relating to a downturn in the UK commercial
property market and its resultant effect on the valuation of the
investment portfolio, the level of rental income being received and
the effect that this would have on cash resources and financial
covenants. The Board took into account the illiquid nature of the
Company’s portfolio, the existence of the long-term borrowing
facilities, the effects of any significant future falls in
investment values and income receipts on the ability to repay and
re-negotiate borrowings, maintain dividend payments and retain
investors. These matters were assessed over an initial period to
September 2023, and the Directors
will continue to assess viability over five year rolling periods,
taking account of foreseeable severe but plausible scenarios.
In the ordinary course of business, the Board reviews a detailed
financial model on a quarterly basis, incorporating market
consensus forecast returns, projected out to the maturity of its
principal loan of £90 million which is due to mature in 2026.
This model uses prudent assumptions and factors in any
potential capital commitments. For the purpose of assessing the
viability of the Group, the model has been adjusted to look at the
next five years and is stress tested with projected returns
comparable to the commercial property market crash experienced
between 2007 and 2009. The model projects a worst case scenario of
an equivalent fall in capital and income values over the next two
years, followed by three years of zero growth. The model
demonstrated that even under these extreme circumstances the
Company remains viable.
Based on their assessment, and in the context of the Group’s
business model, strategy and operational arrangements set out
above, the Directors have a reasonable expectation that the Group
will be able to continue in operation and meet its liabilities as
they fall due over the 5 year period to September 2023.
Financial Instruments and Investment
Property
The Group’s investment objective is to provide ordinary
shareholders with an attractive level of income together with the
potential for income and capital growth from investing in a
diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial
property investments. In addition, the Group’s financial
instruments comprise cash, receivables, interest-bearing loans and
payables that arise directly from its operations.
The Group is exposed to various types of risk that are
associated with financial instruments. The most important
types are credit risk, liquidity risk, interest rate risk and
market price risk. There was no foreign currency risk as at
30 June 2018 or 30 June 2017 as assets and liabilities are
maintained in Sterling.
Credit risk
Credit risk is the risk that an issuer or counterparty will be
unable or unwilling to meet a commitment that it has entered into
with the Group.
In the event of default by an occupational tenant, the Group
will suffer a rental shortfall and incur additional costs,
including legal expenses, in maintaining, insuring and re-letting
the property until it is re-let. The Board receives regular reports
on concentrations of risk and any tenants in arrears. The
Manager monitors such reports in order to anticipate, and minimise
the impact of, defaults by occupational tenants.
The Group has a diversified tenant portfolio. The maximum credit
risk from the rent receivables of the Group at 30 June 2018 is £664,000 (2017: £502,000). It is
the practice of the Group to provide for rental debtors greater
than three months overdue unless there is certainty of recovery. As
at 30 June 2018 the provision was
£40,000 (2017: £136,000). Of this amount £nil was subsequently
written off and £8,000 has been recovered.
All of the cash is placed with financial institutions with a
credit rating of A or above. Bankruptcy or insolvency may
cause the Group’s ability to access cash placed on deposit to be
delayed or limited. Should the credit quality or the
financial position of the banks currently employed significantly
deteriorate, the Manager would move the cash holdings to another
financial institution.
The Group can also spread counterparty risk by placing cash
balances with more than one financial institution. The
Directors consider the residual credit risk to be minimal.
Liquidity risk
Liquidity risk is the risk that the Group will encounter in
realising assets or otherwise raising funds to meet financial
commitments. The Group’s investments comprise UK commercial
property.
Property in which the Group invests is not traded in an
organised public market and may be illiquid. As a result, the
Group may not be able to liquidate quickly its investments in these
properties at an amount close to their fair value in order to meet
its liquidity requirements.
The Group’s liquidity risk is managed on an ongoing basis by the
Manager and monitored on a quarterly basis by the Board. In
order to mitigate liquidity risk the Group aims to have sufficient
cash balances (including the expected proceeds of any property
sales) to meet its obligations for a period of at least twelve
months.
In certain circumstances, the terms of the Group’s bank loans
entitle the lender to require early repayment, for example if
covenants are breached, and in such circumstances the Group’s
ability to maintain dividend levels and the net asset value
attributable to the Ordinary Shares could be adversely
affected.
Interest rate risk
Some of the Group’s financial instruments are
interest-bearing. These are a mix of both fixed and variable
rate instruments with differing maturities. As a consequence,
the Group is exposed to interest rate risk due to fluctuations in
the prevailing market rate.
The Group’s exposure to interest rate risk relates primarily to
the Group’s borrowings. Interest rate risk on the £90 million
Canada Life term loan is managed by fixing the interest rate on
such at 3.36 per cent until maturity on 9 November 2026.
In addition, tenant deposits are held in interest-bearing bank
accounts and the interest rate on these accounts was nil at the
year end. Interest accrued on these accounts is paid to the
tenant.
Market price risk
The Group’s strategy for the management of market price risk is
driven by the investment policy. The management of market price
risk is part of the investment management process and is typical of
commercial property investment. The portfolio is managed with an
awareness of the effects of adverse valuation movements through
detailed and continuing analysis, with an objective of maximising
overall returns to shareholders. Investments in property and
property-related assets are inherently difficult to value due to
the individual nature of each property. As a result, valuations are
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. Such risk is minimised through the appointment of
external property valuers.
F&C UK Real
Estate Investments Limited
Going Concern
In assessing the going concern basis of accounting the Directors
have had regard to the guidance issued by the Financial Reporting
Council. They have reviewed detailed cash flow, income and expense
projections in order to assess the Company’s ability to pay its
operational expenses, bank interest and dividends. The Directors
have examined significant areas of possible financial risk
including cash and cash requirements and the debt covenants, in
particular those relating to loan to value and interest cover. The
Directors have not identified any material uncertainties which cast
significant doubt on the Company’s ability to continue as a going
concern for a period of not less than 12 months from the date of
the approval of the financial statements. The Board believes it is
appropriate to adopt the going concern basis in preparing the
financial statements.
Directors’ Responsibilities in Respect
of the Annual Report & Consolidated Accounts
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with IFRS as
adopted by the European Union, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation taken as
a whole and comply with The Companies (Guernsey) Law, 2008;
and
- the Strategic Report and the Directors’ Report includes a fair
review of the development and performance of the business and the
position of the Company and the undertakings included in the
consolidation taken as a whole together with a description of the
principal risks and uncertainties that it faces; and
- the financial statements and Directors’ Report includes details
of related party transactions; and
In the opinion of the Directors:
- the Annual Report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group’s position and
performance, business model and strategy.
On behalf of the Board
V Lall
Chairman
27 September 2018
F&C UK Real Estate Investments Limited
Notes to the
Consolidated Financial Statements
for the year ended 30 June 2018
1. The audited
results of the Group which were approved by the Board on
27 September 2018 have been prepared
on the basis of International Financial Reporting Standards as
adopted by the EU, interpretations issued by the IFRS
Interpretations Committee, applicable legal and regulatory
requirements of the Companies (Guernsey) Law, 2008 and the Listing
Rules of the UK Listing Authority as well as the accounting
policies set out in the statutory accounts of the Group for the
year ended 30 June 2018.
2. The fourth
interim dividend of 1.25p will be paid on 28
September 2018 to shareholders on the register on
14 September 2018. The ex-dividend
date was 13 September 2018.
3. There were
240,705,539 Ordinary Shares in issue at 30
June 2018. The earnings per Ordinary Share are based on the
net profit for the year of £32,310,000 and on 240,705,539 Ordinary
Shares, being the weighted average number of shares in issue during
the year.
4. These are not
full statutory accounts. The full audited accounts for the year
ended 30 June 2018 will be sent to
shareholders in September 2018, and
will be available for inspection at Trafalgar Court, Les Banques,
St. Peter Port, Guernsey, the registered office of the
Company. The full annual report and consolidated accounts
will be available on the Company’s websites: fcre.co.uk or
fcre.gg
5. The Annual
General Meeting will be held on 21 November
2018.
Alternative Performance Measures
The Company uses the following Alternative Performance Measures
(‘APMs’). APMs do not have a standard meaning prescribed by GAAP
and therefore may not be comparable to similar measures presented
by other entities.
Discount or Premium – The share price of an Investment Company
is derived from buyers and sellers trading their shares on the
stock market. If the share price is lower than the NAV per share,
the shares are trading at a discount. This usually indicates that
there are more sellers than buyers. Shares trading at a price above
the NAV per share, are said to be at a premium.
Dividend Cover – The percentage by which Profits for the year
(less Gains/losses on investment properties and non-recurring other
income) cover the dividend paid.
A reconciliation of dividend cover is shown below:
|
|
30
June
2018 |
30 June
2017 |
|
|
|
£’000 |
£’000 |
|
|
|
|
|
|
Profit for the year |
|
32,310 |
14,101 |
|
Less: |
Realised gains |
(1,568) |
(781) |
|
|
Unrealised gains |
(14,851) |
(2,008) |
|
|
Other income |
(4,375) |
- |
|
Profit before investment
gains and losses |
11,516 |
11,312 |
|
Dividends |
|
12,036 |
11,986 |
|
Dividend Cover
percentage |
95.7% |
94.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend Yield – The annualised dividend divided by the share
price at the year-end.
Net Gearing – Borrowings less net current assets divided by
value of investment properties.
Ongoing Charges – All operating costs incurred by the
Company, expressed as a proportion of its average Net Assets over
the reporting year. The costs of buying and selling
investments and derivatives are excluded, as are interest costs,
taxation, non-recurring property costs and the costs of buying back
or issuing Ordinary Shares.
|
|
30
June
2018 |
30 June
2017 |
|
|
|
£’000 |
£’000 |
|
|
|
|
|
|
Total expenditure |
|
3,775 |
3,979 |
|
Less non-recurring costs |
|
(793) |
(1,126) |
|
Total (a) |
2,982 |
2,853 |
|
Average net assets |
(b) |
251,751 |
234,917 |
|
Ongoing charges
(c=a/b) (c) |
1.2% |
1.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio (Property) Capital Return – The change in property
value during the period after taking account of property purchase
and sales and capital expenditure, calculated on a quarterly
time-weighted basis.
Portfolio (Property) Income Return – The income derived from a
property during the period as a percentage of the property value,
taking account of direct property expenditure, calculated on a
quarterly time-weighted basis.
Portfolio (Property) Total Return – Combining the Portfolio
Capital Return and Portfolio Income Return over the period,
calculated on a quarterly time-weighted basis.
Total Return – The return to shareholders calculated on a per
share basis by adding dividends paid in the period to the increase
or decrease in the Share Price or NAV. The dividends are assumed to
have been reinvested in the form of Ordinary Shares or Net Assets,
respectively, on the date on which they were quoted
ex-dividend.
All enquiries to:
Peter Lowe
Scott Macrae
F&C Investment Business Limited
Tel: 0207 628 8000
The Company Secretary
Northern Trust International Fund Administration Services
(Guernsey) Limited
PO BOX 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
Tel: 01481 745001