TIDMFCRE
To: RNS
Date: 21 September 2017
From: F&C UK Real Estate Investments Limited
LEI: 2138001XRCB89W6XTR23
(Classified Regulated Information, under DTR Annex 1 section 1.1)
· Share price total return* of 26.8 per cent for the year
· Portfolio ungeared total return* of 6.6 per cent for the year
· NAV total return* of 6.1 per cent for the year
· Dividend of 5.0 pence per share for the year, giving a yield* of 4.7 per
cent on the year-end share price
· Dividend cover* increased to 94.4 per cent for the year
* See Alternative Performance Measures
Chairman's Statement
The Group's net asset value ('NAV') total return* for the year was 6.1 per cent
with a NAV per share as at 30 June 2017 of 100.1 pence, up from 99.2 pence per
share at the prior year-end.
The share price total return* for the year was 26.8 per cent with the shares
trading at 106.8 pence per share at the year-end, a premium* of 6.7 per cent to
the NAV. The increase in the share price for the year can primarily be
explained by the fact that the share price at the previous year-end was trading
at a 10.8 per cent discount, reflecting the initial fall experienced following
the result of the EU referendum on 23 June 2016. Despite the move to a
discount, the strength of the closed-ended sector was demonstrated as many
open-ended funds were forced into short term selling of property to finance
redemptions. In many cases, this was followed by the suspension of redemptions
until the market stabilised. The share price rebounded relatively quickly
following the initial shock and has been trading at a gradually increasing
premium over the year.
Property Market and Portfolio
The UK commercial market delivered a total return of 5.6 per cent as measured
by the MSCI Investment Property Databank ('IPD') UK Quarterly Index for all
assets in the year to 30 June 2017. The first quarter of the year witnessed a
price correction following the EU Referendum result, however, the subsequent
three quarters saw a re-balancing and by the year-end, capital values had
recorded a modest 0.9 per cent annual growth. Performance was driven by
strength in investment demand for industrial property and alternative assets
such as student accommodation, healthcare and self-storage, coupled with
overseas buying of London property. All the standard segments of the IPD Index
delivered positive benchmark total returns for the year.
In the year to 30 June 2017, All Property performance was driven by a 4.7 per
cent income return. Open market rental value growth was 1.9 per cent for the
year, led by industrials, but the structural weakness of regional retail
persisted with rental growth for this sector negative. After a fall in
investment volumes around the time of the EU Referendum, activity has seen some
recovery, driven by overseas buyers and local authorities.
The Group's property portfolio produced an ungeared return* of 6.6 per cent
over the year to June, outperforming the IPD Quarterly Index. Performance was
driven primarily by an above market income return of 5.9 per cent.
Unsurprisingly given the positive sentiment for the Industrial sector over the
year, the portfolio's industrial and distribution assets, being exclusively
located within the South East, were again the key contributors to performance,
producing a total return comfortably in excess of both the IPD UK Quarterly
Index and the market average in the sector for the period. Encouragingly, the
portfolio's retail assets also outperformed their peers, though at a lower
overall level of return. The portfolio's office assets offered poorer
performance over the period and although the Central London assets performed
broadly in line with their peers, they contributed negatively at the portfolio
level.
The portfolio offers an above market income yield, a predominantly fully let
portfolio with a void rate of 5.6 per cent and contractual income with an
average weighted lease term of approximately 7 years. As demonstrated by the
present portfolio composition, the overall strategy is to retain an overweight
position to Industrial and Warehouse property.
The Company continues its cautious approach to the deployment of capital, with
the primary focus having been on the disposal of non core and secondary assets
at a time of low yields and discernible structural change in certain retail
submarkets. Nevertheless, a number of buying opportunities are currently being
actively considered with the Company's favourable cash position allowing for a
planned and cautious approach to acquisitions.
Borrowings and Refinancing
The Group currently has in place a secured GBP90 million non-amortising term loan
facility with Canada Life Investments, repayable in November 2026 and a GBP20
million 5-year revolving credit facility agreement with Barclays Bank plc, GBP16
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 28.3 per cent of
investment properties at 30 June 2017. 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.
The Group had GBP16.6 million of cash available and an undrawn facility of GBP4
million at 30 June 2017.
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 29 September
2017. This gives a total dividend for the year ended 30 June 2017 of 5.0 pence
per share, a yield* of 4.7 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 94.4 per cent, compared to 91.7
per cent for the previous year. The improvement in the level of cover can
primarily be attributed to a reduction in the finance costs following the
refinancing exercise in November 2015.
Share Issues
The Group has experienced continued market demand for its shares and issued 2
million Ordinary Shares early in 2017 at a premium to the published net asset
value at the time of each issuance, raising proceeds of GBP2.0 million. There
continues to be demand for the shares, however, the Company currently has a
significant amount of cash and further share issuances will only be made if it
is considered to be in the interest of shareholders.
At the year-end, there were 240,705,539 Ordinary Shares in issue.
Responsible Property Investment
The Company has taken measures to strengthen its approach to responsible
property investment. An outline of the main actions is included in the
Manager's Review.
Outlook
The outlook continues to be dominated by Brexit, with considerable uncertainty
still remaining about the likely outcome of negotiations and the nature of the
exit process. The UK general election occurred towards the end of the reporting
period and, although the property market appears to have been little affected
at the headline level, the result has added to the uncertainty, particularly
surrounding business investment. Economic growth has disappointed recently and
the extent to which fiscal austerity will be pursued is also unclear. Monetary
policy was eased further in the wake of the Brexit vote but the timing and
extent of policy normalisation will be a factor affecting the property market
outlook.
In an environment of relatively lower growth and increased economic and
political uncertainty, property's income return should prove an attractive
defensive characteristic to investors. The Board believes that the existing
portfolio remains well placed to continue to deliver on the Company objective.
Vikram Lall
Chairman
* See Alternative Performance Measures
Manager's Review
Property Market
The UK commercial property market delivered a total return of 5.6 per cent in
the year to June 2017, as measured by the MSCI Investment Property Databank
("IPD") all Quarterly and Monthly Funds Index for all-property. Performance was
driven by an annual income return of 4.7 per cent, with capital values rising
by 0.9 per cent.
The first months of the review period witnessed a fall in capital values as the
market absorbed the shock of the EU referendum result. Property has since seen
a re-balancing with capital value growth returning to recover the ground lost
during the early months of the financial year. The income return was largely
unaffected during this period.
The UK economy has continued to see growth, although the pace slackened in the
second half of the period. Inflation has moved higher, in part reflecting the
depreciation of sterling in the aftermath of the vote. Monetary policy was
eased in August 2016 in response to the referendum result, with the bank rate
reduced to 0.25 per cent. Gilt yields finished the reporting year higher than
at the start, but with ten-year yields at 1.28 per cent, they remain at very
low levels by historic standards. The Brexit decision has dominated the
political sphere over the past year, with Article 50 invoked in March 2017 and
negotiations commencing in June 2017. The Government called a snap election in
June which failed to produce an overall majority and has widened the debate not
just on Brexit but on fiscal policy and the UK's austerity programme generally.
Property investment activity suffered during the immediate aftermath of the
vote but has since recovered, helped by strong investment flows from overseas
and also by purchases from local authorities taking advantage of low borrowing
costs. Although there were some price reductions, most notably from the open
ended vehicles that attempted to satisfy redemptions, these were on the whole
fairly minor and available for only a brief window. Most deals proceeded and
there was no flight of capital from the UK. Institutions were net sellers of
property, but this was primarily in the first half of the reporting period. The
open-ended retail funds struggled with liquidity issues in the immediate
aftermath of the vote, but all have since re-opened and modest net inflows
resumed towards the end of the reporting period. The year to June 2017 saw GBP52
billion invested in property versus GBP59 billion in the previous year.
Investment in offices and town centre retail assets was lower but the year saw
growth in investment in industrials and logistics, and alternative assets. The
banks have remained cautious in their new lending to property, both for
standing investments and development.
The year saw considerable equity invested in the market, but investors were
generally cautious and favouring long-term secure income. There was some yield
compression evident, particularly in the industrial market and some specialist
markets such as healthcare and leisure, but shopping centres and retail parks,
especially at the secondary end, fell from favour, with yields softening.
Total return performance by segment saw some changes following the Brexit vote.
Industrials and distribution property was seen as being relatively immune from
Brexit and beneficiaries of both technological change and a structural change
in retailing. As a result, they pulled further ahead of offices and retail to
deliver a total return of 12.0 per cent. Offices delivered a 3.4 per cent
return. The gap between London offices and the regions narrowed, with Rest of
UK offices overtaking the City on an annual basis in terms of total returns.
For retail, total returns were 3.3 per cent. As in previous years, a strong
Central London shops market boosted the South East numbers but standard retail
elsewhere under-performed the all-property average and shopping centres and
retail warehousing were particularly weak.
Open market rental growth was 1.9 per cent at the all-property level,
representing a deceleration from the pace seen in the previous reporting
period. At the market level, although retail property and regional offices
recorded some moderation in rental growth, the main factor was a sharp
deterioration in rental growth for Central London offices, although it did
remain positive. In contrast, industrials saw some improvement in rental growth
year on year and were the major driver behind rental growth performance.
Gross income growth for the year to June 2017 was 2.7 per cent, with offices
and alternatives performing well but all the main sectors seeing positive
growth. This compares with 3.0 per cent in the previous year.
The property market appears to have stabilised following the referendum result
but considerable uncertainty remains and both investors and occupiers are
cautious. The yield premium against gilts remains attractive and an
all-property annual income return of 4.7 per cent may look appealing when
compared against other assets.
Portfolio
The Company's property portfolio produced an ungeared total return* of 6.6 per
cent over the year to June 2017 versus the IPD Quarterly index of 5.6 per cent.
This outperformance was driven primarily by an income return* of 5.9 per cent,
which was an improvement on 2016, and some way above the income return derived
from the IPD Quarterly Index of 4.7 per cent. Capital growth was marginally
below that of the Quarterly Index at 0.6 per cent. Portfolio turnover and
thereby the burden of associated transaction costs were low, as were non
recoverable costs linked to property voids, which is key in a relatively low
returns environment. Over the three years to June 2017 the portfolio has
delivered an ungeared total return* of 10.0 per cent per annum.
At 30 June 2017 the value of the portfolio was GBP335.4 million. No assets were
acquired over the year apart from some additional car parking space at Lochside
Way, Edinburgh Park. This reflects the Manager's continued focus on driving
performance from the existing portfolio at a time when market pricing has
offered few attractive opportunities to acquire assets of an appropriate
quality to satisfy the Company objective. On the other hand a sales programme
has been undertaken to dispose of the secondary and non-core holdings to take
advantage of investor appetite. A majority of these assets have been from the
high street retail sector with a further three assets sold over the year at net
premium to valuation.
At the sector level the portfolio's industrial and distribution warehouse
assets continued their run of outperformance, producing a total return* of 16.5
per cent, in excess of both the IPD Quarterly Index and the sector average for
the period. This is the fourth year in a row that industrial holdings have led
the portfolio's returns, being primarily located in the core South East where
limited supply and good levels of demand have driven performance. The
portfolio's Retail sector outperformed its peer group over the year but Offices
again underperformed, despite a generous yield advantage, on account of below
market capital growth.
Unsurprisingly the majority of the best performing assets were in the
industrial and logistics sector, driven by a combination of both capital and
income growth. Some of the addresses are familiar from last year, Lakeside
Road, Colnbrook; Hemel Gateway, Hemel Hempstead and the two assets in
Eastleigh, Hampshire all featuring in the top 5 performing assets. Chippenham
Drive, Milton Keynes was the best performing asset over the year by weighted
contribution following the refurbishment in 2016 that came in below budget, and
the successful onward letting at, what was then, a new benchmark level of rent
for refurbished stock in the locality. Following the expiration of the tenant's
rent free incentive the property is now income producing and offers a
meaningful contribution to the dividend.
The portfolio's overweight position to retail warehousing acted as a brake on
performance over the year, despite the sector experiencing an improvement in
sentiment towards the end of the period as investors saw relative value against
an earlier pick up in pricing elsewhere. Pleasingly the portfolio's assets
within this sub-sector outperformed their peers over the year, a position
mirrored by the portfolio's South East retail holdings.
Challenges remain, in particular within the underperforming Offices sector.
Despite a substantial yield advantage, negative capital growth associated with
shorter unexpired lease terms, and risks associated with near term capital
expenditure has weighed more heavily on some of the Company's assets than for
the market as a whole. While this has led to poorer performance over recent
quarters, this should provide a more sustainable base from which to approach
lease events and asset management projects in order to enhance value. As an
example of the work being undertaken in this regard since the period end, the
lease on the office property at 15 London Road, Redhill has been re-geared to
the Department for Work & Pensions to extend the term for a further five years
at no capital cost. This has de-risked the asset in the short term and extended
the income due without interruption.
Following on from a sustained period of outperformance the portfolio's London
assets at 24 Haymarket and 14 Berkeley Street, in Central London, are now
performing below the overall quarterly return for the IPD Index, and therefore
someway below the overall portfolio return. The lower yielding nature of the
assets was supported by rental growth in the period to mid-2016 but this has
since moderated somewhat. Both assets are multi-let, mixed use properties which
offer underlying reversion in the rents particularly on the retail element.
Given the point in the London capital cycle, the key to their success moving
forward will be the ability to capture this improvement in rents receivable
through either active management (Berkeley Street) or the rent review mechanism
(24 Haymarket). The portfolio retains a relatively low weighting to central
London of less than 10 per cent of assets.
Despite the volatility in capital values triggered by the vote to leave the
European Union and the corresponding market uncertainty created by well
publicised redemptions from the open ended funds, the story remains very much
about income, with real estate's contractually backed rental income set to be
the key driver of returns moving forward. The portfolio's above market yield,
low void rate of 5.6 per cent and weighted unexpired lease term of c.7 years,
secured primarily to low risk corporate tenants are all good defensive
characteristics, and leave the portfolio well placed to deliver on the Company
objective. The portfolio offers a relatively high exposure to Industrial and
Logistics property at over 30 per cent of total assets and to the wider South
East (60 per cent of assets by value), sectors and geographies supported by
robust supply side characteristics backed by strong tenant demand.
Considerable weight of money has been targeting the sector over the last 6
months, initially from opportunistic buyers in the wake of Brexit and followed
by yield driven investors, UK Institutions and Overseas buyers, particularly
for central London trophy assets. The market remains very competitive which has
had the effect of driving yields to historic lows. Against this backdrop the
Manager has been particularly selective in identifying new acquisition targets
at sustainable pricing. The cash position and the flexibility afforded by the
revolving debt facility provides a good footing from which to approach the
market. Since the period end the Company has agreed terms to purchase a
freehold, single let distribution unit located in the South East for a sum of
c.GBP10 million at a yield of c.5.2 per cent.
The more immediate priority has been to continue the success of last year's
planned sales programme (three small sales were completed over the previous
period raising GBP3.5 million) to address the more secondary and non-core tail of
legacy assets, selling into what has been a market relatively receptive to
risk. A further three assets, all from the high street retail sub-sector, have
been sold over the year to June 2017, realising GBP7.5 million in net proceeds at
a premium to valuation.
Borrowings
The Company refinanced in 2015 to secure a new GBP90 million 11 year
non-amortising term loan facility agreement with Canada Life Investments and a
GBP20 million 5 year revolving credit facility agreement with Barclays Bank plc.
The fixed interest rate payable over the term of the loan with Canada Life
Investments is at the all-in rate of 3.36 per cent per annum and the interest
rate that will be 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 28.3 per cent at 30 June 2017.
Responsible Property Investment Update
The principles of Responsible Property Investment (RPI), through which
environmental, social and governance (ESG) factors are integrated into
investment processes and asset ownership activities, have continued to gain
significant traction and momentum in the UK property market. In particular, the
emergence of new regulations which target the energy performance of existing
buildings, together with the ratification and coming into force of the Paris
Agreement on Climate Change during 2016, have been key stimulants of investor
engagement on the topic. Increasingly, investment decision-making is influenced
by these factors, in terms of capital allocation strategies and commercial
property transactions.
The Company has taken measures to strengthen its approach to RPI during 2016
and 2017, most notably through the actions of its Managers, which have
included:
* Formalising an ESG Committee with representation from across its
investment management teams, with the purpose of leading on, monitoring and
overseeing the Property Managers' approach to RPI.
* Establishing a new RPI Strategy for its corporate and investment
activities, which is reflective of strengthening market expectations with
respect to ESG factors, and which has the mutual goals of: ensuring portfolio
resilience; driving environmental improvements; and engaging with our
stakeholders.
* Putting in place comprehensive RPI requirements for asset and
property managers to ensure continued attendance to ESG factors across the
property investment lifecycle.
* Introducing Responsible Property Management Guidelines to support
property managers in identifying and capturing opportunities for improving the
ESG performance and attributes of assets, covering factors such as energy
efficiency, water conservation, health and well-being, waste management and
procurement.
* Implementing a system for the classification of all assets under
management according to their energy performance risk and energy consumption
characteristics, which the Company is using as a basis for prioritising actions
and determining the frequency of its comprehensive ESG monitoring activities at
the property level.
* Installing a market-leading RPI Appraisal system, which is now
applied to all acquisitions made by the Company. We are also in the process of
applying the Appraisal system to all assets under management, a process which
will be completed by Q4 2017.
* Preparing Guidelines for Sustainable Development & Refurbishment
which is to be applied to all significant capital projects undertaken on the
portfolio.
* Delivering training to its fund, investment, asset and property
management teams to ensure that they are cognisant of the evolving RPI agenda,
aware of the expectations which the Company places upon them in relation to ESG
factors, and knowledgeable about what needs to be done to implement the new RPI
Strategy.
* In carrying out the above, the Property Managers appointed a
specialist RPI consulting and training firm, Hillbreak, which will continue to
support and advise by taking an independent role on the Property Managers' ESG
Committee.
The Company and its Property Managers will remain vigilant of the evolving
nature of the RPI agenda and will continue to develop its approach to ESG
factors so that it remains on track to realising its RPI goals, whilst ensuring
that these remain relevant.
Outlook
The Manager believes that the property portfolio is appropriately placed to
deliver solid performance over the coming years led by a defendable top
quartile (IPD Quarterly Index) income return. The intention is to continue to
dispose of the smaller, and non-core assets, whilst looking for new investment
opportunities which will complement the existing portfolio composition. We will
remain selective in our acquisition strategy given that a significant weight of
money continues to compete for quality commercial property assets.
Brexit will inevitably be a major factor influencing investors for several
years. There remains considerable uncertainty about the outcome of
negotiations, the timetable for withdrawal and the impact on the economy. 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 products and prioritise the longevity of a
secure income stream. The other major uncertainty is the likely path of
interest rates. Sentiment is moving towards a likely upward move, although the
timing and speed of change is unclear. The scope for further yield compression
to drive performance may be limited, and we would 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 Year ended
June 2017 30 June 2016
GBP
'000 GBP'000
Revenue
Rental income 19,191 19,562
Total revenue 19,191 19,562
Gains on investment properties
Gains/(losses) on sale of investment properties 781 (144)
realised
Unrealised gains on revaluation of investment 2,008 4,951
properties
21,980 24,369
Expenditure
Investment management fee (2,013) (2,084)
Other expenses (1,966) (1,883)
Total expenditure (3,979) (3,967)
Net operating profit before finance costs and
taxation 18,001 20,402
Net finance costs
Interest receivable 4 9
Finance costs (3,598) (4,455)
Gain on redemption of interest rate swap - 1,485
(3,594) (2,961)
Net profit from ordinary activities before taxation 14,407 17,441
Taxation on profit on ordinary activities (306) (264)
Profit for the year 14,101 17,177
Other comprehensive income
Items that are or may be reclassified subsequently
to profit or loss
Net change in fair value of swap reclassified to - (1,485)
profit or loss
Movement in fair value of effective interest rate - 1,293
swap
Total other comprehensive income - (192)
Total comprehensive income for the year, net of tax 14,101 16,985
Basic and diluted earnings per share 5.9p 7.2p
All items in the above statement derive from continuing operations.
All of the profit and other comprehensive income for the year is attributable
to the owners of the Company.
F&C UK Real Estate Investments Limited
Consolidated Balance Sheet
30 June 2017 30 June 2016
GBP'000 GBP'000
Non-current assets
Investment properties 330,834 333,798
Trade and other receivables 3,894 5,333
334,728 339,131
Current assets
Trade and other receivables 1,291 1,681
Cash and cash equivalents 16,565 11,931
17,856 13,612
Total assets 352,584 352,743
Non-current liabilities
Interest-bearing bank loans (105,061) (108,845)
Trade and other payables (352) (832)
(105,413) (109,677)
Current liabilities
Trade and other payables (6,023) (6,040)
Tax payable (306) (284)
(6,329) (6,324)
Total liabilities (111,742) (116,001)
Net assets 240,842 236,742
Represented by:
Share capital 2,407 2,387
Special distributable reserve 177,161 175,367
Capital reserve 61,274 58,485
Revenue reserve - 503
Equity shareholders' funds 240,842 236,742
Net asset value per share 100.1p 99.2p
F&C UK Real Estate Investments Limited
Consolidated Statement of Changes in Equity
For the year ended 30 June 2017
Special
Share Distributable Capital Other Revenue
Capital Reserve Reserve Reserve Reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2016 2,387 175,367 58,485 - 503 236,742
Profit for the year - - - - 14,101 14,101
Total comprehensive - - - - 14,101 14,101
income for the year
Issue of ordinary 20 1,965 - - - 1,985
shares
Dividends paid - - - - (11,986) (11,986)
Transfer in respect of
gains on investment - - 2,789 - (2,789) -
properties
Transfer to revenue - (171) - - 171 -
reserve
At 30 June 2017 2,407 177,161 61,274 - - 240,842
For the year ended 30 June 2016
Special
Share Distributable Capital Other Revenue
Capital Reserve Reserve Reserve Reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2015 2,339 170,620 53,678 192 - 226,829
Profit for the year - - - - 17,177 17,177
Other comprehensive - - - (192) - (192)
losses
Total comprehensive - - - (192) 17,177 16,985
income for the year
Issue of ordinary 48 4,747 - - - 4,795
shares
Dividends paid - - - - (11,867) (11,867)
Transfer in respect of
gains on investment - - 4,807 - (4,807) -
properties
At 30 June 2016 2,387 175,367 58,485 - 503 236,742
F&C UK Real Estate Investments Limited
Consolidated Statement of Cash Flows
Year ended Year ended
30 June 2017 30 June 2016
GBP'000 GBP'000
Cash flows from operating activities
Net profit for the year before taxation 14,407 17,441
Adjustments for:
(Gains)/losses on sale of investment properties (781) 144
realised
Unrealised gains on revaluation of investment (2,008) (4,951)
properties
Decrease/(increase) in operating trade and other 1,829 (153)
receivables
Decrease in operating trade and other payables (497) (40)
Interest received (4) (9)
Finance costs 3,598 4,455
Gain on redemption of interest rate swap - (1,485)
16,544 15,402
Taxation paid (284) (58)
Net cash inflow from operating activities 16,260 15,344
Cash flows from investing activities
Purchase of investment properties (450) -
Capital expenditure (1,257) (636)
Sale of investment properties 7,460 3,519
Interest received 4 9
Net cash inflow from investing activities 5,757 2,892
Cash flows from financing activities
Shares issued (net of costs) 1,985 4,795
Dividends paid (11,986) (11,867)
Bank loan interest paid (3,382) (2,057)
Interest on interest rate swap arrangement - (2,561)
Redemption of interest rate swap arrangement - (5,294)
Bank loan repaid - Lloyds Loan - (102,000)
Bank loan drawn down, net of costs - Canada Life Loan - 88,503
Bank loan (repaid)/drawn down, net of costs - Barclays (4,000) 19,520
Loan
Net cash outflow from financing activities (17,383) (10,961)
Net increase in cash and cash equivalents 4,634 7,275
Opening cash and cash equivalents 11,931 4,656
Closing cash and cash equivalents 16,565 11,931
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 efficiency - 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.
· 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.
Principal risks encountered during the year
· Valuation Accuracy - There was concern over the accuracy of property
valuations following the Brexit vote. A caveat on the accuracy of the
valuations was included in the June 2016 external valuations and whilst this
was subsequently removed for future valuations, a degree of uncertainty still
exists.
· Discount/Premium to Net Asset Value - The share price went through a
period of instability and fell significantly to a discount of 22 per cent
following the Brexit vote. The share price recovered reasonably quickly and has
subsequently settled at a small premium.
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 2017 or 30 June 2016 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 2017 is GBP502,000 (2016: GBP597,000). 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 2017 the
provision was GBP136,000 (2016: GBP17,000). Of this amount GBP99,000 was subsequently
written off and GBP10,000 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 GBP90 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
In accordance with International Financial Reporting Standards as adopted by
the EU and applicable law, 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 (as amended);
· the Strategic 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;
· 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; and
· the financial statements and Directors' Report includes details of
related party transactions.
On behalf of the Board
V Lall
Chairman
20 September 2017
F&C UK Real Estate Investments Limited
Notes to the Consolidated Financial Statements
for the year ended 30 June 2017
1. The audited results of the Group which were approved by the Board on
20 September 2017 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 (as amended) 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 2017.
2. The fourth interim dividend of 1.25p will be paid on 29 September
2017 to shareholders on the register on 8 September 2017. The ex-dividend date
was 7 September 2017.
3. There were 240,705,539 Ordinary Shares in issue at 30 June 2017. The
earnings per Ordinary Share are based on the net profit for the year of GBP
14,101,000 and on 239,568,005 Ordinary Shares, being the weighted average
number of shares in issue during the year.
4. Three properties were sold during the year with net proceeds
totalling GBP7.5 million. No properties were purchased in the year apart from
some additional car parking space at Lochside Way, Edinburgh Park.
5. These are not full statutory accounts. The full audited accounts for
the year ended 30 June 2017 will be sent to shareholders in September 2017, 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
6. The Annual General Meeting will be held on 22 November 2017.
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) cover the dividend paid.
A reconciliation of dividend cover is shown below:
30 June 30 June
2017 2016
GBP'000 GBP'000
Profit for the year 14,101 17,177
Add back: Realised (gains)/losses (781) 144
Unrealised gains (2,008) (4,951)
Gain on redemption of swap - (1,485)
Profit before investment gains and losses 11,312 10,885
Dividends 11,986 11,867
Dividend Cover percentage 94.4 91.7
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.
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
END
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