TIDMFCRE
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 GBP15.0 million of cash available and an undrawn facility of GBP7
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 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, GBP13
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 GBP4.4
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 GBP9.56 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 GBP64 billion invested in property versus GBP52 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 (GBP'000) 353,625 335,350
Average Lot Size (GBP'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 GBP9.56 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 (GBP'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 (GBP'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 (GBP'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 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 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 Year ended
June 2018 30 June 2017
GBP'000 GBP'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 14,851 2,008
properties
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 32,605 14,407
taxation
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 30 June 2017
GBP'000 GBP'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
Special
Share Distributable Capital Revenue
Capital Reserve Reserve Reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2017 2,407 177,161 61,274 - 240,842
Profit for the year - - - 32,310 32,310
Total comprehensive - - - 32,310 32,310
income for the year
Dividends paid - - - (12,036) (12,036)
Transfer in respect of - - 16,419 (16,419) -
gains on investment
properties
At 30 June 2018 2,407 177,161 77,693 3,855 261,116
For the year ended 30 June 2017
Special
Share Distributable Capital Revenue
Capital Reserve Reserve Reserve Total
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
F&C UK Real Estate Investments Limited
Consolidated Statement of Cash Flows
Year ended Year ended
30 June 2018 30 June 2017
GBP'000 GBP'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 (14,851) (2,008)
properties
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 Professional external Valuing properties was
in valuing the property valuers are appointed to challenging in the
assets due to lack of value the portfolio on a aftermath of the Brexit
market evidence or market quarterly basis. There is vote in June 2016. There
uncertainty. Error in the regular liaison with the has been more
calculation/ application valuers regarding all transactional based
of the Company Net Asset elements of the market evidence this year
Value ('NAV') leads to a portfolio. There is which the valuers have
material misstatement. attendance by one or more used to assist them in
Risk unchanged throughout Directors at the producing the quarterly
the year under review. valuation meetings and valuations. There was
the Auditors attend the attendance by one or more
year end valuation Directors at the
meeting. valuation meetings
throughout the year.
Unfavourable markets, The underlying investment The Board review the
poor stock selection, strategy, performance, Manager's performance at
inappropriate asset gearing and income quarterly Board Meetings
allocation and forecasts are reviewed against key performance
under-performance against with the Investment indicators and is
benchmark and/or peer Manager at each Board satisfied that the
group. Meeting. The Company's Manager's long-term
This risk may be portfolio is well performance is in line
exacerbated by gearing diversified and of a high with expectations.
levels. quality. Gearing is kept
Risk unchanged throughout at modest levels.
the year under review.
The retail market has The Manager provides The portfolio was lightly
witnessed a number of regular information on impacted as at 30 June
company voluntary the expected level of 2018. Post year-end
arrangements, profit rental income that will Homebase, a tenant in
warning announcements and be generated from the three of the portfolio's
administrations in recent underlying properties. properties, placed the
months. There is an The Portfolio is well business into a CVA.
increased risk of tenant diversified by geography Business plans are in
defaults in this sector and sector and the place to address
which could put the level exposure to individual potential consequences on
of dividend cover at tenants is monitored and the assets affected and
risk. managed to ensure there the Manager remains
Risk increased in the is no over exposure. confident in successfully
year under review. 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 GBP90 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 GBP664,000 (2017: GBP502,000). 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 GBP40,000 (2017: GBP136,000). Of this amount GBPnil was subsequently
written off and GBP8,000 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
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 GBP
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 30 June
2018 2017
GBP'000 GBP'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 30 June
2018 2017
GBP'000 GBP'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
END
(END) Dow Jones Newswires
September 28, 2018 02:00 ET (06:00 GMT)
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