TIDMFCRE
To: RNS
Date: 28 September 2016
From: F&C UK Real Estate Investments Limited
* NAV total return of 7.5 per cent for the year
* Portfolio ungeared total return of 7.1 per cent for the year
* Dividend of 5.0 pence per share for the year, giving a yield of 5.6 per
cent on the year end share price
* Dividend cover increased to 91.7 per cent as compared to 76.8 per cent for
the previous year
* The Company entered into two new loan agreements totalling GBP110 million.
Weighted average interest rate reduced to 3.3 per cent, from 5.8 per cent
under the previous loan arrangements.
Chairman's Statement
The UK commercial property market has been going through a period of adjustment
with capital returns stabilising following six years of capital growth. The
Group's net asset value ('NAV') total return for the year was 7.5 per cent with
a NAV as at 30 June 2016 of 99.2 pence per share, up from 97.0 pence per share
at the prior year-end.
The share price total return for the year was -6.5 per cent with the shares
trading at 88.5 pence per share at the year-end, a discount of 10.8 per cent to
the NAV. The share price had generally been trading at a small premium until
the last two months of the year as sentiment towards the sector shifted and
property valuations began to level off. Following on from the initial drop in
the share price, the result of the EU referendum on 23 June 2016 prompted a
sharper reaction as investors responded to the climate of uncertainty following
the leave vote. This was very close to the year-end and the Group's share price
has subsequently recovered. As at 26 September 2016, the share price was
trading at a 3.2 per cent discount to the year-end NAV.
Property Market and Portfolio
The UK commercial property market delivered a total return of 9.1 per cent as
measured by the Investment Property Databank ('IPD') UK Quarterly Index for all
assets in the year to June 2016. Performance moderated in the second half of
the review period, as investors became more concerned about pricing, the slow
pace of economic growth in the UK and abroad and the approach of the EU
referendum. The referendum vote took place on 23 June, limiting the impact of
the outcome during this reporting period.
In the year to June 2016, All Property performance was driven by a 4.7 per cent
benchmark income return and 4.3 per cent benchmark capital growth. Industrials
and offices out-performed retail with London out-performing the regions. The
occupier market continued to see a broadening of rental growth beyond London
and core South East. The strength of investment demand and yield compression
that has driven the market over recent years moderated and investment activity
was around 75 per cent of the equivalent period a year ago.
The end of the reporting period was marked by increased uncertainty in the
capital markets, which translated into more mixed market sentiment and a wider
range of transactional evidence than might ordinarily be expected. This was
relevant to the valuation of the Company's assets. The Company's property
valuers Cushman & Wakefield therefore issued the valuations for the quarter
ended 30 June 2016 under a 'Health Warning', stating that the probability of
their opinion of value exactly coinciding with the price achieved, were there
to be a sale, had reduced, and that they would recommend that the valuation is
kept under regular review and that specific market advice should be obtained in
the event of disposal. The Board recognise the heightened risk inherent in the
market at this time and the Manager continues to monitor the situation closely
on behalf of the Board.
There has been market uncertainty and evidence of a pricing adjustment in the
immediate aftermath of the Brexit vote, although this does appear to be
moderating as transactional evidence to support pricing improves. Market
indicators suggest some weakening of values since the end of June 2016 with the
IPD Monthly Index pointing to capital falls of 2.8 per cent and 0.7 per cent
over July and August respectively. The Manager believes that the monthly data
is relevant as a lead indicator for the September quarter Company valuation.
The Group's property portfolio produced an ungeared return of 7.1 per cent over
the year to June 2016, driven primarily by an income return of 5.6 per cent.
Against a backdrop of economic and political uncertainty, and historic low
yields, the Company has been cautious in its approach to the deployment of
capital, evidenced by the fact that three sales and no purchases were
undertaken over the year. Much like the wider market, the portfolio's
industrial and distribution assets were again the key contributors at the
sector level, producing a total return in excess of both the IPD UK Quarterly
Index and the market average for the sector for the period. Unsurprisingly,
most of the top performing assets were from this sector, the majority being
located within the South East. They delivered strong capital growth over the
early part of the year, benefitting from both yield shift and underlying income
growth. The portfolio's Central London assets continued to make a valuable
contribution, though the office sector in general struggled against its peers
and remains a focus for near term asset management initiatives.
The portfolio offers an above market income yield, a void rate of only 4.2 per
cent and income with an weighted average lease term of over 7 years, secured on
an institutional grade portfolio. With the capital cycle at its end and
returns from UK real estate now likely to be income driven for the foreseeable
future the Board believes that the portfolio is well placed to deliver on the
Company objective of providing shareholders with an attractive income, together
with the potential for income and capital growth.
Borrowings and Refinancing
The Group underwent a refinancing exercise during the year and secured a 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.
Under the new facilities, the Group drew down GBP110 million to finance the
repayment of the term loan facility provided by Lloyds Bank plc, of which GBP102
million was drawn down, and was due for repayment in January 2017. There was no
early repayment penalty in respect of the previous facility but the Group did
terminate the interest rate hedging arrangements entered into in connection
with this facility. The swap liability had already been accounted for in the
NAV and the cost of termination amounted to GBP5.3 million. No further swap was
required given the fixed nature of the new principal loan.
Following the refinancing, the Group's gearing level, net of cash, represents
29.1 per cent of investment properties at 30 June 2016. The weighted average
interest rate (including amortisation of refinancing costs) on the Group's
total current borrowings is 3.3 per cent. The rate on the Group's total
borrowings has therefore fallen by 2.5 per cent from 5.8 per cent following the
refinancing. The Company continues to maintain a prudent attitude to gearing.
The savings achieved following the refinancing have helped the level of
dividend cover which was 91.7 per cent for the year, compared to 76.8 per cent
for last year.
The Group had GBP11.9 million of cash available at 30 June 2016.
Dividends
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 30 September
2016. This gives a total dividend for the year ended 30 June 2016 of 5.0 pence
per share, a yield of 5.6 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.
Share Issues
The Group experienced continued market demand for its shares in the first half
of the year and has issued 4.85 million Ordinary Shares at a premium to the
published net asset value at the time of each issuance, raising proceeds of GBP
4.8 million. As highlighted above, the share price has been trading at a
discount to NAV in recent months and further share issues have therefore not
been deemed appropriate by the Board.
At the year-end, there were 238,705,539 Ordinary Shares in issue.
Board Composition
As mentioned in our Interim Results announcement in February 2016, Quentin
Spicer retired from the Board and did not offer himself for re-election at the
Annual General Meeting in November 2015. I have taken on the role of Chairman
following his departure. I would like to reiterate our sincerest thanks to
Quentin for his commitment and strong leadership over the years.
We also highlighted the appointment of a new Non-Executive Director, Alexa
Henderson with effect from 21 December 2015. Alexa brings with her a wealth of
financial experience and she has taken on the role of Chair of the Audit
Committee.
Outlook
Investor sentiment has weakened following the UK's vote to leave the EU. A
period of uncertainty is in prospect, both with regard to the negotiation
process and the likely tone of economic policy under a new administration.
Monetary policy has already eased and market expectations are for a prolonged
period of low interest rates.
Consensus expectations are that economic growth will be lower, particularly
over the next year or so but that there will be no prolonged recession. This is
unlikely to be good news for property values in the short term, however in this
environment, income is likely to be the main driver of performance, which is in
keeping with both the Manager's strategy and the Company objective.
While nervousness in the investment markets does present some downside risk to
near term values, the Manager reports that initial post Brexit demand is still
evident across the majority of sectors and geographical areas with increased
focus on defensive assets, longer leases and core locations.
Manager's Review
The UK commercial property market delivered a total return of 9.1 per cent in
the year to June 2016, as measured by the Investment Property Databank ('IPD')
UK Quarterly Index. This compares with 15.7 per cent in the previous 12-month
period. Performance was supported by an annual income return of 4.7 per cent,
with capital values rising by 4.3 per cent. The income return varied from 3.0
per cent for West End offices to 5.8 per cent for regional industrials.
UK Economy
The UK economy continued to deliver solid growth with real GDP rising by 2.2
per cent in the year to June 2016. Employment reached record highs during the
year and annual inflation, as measured by the CPI, helped by lower fuel and
food prices was a modest 0.5 per cent. The Budget in March 2016 was notable for
the increase in stamp duty, which adversely affected capital values during that
quarter. Monetary policy was supportive, with official rates remaining at 0.5
per cent throughout the period. Gilt yields continued to fall finishing the
period at 1.0 per cent. In February 2016, it was announced that a referendum on
UK membership of the EU would take place on 23 June 2016. Uncertainty
surrounding the outcome of this vote coupled with slower growth overseas
contributed to some slowdown in the pace of economic growth in the later part
of the review period.
UK Property Market
The year witnessed a moderation in investment activity to GBP57 billion from GBP77
billion in the previous year. While investors may have been influenced by wider
economic and political developments, there was also concern at the level of
pricing in some parts of the market, especially in London. Overseas buyers
continued to drive parts of the market, although the volume of their net
investment faded as the year under review drew to a close. Institutions were
net sellers over the period with net disinvestment focused on the final three
months of the reporting period. Investment into regional offices and retail
warehousing proved relatively resilient but most segments recorded an annual
decline. This was most pronounced for leisure and non-traditional property
assets, which had seen both strong transactional volumes and relative
performance in the prior period. Banks continued to wind down their problem
loans but also were more willing to undertake new lending, competing alongside
new entrants, for well-let standing investments.
Investors still favoured prime stock but a lack of availability and low yields
led to a search for higher yielding assets. CBRE data indicates that for
outside London the yield gap between prime and secondary remained broadly
stable over the course of the year.
The year saw investors becoming more cautious with some thinning in the depth
of demand, but there was still competition for quality stock that met investor
requirements. This fed through to further modest yield compression. Quarterly
IPD data showed initial yields at the all-property level moving in from 5.0 per
cent to 4.8 per cent in the year to June 2016.
Performance by sector, as measured by IPD, followed the pattern of the previous
yearly reporting period. Industrials and offices both out-performed with each
delivering an 11.6 per cent total return. The performance of offices was helped
by a strong performance in London and the South East. The regional office
market delivered an 8.2 per cent annual total return. In retail, there was
considerable polarisation with Central London shops out-performing, but
standard retail outside London, shopping centres, retail warehousing and
supermarkets all relatively weak, bringing the all-retail average down to 6.3
per cent.
Rental growth was 3.3 per cent at the all-property level, slightly less than
the 3.8 per cent recorded in the previous year. This in part reflected the
slowdown in the pace of rental growth for Central London offices. Despite this,
rental growth in the City and West End still drove the market forward. Central
London retail and South East industrials also saw rental growth exceeding 5 per
cent annually. There were rental growth hotspots for offices in Bristol,
Cambridge and Guildford. In contrast, rental growth remained negative for
standard retail outside the South East, variety stores and supermarkets,
underscoring the structural issues faced by those parts of the market.
This underlying rental growth translated into net income growth for the year to
June 2016 of 3.0 per cent, improved from 1.7 per cent for the year to June
2015. This was the strongest June out-turn since 2008. Again, there was
polarisation as income from West End retail and Midtown offices recorded rates
above 10 per cent, while income growth was still negative for regional retail.
The property market delivered another year of strong performance in the year to
June 2016 but the pace has slowed following two annual reporting periods where
total returns were in the mid-teen range. The result of the UK referendum came
towards the end of the period and this is expected to have a marked effect on
the economy, economic policy and the property market. At the time of writing
monthly data suggests an early easing of pricing as open-ended property funds
seek to satisfy liquidity requirements and buyers apply a watching brief to the
market place.
Portfolio
The Company's property portfolio produced an ungeared total return of 7.1 per
cent over the year to June 2016, driven primarily by an income return of 5.6
per cent, which was some way above the income return derived from the IPD UK
Quarterly Index of 4.7 per cent. Pleasingly, gross income growth from standing
investments was also well in excess of the Quarterly Index over the year, at
5.3 per cent, providing valuable support to dividend cover. This reflected 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 suitable to satisfy the Company objective. At 30 June the value of the
portfolio had increased to GBP339.2 million (after sales), compared to GBP337.5
million this time last year. Over the three years to June 2016 the portfolio
has delivered an ungeared total return of 12.8 per cent per annum.
At the sector level the portfolio's industrial and distribution assets
continued their run of outperformance, producing a total return of 11.8 per
cent, in excess of both the IPD Quarterly Index and the sector average for the
period. This is the third year in a row that industrial holdings have led the
portfolio's returns. Performance has been driven by robust occupational demand
and limited supply, complimented by successful asset management which has
translated to income growth. The Fund's industrial assets have also benefitted
from a general market preference for modern, well-specified property located
within the South East. Retail and offices both underperformed their respective
peers, particularly in terms of capital growth, the latter by some distance,
however both delivered meaningful yield premium, providing valuable dividend
cover.
The majority of top performing assets hailed from the industrial and
distribution sectors. Despite the capital cycle having now run its course, this
was not necessarily the case in the first half of the year and the majority of
top performers were again those assets experiencing the strongest capital
growth. While yield shift had a key part to play in this, these assets were
also the beneficiary of underlying rental growth and/or associated income
growth. Some of the addresses are familiar from last year, with Lakeside Road,
Colnbrook, Hemel Gateway, Hemel Hempstead and Eastern Road, Bracknell all
featuring in the top 5 performing assets. Whilst Lakeside Road, Colnbrook was
the key asset by weighted contribution to overall portfolio return, the two
highest total returns over the period were from Chippenham Drive, Milton Keynes
and 24 Haymarket, London delivering 31 per cent and 28 per cent respectively.
The refurbishment of the vacant industrial unit at Milton Keynes is now
complete and terms have been agreed to let the property at levels in excess of
historic valuation expectations. The positive performance is therefore on
account of delivering the project below the initial budget and attracting a
tenant on competitive terms on a relatively short timetable, alongside the
general continued improvement in sentiment towards the sector. At the time of
writing this property accounts for over half of total portfolio void and the
successful letting will make a telling improvement to portfolio yield.
Despite the continued depth of investment demand for central London property,
particularly strong in the first half of the year, the performance of 24
Haymarket has primarily been driven by growth in the underlying rental tone
derived from a competitive occupational market. This has been felt strongest on
the restaurant element of the building. Similarly, the ground and basement
retail unit at the portfolio's largest asset at Berkeley Street, London is now
set to offer an attractive improvement in rental income following agreement of
the outstanding 2015 rent review. Despite the prevalence of South East
industrial assets in the Company's top performers, more recently we have seen a
welcome return to asset specific fundamentals rather than sector preference
driven yield shift, such that the top performers over the latter 6 months to
June include representatives from a wider variety of sectors and geographies.
The above market income yield, low void rate (4.2 per cent for the Company
versus 7.1 per cent for the IPD Quarterly Index), attractive and contractually
backed weighted average income term of over 7 years, leave the Company well
placed to benefit in today's income driven environment. Property returns over
anything other than the shortest time scales are income dominated and against
this backdrop the portfolio is appropriately positioned to deliver on the
Company objective.
Nevertheless, overall portfolio returns were below that of the Quarterly Index
over 2016 pointing to some underlying challenges. Given the attractive annual
income return and the absence of any significant transaction costs, asset level
underperformance was predominantly a result of lower capital growth than for
the wider market. This was particularly prevalent in the offices sector where
the shorter unexpired lease terms, and expectations of associated capital
expenditure has weighed more heavily on recent valuations. In the event that
the upcoming lease events in this sector can be successfully negotiated then
this ought not to represent an insurmountable challenge. With this in mind a
number of lease events in the Central London and South Eastern office holdings
are now close to early settlement. In some circumstances the goal is to
mitigate leasing risk and in the case of the Central London market, there still
selectively exists the opportunity to generate income growth.
Given the weight of money that has been targeting the sector over recent years,
driving yields to historic lows, the Manager has been particularly discerning
where new purchases are concerned. We are at a point in the capital cycle where
it has been challenging to source new stock at a price which satisfies the
Company objective and certainly the lack of recent purchases has been a
conscious decision on the part of both the Manager and the Board. The burden of
transaction costs are also particularly relevant in an income driven, lower
returns environment and made even more of a consideration following the recent
adjustment to Stamp Duty Land Tax rates. The current cash position and the
flexibility of a revolving debt facility does however provide scope for
opportunistic purchases that fulfil the necessary criteria and complement the
existing portfolio. The Manager remains vigilant in this regard, particularly
given the recent vote to leave the European Union and corresponding potential
for some near term market turbulence.
The priority instead has been to address the future of the smaller, more
secondary or legacy regional assets. Three sales have been completed over the
year (Bridge Street, Guildford, Northbrook Street, Newbury and Newcombe Drive,
Swindon) realising GBP3.5 million. The sale of a fourth property at King William
House, Hull has now completed post the financial year end, providing a further
GBP2.6 million of net proceeds. Historically these assets provided both liquidity
and attractive dividend cover; however, the rather compromised specification,
upcoming requirement for capital expenditure, combined with reduced lease terms
and occupational risk present at Swindon and Hull in particular, no longer
satisfied the Manager's strategy. Given the recent re-pricing of risk, the
timing of disposal now feels even more appropriate.
Borrowings
As highlighted in the Chairman's Statement, the Company successfully refinanced
its existing GBP115 million loan facility with Lloyds Bank plc, due for repayment
in 2017, with a 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 that will be 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.
In accordance with the Company policy to adopt a prudent approach to borrowing,
net gearing at 30 June was 29.1 per cent, in line with the majority of the peer
group and a level at which the Manager considers is appropriate. This figure
includes the fully drawn revolving debt facility. The near term intention is to
pay a proportion of this down on account of the favourable cash position of the
Company, further bolstered by recent sales proceeds. In the event that
suitable investment opportunity is identified, this arrangement provides
valuable flexibility to access the market.
Outlook
The impact of the UK's decision to leave the EU may well lead to slower
economic growth and, in the short term at least, has the potential to lead to
wider uncertainty and increased volatility in the capital markets. Weakening
sentiment does pose a threat to near term values with the impact of recent
transactions, some of them from motivated sellers such as the UK open-ended
funds, likely to become apparent in the third quarter valuations. There is
little doubt that the weekly and monthly valuations in the weeks since the
vote, while reflecting a range of outcomes, point towards a softening of
values. City offices, properties with short leases, secondary and development
led stock have been most affected in the immediate aftermath. Quality, well-let
properties in established centres, particularly in the industrial and
distribution sector have been more resilient. Sentiment towards alternative
property assets remains robust with concerns persisting about the health of the
secondary retail market.
Following a three-year run of capital appreciation across the majority of the
market, the Manager considers that the portfolio is well placed to capitalise
on the likelihood of income dominated returns over the foreseeable future. The
Fund's defensive characteristics, including a yield premium and attractive
duration of income, low void rate, and appropriate exposure to London and the
South East in particular, leave the Company well placed to weather any near
term correction in pricing. Despite historic low valuation yields the case for
property still stands up to scrutiny, offering an attractive premium over
gilts, with potential for at least some further income growth in selected
markets. Against this backdrop, management of the income stream is more
important than ever and this will be the primary focus of the Manager. In more
turbulent markets, stock selection is paramount, and as has been demonstrated
in recent quarters, the Company will continue its commitment to retaining a
resilient asset base, disposing of smaller, non-core assets and using the
favourable cash position to access the market on an opportunistic basis in
search of new acquisitions.
The UK offers a large diverse economy and provides a transparent and mature
property market, which has delivered solid risk adjusted performance over the
long term alongside the opportunity to access a consistent, relatively high
income return. These are all attractive characteristics in uncertain times.
F&C UK Real Estate Investments Limited
Consolidated Statement of Comprehensive Income
Year ended 30 Year ended
June 2016 30 June 2015
GBP'000 GBP'000
Revenue
Rental income 19,562 18,932
Total revenue 19,562 18,932
Gains on investment properties 4,807 31,665
24,369 50,597
Expenditure
Investment management fee (2,084) (1,974)
Other expenses (1,883) (1,929)
Total expenditure (3,967) (3,903)
Net operating profit before finance costs 20,402 46,694
Net finance costs
Interest receivable 9 15
Finance costs (4,455) (5,955)
Gain on redemption of interest rate swap 1,485 -
(2,961) (5,940)
Net profit from ordinary activities before 17,441 40,754
taxation
Taxation on profit on ordinary activities (264) (163)
Profit for the year 17,177 40,591
Other comprehensive income
Items that are or may be reclassified
subsequently to profit or loss
Net change in fair value of swap reclassified (1,485) -
to profit or loss
Movement in fair value of effective interest 1,293 2,649
rate swap
Total other comprehensive income (192) 2,649
Total comprehensive income for the year, net of 16,985 43,240
tax
Basic and diluted earnings per share 7.2p 17.5p
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 2016 30 June 2015
GBP'000 GBP'000
Non-current assets
Investment properties 333,798 331,874
Current assets
Trade and other receivables 7,014 6,861
Cash and cash equivalents 11,931 4,656
18,945 11,517
Total assets 352,743 343,391
Non-current liabilities
Interest-bearing bank loans (108,845) (102,986)
Interest rate swap - (1,929)
(108,845) (104,915)
Current liabilities
Trade and other payables (6,872) (6,912)
Income tax payable (284) (77)
Interest rate swap - (4,658)
(7,156) (11,647)
Total liabilities (116,001) (116,562)
Net assets 236,742 226,829
Represented by:
Share capital 2,387 2,339
Special distributable reserve 175,367 170,620
Capital reserve 58,485 53,678
Other reserve - 192
Revenue reserve 503 -
Equity shareholders' funds 236,742 226,829
Net asset value per share 99.2p 97.0p
F&C UK Real Estate Investments Limited
Consolidated Statement of Changes in Equity
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
For the year ended 30 June 2015
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 2014 2,309 170,704 22,013 (2,457) - 192,569
Profit for the year - - - - 40,591 40,591
Other comprehensive - - - 2,649 - 2,649
gains
Total comprehensive - - - 2,649 40,591 43,240
income for the year
Issue of ordinary 30 2,608 - - - 2,638
shares
Dividends paid - - - - (11,618) (11,618)
Transfer in respect of - - 31,665 - (31,665) -
gains on investment
properties
Transfer to revenue - (2,692) - - 2,692 -
reserve
At 30 June 2015 2,339 170,620 53,678 192 - 226,829
F&C UK Real Estate Investments Limited
Consolidated Cash Flow Statement
Year ended Year ended
30 June 2016 30 June 2015
GBP'000 GBP'000
Cash flows from operating activities
Net profit for the year before taxation 17,441 40,754
Adjustments for:
Gains on investment properties (4,807) (31,665)
Increase in operating trade and other receivables (153) (800)
(Decrease)/increase in operating trade and other (40) 802
payables
Interest received (9) (15)
Finance costs 4,455 5,955
Gain on redemption of interest rate swap (1,485) -
15,402 15,031
Taxation paid (58) (462)
Net cash inflow from operating activities 15,344 14,569
Cash flows from investing activities
Purchase of investment properties - (10,054)
Capital expenditure (636) (403)
Sale of investment properties 3,519 5,635
Interest received 9 15
Net cash inflow/(outflow) from investing activities 2,892 (4,807)
Cash flows from financing activities
Shares issued (net of costs) 4,795 2,638
Dividends paid (11,867) (11,618)
Bank loan interest paid (2,057) (1,202)
Interest on interest rate swap arrangement (2,561) (4,697)
Redemption of interest rate swap arrangement (5,294) -
Bank loan repaid - Lloyds Loan (102,000) (7,000)
Bank loan drawn down, net of costs - Canada Life Loan 88,503 -
Bank loan drawn down, net of costs - Barclays Loan 19,520 -
Net cash outflow from financing activities (10,961) (21,879)
Net increase/(decrease) in cash and cash equivalents 7,275 (12,117)
Opening cash and cash equivalents 4,656 16,773
Closing cash and cash equivalents 11,931 4,656
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:
* 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.
* Operational - failure of the Manager's accounting systems or disruption to
the Manager's business, or that of third party service providers, could
lead to an inability to provide accurate reporting and monitoring, leading
to a loss of shareholders' confidence.
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, and applies the principles detailed in the internal control guidance
issued by the Financial Reporting Council.
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, bank loans and payables.
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 2016 or 30 June 2015 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 2016 is GBP597,000 (2015: GBP654,000). 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 2016 the
provision was GBP17,000 (2015: GBP65,000). Of this amount GBPnil was subsequently
written off and GBP5,000 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 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 0.2 per cent 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.
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; and
* the Strategic Report and Report of the Directors include 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.
On behalf of the Board
V Lall
Chairman
27 September 2016
F&C UK Real Estate Investments Limited
Notes to the Consolidated Financial Statements
for the year ended 30 June 2016
1. The audited results of the Group which were approved by the Board on
27 September 2016 have been prepared on the basis of International Financial
Reporting Standards as adopted by the EU and the accounting policies set out in
the statutory accounts of the Group for the year ended 30 June 2016.
2. The fourth interim dividend of 1.25p will be paid on 30 September
2016 to shareholders on the register on 9 September 2016. The ex-dividend date
was 8 September 2016.
3. There were 238,705,539 Ordinary Shares in issue at 30 June 2016. The
earnings per Ordinary Share are based on the net profit for the year of GBP
17,177,000 and on 237,264,306 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 GBP3.5 million. No properties were purchased in the year.
5. These are not full statutory accounts. The full audited accounts for
the year ended 30 June 2016 will be sent to shareholders in September 2016, 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:
www.fcre.co.uk or www.fcre.gg
6. The Annual General Meeting will be held on 30 November 2016.
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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