5th Apr 2007 07:01
ING UK Real Estate Income Trust Ltd05 April 2007 ING UK Real Estate Income Trust Limited 5 April 2007 Preliminary Profits Announcement for the period ended 31 December 2006 ING UK Real Estate Income Trust Limited, a Guernsey registered closed-endedinvestment company, today announces preliminary results for the period sinceincorporation on 15 September 2005 to 31 December 2006. Chairman's Statement The Annual Report covers the period from the Group's incorporation on 15September 2005 until 31 December 2006, during which time conditions within theUK commercial property market remained favourable. Returns from UK commercialproperty have now delivered in excess of 18% per annum over the last threeyears. As a result I am pleased to report a healthy position for the Group. The netasset value per share has increased by 26% during the period. In addition theGroup has made dividend payments equivalent to 5.8475 pence per share in theperiod. The underlying property portfolio has risen from £491 million at launch to £702million at 31 December 2006, remaining principally focussed towards the officesector, where performance is expected to be strongest in the short to mediumterm. In November 2006 the Group successfully placed a further 26.5 million shares,which facilitated the acquisition of eight new assets, the primary objective ofwhich was to increase the Group's exposure to the office and industrial sectorsin the South East. We are grateful to our shareholders for their support in thistransaction. As part of this transaction the Group increased its level of gearing, which isnow 44.6%, at a time when the Board believes it will remain accretive toperformance. The additional facility is structured to allow flexibility toalter the level of debt in the future, as and when it may be prudent to optimiseits impact on performance in the light of changing financial conditions. Following an initial period of stabilisation, the asset management initiativesput in place at launch have started to come to fruition and make a positivecontribution to performance. The Group has also made a number of acquisitionsalongside selective disposals, which are detailed within the InvestmentManager's Report. My colleague David Blight has, with effect from today, stepped down from theBoard and I would like to take this opportunity to thank David for hiscontribution since the Company's inception. I am pleased to welcome TjeerdBorstlap to the Board, and appreciate the continuing support from ING in thisregard. Tjeerd is currently Chief Financial Officer of ING Real EstateInvestment Management globally, based in The Hague and I have no doubt that hewill make a positive contribution. Increased demand for UK commercial property has led to falling yields and assuch the income return for commercial property is now below the cost of debt.Purchasing remains very difficult, especially on an income only basis. TheGroup's portfolio remains constructed so as to maximise income, offering aninitial property yield of 5.4% compared with a market average of 4.6%(Investment Property Databank ("IPD") Monthly Index January 2007). Whilst 2007 is not forecast to see returns reaching recent levels, the Boardremains confident in the Investment Manager's ability to continue to enhance theincome potential and drive performance. Nicholas Thompson Chairman of the Board 4 April 2007 Investment Manager's Report Economic Overview Following a housing market related slowdown in 2005, the UK economy reboundedstrongly in 2006, up 3.0%. A significant driver of this was the financial andbusiness services sector, in which output is now growing at a highly robust 5%per annum plus. Retail sales also picked up in 2006, with average growth of4.0%. Unemployment in the UK remains at a historic low and is currently measured atjust 3% (Claimant Count Measure) compared to its long term average of around5.5%. While the number of unemployed workers increased during 2006, the totalpool of labour also increased, mainly due to a growing number of migrantworkers, resulting in a steady unemployment rate. At November 2006, there were atotal of 30.7 million economically active people in the UK (source: Office ofNational Statistics), an increase of 400,000 since the previous year. Inflation, as measured by the Consumer Price Index, picked up during 2006, from1.9% at the end of 2005 to 3.0% in December 2006. The Retail Price Index,excluding mortgage interest payments ('RPIX'), also trended upwards from 2.0% in2005 to 3.8% in 2006. This was caused mainly by growing utility bills and foodprices. Owing to rising rates of inflation and a faster than expected economicupturn, the Bank of England has raised interest rates and the UK base rate isnow 5.25%. Our economic forecasts suggest that rates will peak at 5.5% and thiswill cause inflation to fall back to 2% by the end of this year. Property Market Overview UK commercial property achieved a total return of 18.1% in 2006 (IPD AnnualIndex). Equities also performed well with total returns registering 16.8% in2006. Gilts saw poor performance throughout 2006, finishing the year with areturn of just below zero. As the chart below shows, property is the bestperforming asset class over the last one, three, five, ten, fifteen and twentyyear periods. Looking forward it is not expected that the level of returns seenover the past three years (in excess of 18% per annum each year over 2004-2006)will continue. These high returns were driven largely by a reduction in yields,which has driven up capital values. In our view, the process of falling yieldsis largely over and so capital values are expected to stabilise. Thus the driverof future performance will be rental value growth. December 2006 Total Returns - Property, Equities and Gilts Property Equities Gilts1 year 18.1% 16.8% -0.1%3 years 18.5% 17.2% 4.6%5 years 15.1% 8.5% 5.1%10 years 13.6% 7.9% 6.9%15 years 11.9% 10.6% 8.4%20 years 11.6% 11.0% 9.1% Within the commercial property market, returns differed from sector to sector.The office sector saw the strongest returns, which were measured at 23%, theirhighest rate since the late 1980s. The sector has been driven by central London,where the amount of vacant space has been contracting. This has spurred onrental growth to reach 12.2% in 2006. We expect the vacancy rate to continue tofall, as the amount of new space entering the market is historically low, and asa result rental growth will increase further. The industrial sector was the next best performing sector in 2006, whichachieved a total return of 17.7%. Rental growth in the industrial market sawsome improvement, increasing from 1.1% in 2005 to 1.3% in 2006. The increasingamount of available industrial space, up from 184 million sq ft in 2005 to 193million sq ft in 2006 (King Sturge, Chartered Surveyors), is currently holdingback the rate at which rents can grow. Nevertheless, this trend differssignificantly from location to location, with London seeing the highest level ofrental growth. The strong returns seen in 2006 were driven mainly by continuedcapital appreciation of 11.3%, of which over 10% was derived from falling yieldsalone. Returns were lowest in the retail sector, but were still measured above theirlong term average at 15.2% in 2006. The retail market was the only sector whererental growth actually declined in 2006 compared to 2005, falling from 3.9% to3.2%. This was driven mainly by the slowdown in the out-of-town retail marketfor household goods, such as furniture, carpets and DIY. Many retailers in thissector suffered from the slowdown in retail sales growth in 2005, as well asrising costs from energy bills, staffing and business rates. This has impededtheir ability to pay significantly higher rents. Capital growth remained buoyantin the retail sector, however, growing at over 10% in 2006. The chart below shows the total return achieved in 2006 for the main sub-sectorsof the UK commercial property market. We expect the outperformance of the Londonoffice market to continue. 2006 Total Returns by Market Segment All Property 18.1%Distribution Warehouses 17.8%Standard Industrials 17.6%Rest of UK Offices 18.2%Rest of South East Offices 19.1%West End & Mid Town Offices 30.8%City Offices 24.7%Retail Warehouses 15.3%Shopping Centres 15.6%Standard Shops 13.8% Group Portfolio Performance For 2006, at an underlying ungeared level, the Group's direct property portfolioproduced a total return of 17.3%. This compares with the IPD Annual Index of18.1%. However, as expected the portfolio continued to outperform on an income returnbasis, with the high initial yield and active management initiatives. The incomereturn from the portfolio was 6.5% for 2006, significantly ahead of the IPDAnnual Index (4.9%). Capital growth lagged the Index at 10.2% (IPD 12.6%). The best performing sector was the retail sector, with a significantcontribution from a very satisfactory settlement on the rent review at aproperty in Chester. In the industrial sector, the Magna Park property performedstrongly, principally as a result of the profit share agreement which wasentered into on an adjacent plot. This is detailed below. The retail, industrial and leisure elements of the portfolio all outperformedtheir benchmarks, however the office assets underperformed their benchmark in2006. The underperformance of the office assets in 2006 was due to a combinationof factors. The portfolio initially had a relatively low weighting towardscentral London and this, combined with five office acquisitions in 2006, in partto improve the exposure to the central London market, has led to theunderperformance in the sector. In addition, whilst a number of activemanagement opportunities were identified in the office sector, these have takenslightly longer than envisaged to realise. As such they provide opportunitiesfor future performance but did not contribute in 2006. Asset Management Highlights In terms of active management, opportunities have been identified in all sectorsand implemented where appropriate. There have been a number of highlights sincelaunch which have contributed positively toward performance. Over the period, office and industrial weightings were increased to 41.7% and27% respectively. 45 rent reviews were documented and over 20 lettings werecompleted. The void rate on the portfolio (excluding rental guarantees) reducedfrom 4.5% at 31 December 2005 to 2.6% at 31 December 2006, and the average leaselength stands at 8.74 years as at 31 December 2006. In Lutterworth, at Unit 5320 Magna Park, which was successfully rebuiltfollowing a fire in late 2005, the Group granted consent for a link buildingbetween the property and a newly constructed adjacent unit which was to beoccupied by the Group's tenant. In order to grant this consent, the Groupnegotiated a premium payment from the adjoining owner and entered into a profitshare agreement in respect of the sale of the building on the adjacent site. Intotal the transaction resulted in payments to the Group of over £1 million. At Molly Millars Lane, Wokingham, the Group took a surrender of the lease of oneof the largest industrial units on this estate. The Group agreed to accept apremium payment of £950,000 for the surrender, which equated to a rental cover,based on estimated rental value, of 4.7 years. Following minor refurbishmentworks, the Group subsequently agreed terms to let this unit at £195,000 perannum on a new ten year lease, with a five year break option. In Welwyn Garden City, at Shire Park, the Group re-geared this multi-let officebuilding which was let to two tenants on leases expiring in 2010 and 2012respectively. One of the tenants was not in occupation and the Group negotiateda simultaneous surrender of this lease for a premium payment and subsequentlyre-let the entire building to the other occupier on a new 15 year lease. At St James Court in Bristol the Group surrendered the lease of the third floorin this modern three storey office building for a premium payment from theoutgoing tenant. Similar to Molly Millars Lane above, the Group refurbished thefloor and, following a marketing campaign, an occupier was secured, taking a newten year lease with a five year break option. The letting was completed on 29September 2006. Acquisitions and Disposals In the period from launch until 31 December 2006 the Group acquired 12 assetsand disposed of three. The acquisitions were primarily in the office andindustrial sectors, whilst the disposals came from the retail and leisuresectors. The principal transactions were as follows:- In May the Group acquired Boundary House, an office building on Jewry Street,within the City of London. It comprises over 45,000 square feet of office spacewith eight occupational tenants and an average rent of only £20 per sq ft,comfortably below the estimated rental value of £25 per sq ft. The purchaseprice of £16.1 million reflected an initial yield of 5.2%. In July the Group acquired Notcutt House, Southwark Bridge Road, SE1. Thepurchase price of £7 million reflects a net initial yield of 5.75%. The propertycomprises 12,653 sq ft of air conditioned office space refurbished in 2001 whichis let at £427,000 per annum until September 2016 to Conchango (UK) plc. In September the Group purchased an industrial unit, Vigo 250, located atBirtley Road in Washington, Tyne & Wear for £12.85 million reflecting a netinitial yield of 6.25%. The unit is a high specification production andwarehouse building totalling 246,752 sq ft, built in 1995. The building is letto Tanfield Group Plc for a term of 25 years at an initial rent of £850,000 perannum with five yearly, upward only rent reviews, which benefit from minimumfixed rental uplifts after five and ten years. In December the Group completed the acquisition of a portfolio of eightproperties for £125.5 million. The Group acquired three office investments inBracknell, Fleet and Swindon, two industrial investments in Harlow andLutterworth and three retail units in Bristol, Carlisle and Rugby. Theacquisition was funded through a share placing of 26.5 million shares, raising£32.2 million of additional equity. An additional debt facility of £88.45million was utilised increasing the overall gearing of the Group to 44.6%. This additional debt facility provided, in addition to the securitised debt, aflexible facility albeit at a higher margin, thus increasing the blended cost ofdebt across the Group to 5.5%. In line with its existing strategy the Group sold, immediately after purchasingthe portfolio, one of the smaller retail assets located in Rugby, at a profit tothe purchase price. In August, the Group disposed of another of its smaller assets, a supermarket atGorgie Park Road, Edinburgh for £3.6 million which reflects a net initial yieldof 4.14%. The disposal was in line with the income driven strategy of the Groupand was over £1 million above the valuation at launch. In October the Group disposed of the Scorpio Inns Public House Portfolio to theoccupying tenant, The Punch Pub Company (PTL) Limited. The disposal of theportfolio followed the tenant exercising one of its options to purchase. Theproceeds from the disposal were £3 million ahead of the valuation at launch. Outlook Against the backdrop of an improving occupier market, at the All Property level,we expect rental growth to reach 4.0% in 2007. Combined with further yieldcompression, we expect capital growth of 5.7% to be achieved. This takes ourtotal return estimate for UK commercial property to 10.6%, assuming an incomereturn of 4.6%. This compares to the Investment Property Forum ("IPF") ConsensusForecast of 9.0% for 2007. Looking out on a longer term basis we expect total returns to moderate, asyields stabilise. While some commentators are projecting falls in capital valuesresulting from rising yields in the immediate or near term, we do not share thisview. We expect yields to remain constant during 2007, 2008 and 2009, andreturns to be driven by strong rates of rental growth. On a three year view, weforecast total returns to average 9.2% per annum. Our more buoyant view oncapital growth puts our forecast ahead of the IPF Consensus Forecast of 6.3% perannum over the same period. At the sector level for 2007 offices are expected to see the strongestperformance. This sector will be driven by the central London market, which weforecast to see rates of rental growth as high as 13% to 14%. The retail andindustrial markets, which will both see slower rates of rental growth, areforecast to see lower returns. Nevertheless, we expect both retail andindustrial assets to produce respectable returns against other asset classes. In terms of the Group's portfolio, the focus remains on maximising income andcontinuing with the successful tenant re-engineering that has taken place todate. The portfolio is well structured on a sector basis, but there are stillopportunities to sell assets where performance is limited. In addition, thefocus will be to sell a number of the smaller and lower yielding assets toreduce the overall number of assets within the portfolio and increase the incomereturn. ING Real Estate Investment Management (UK) Limited 4 April 2007 Consolidated Income Statementfor the period from 15 September 2005 to 31 December 2006 Income Capital Total £000 £000 £000IncomeRental income 39,329 - 39,329Service charges recharged to tenants 6,074 - 6,074Other operating income 4,661 - 4,661Total operating income 50,064 - 50,064 Gains and losses on investmentsRealised gains arising on disposal ofinvestment properties - 4,572 4,572Unrealised gains on revaluation ofinvestment properties - 70,421 70,421Unrealised gain on interest rate swap - 8,727 8,727Total gains on investments - 83,720 83,720 ExpensesProperty operating expenses (2,572) - (2,572)Service charge costs (6,074) - (6,074)Management expenses (5,977) - (5,977)Other operating expenses (1,607) - (1,607)Total operating expenses (16,230) - (16,230) Profit before finance costs and tax 33,834 83,720 117,554 Finance costsInterest receivable 1,617 - 1,617Interest payable (12,549) - (12,549)Total finance costs (10,932) - (10,932) Profit before tax 22,902 83,720 106,622Tax (460) - (460) Profit for the period 22,442 83,720 106,162Dividends (17,835) - (17,835)Retained earnings 4,607 83,720 88,327 Earnings per shareBasic 34.4pDiluted 34.4p The total column of this statement represents the Group's Income Statement,prepared in accordance with International Financial Reporting Standards. Thesupplementary income return and capital return columns are both prepared underguidance published by the Association of Investment Companies. All items in theabove statement derive from continuing operations. All income is attributable to the equity holders of the parent company. Thereare no minority interests. Consolidated Statement of Changes in Equityfor the period from 15 September 2005 to 31 December 2006 Share Share Premium Distributable Retained Total Capital Account Reserve Earnings £000 £000 £000 £000 £000 Balance as at 15 - - - - -September 2005 Net profit forthe period - - - 106,162 106,162 ------- -------- ---------- -------- ---------Totalrecognisedincome andexpenses forthe period - - - 106,162 106,162 Dividends paid - - - (17,835) (17,835) Issue ofordinaryshares - 337,198 - - 337,198 Issue costs - (7,199) - - (7,199) Transfer todistributablereserve - (298,610) 298,610 - - ------- -------- ---------- -------- ---------Balance as at31 December2006 - 31,389 298,610 88,327 418,326 ======= ======== ========== ======== ========= Consolidated Balance Sheetas at 31 December 2006 2006 £000 Non-current assetsInvestment properties 702,167 --------------------Total non-current assets 702,167 Current assetsAccounts receivable 7,437Cash and cash equivalents 37,873 --------------------Total current assets 45,310 Total assets 747,477 Current liabilitiesAccounts payable and accruals (24,428) --------------------Total current liabilities (24,428) Non-current liabilitiesLoans and borrowings (304,723) --------------------Total non-current liabilities (304,723) Total liabilities (329,151) --------------------Net assets 418,326 ==================== EquityOrdinary share capital -Share premium account 31,389Distributable reserve 298,610Retained earnings 88,327 --------------------Total equity 418,326 ==================== Net asset value per share 1.26 ==================== Consolidated Cash Flow Statementfor the period from 15 September 2005 to 31 December 2006 £000 Profit before tax 106,622 Adjusted forInterest received (1,617)Interest paid 12,549Realised and unrealised gains on investments (83,720)Amortisation of finance costs (331) -----------------Operating profit before working capital changes 33,503 Increase in trade and other receivables (4,930)Increase in trade and other payables 23,968 ----------------- 19,038 Net cash inflows from operating activities 52,541 Cash flows from investing activitiesPurchase of investment properties (652,930)Disposal of investment properties 25,756Interest received 1,617 -----------------Net cash outflow from investing activities (625,557) Cash flows from financing activitiesEquity raised 337,198Proceeds from long term borrowings 738,000Repayment of long term borrowings (424,550)Issue costs of borrowing & equity raising (10,037)Interest paid on loans (12,549)Dividends paid (17,835) -----------------Net cash inflows from financing activities 610,227 Net increase in cash and cash equivalents 37,211 Cash and cash equivalents at beginning of period - -----------------Cash and cash equivalents at end of period 37,873 ================= Notes to the Preliminary Announcement 1. Accounting policies - Basis of preparation This press release contains the financial information of ING UK Real EstateIncome Trust Limited (the "Company") and its subsidiaries (together referred toas the "Group") for the period from 15 September 2005 to 31 December 2006. The financial information is prepared on the historical cost basis except forthe revaluation of investment properties and is presented in pounds sterlingrounded to the nearest thousand. The financial information set out above does not constitute the Company'sstatutory accounts for the period ended 31 December 2006. Statutory accounts for2006, prepared under IFRS as adopted by the International Accounting StandardsBoard, will be delivered in due course. The auditors have reported on thoseaccounts; their report (i) was unqualified, (ii) did not include references toany matters to which the auditors drew attention by way of emphasis withoutqualifying their reports. For further information: All Enquiries The Company SecretaryNorthern Trust International Fund Administration Services (Guernsey) LimitedTrafalgar CourtLes BanquesSt Peter PortGuernseyGY1 3QL Tel: 01481 745439Fax: 01481 745085 ING Real Estate Investment Management (UK) LimitedSelina Sasse, 020 7767 5756, [email protected] Financial DynamicsDido Laurimore/Stephanie Highett, 020 7831 3113 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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