7th Jun 2007 08:00
McKay Securities PLC07 June 2007 MCKAY SECURITIES PLC PRELIMINARY RESULTS 7th June 2007 ------------------------------------- The Directors of McKay Securities PLC announce the results of the Group for theyear ended 31st March 2007. FINANCIAL HIGHLIGHTS-------------------- * Profit before tax up 24.9% to £57.46 million (2006 - £46.01 million) Adjusted profit before tax up 9.9% to £7.22 million (2006 - £6.57 million) - note 3 * Equity shareholders' funds up 42.2% to £235.99 million (2006 - £165.96 million), equivalent to 515 pence per share (2006 - 364p) * Net contribution to shareholders' funds of £32.16 million arising from conversion to REIT status on 1st April 2007 * Adjusted net asset value per share up 20.2% to 506p (2006 - 421p) and up 23.7% excluding REIT conversion charge - note 9 * Revaluation gain of £43.55 million; an increase over book value of 14.2% (2006 - 13.4%) * Final dividend up 8.8% to 7.4 pence per share (2006 - 6.8 pence per share). Total dividend for the year of 11.0 pence per share (2006 - 10.2 pence), up 7.8% * Diluted adjusted earnings per share up 18.5% to 14.55p (2006 - 12.28p) - note 6 * Weighted average cost of borrowing of 5.8% (2006 - 5.9%) * Total shareholder return of 40.4% (2006 - 38.2%) Eric Lloyd, Chairman, commented:"I am delighted to report, in this sixtieth anniversary year of the Company andin my last Statement as Chairman, a record year of growth for the Group,culminating in the conversion to REIT status. With the benefit of REIT statusadded to the quality of the portfolio and the opportunities it presents, theBoard is confident that the Group will continue to prosper". For further information please contact: McKay Securities PLC - 0118 950 2333 Simon Perkins (Managing Director)Alan Childs (Finance Director) www.mckaysecurities.plc.uk-------------------------- Details of the programme for the payment of the final dividend on the OrdinaryShares is as follows: Ex dividend date 13th June 2007 Record Date for the final dividend 15th June 2007 Report and Financial Statements dispatched toShareholders with Notice of AGM 26th June 2007 Annual General Meeting to be held at 12 noon at TheRoyal Thames Yacht Club, 60 Knightsbridge, London SW1 25th July 2007 Final dividend paid 8th August 2007 CHAIRMAN'S STATEMENT-------------------- Pre-tax profit for the year to 31st March 2007 amounted to £57.46 millioncompared with £46.01 million for the same period last year. Adjusted pre-taxprofit, excluding non-recurring profit on sales and surrender premiums,revaluation gains and movement in the fair value of interest rate hedginginstruments (note 3) increased by 9.9% to £7.22 million (2006 - £6.57 million). A final dividend of 7.4 pence per ordinary share is recommended by the Board(2006 - 6.8 pence) payable on 8th August 2007 to shareholders on the register atthe close of business on 15th June 2007. This takes the total dividend for theyear to 11 pence (2006 - 10.2 pence); an increase of 7.8%. The annual external valuation of the Group's property portfolio at 31st March2007 totalled £351.27 million resulting in a surplus of £43.55 million; anincrease over book value of 14.2% (2006 - 13.4%). Net asset value per share increased by 151 pence (41.5%) from 364 pence to 515pence. Of this increase, 70 pence per share represented the net tax benefitsarising from the Group's conversion to Real Estate Investment Trust (REIT)status on 1st April 2007. The increase in net asset value per share disregardingconversion to REIT status would have been 22.3%. Total shareholder return, calculated on share price growth during the year withdividends reinvested at the date of payment, was 40.4% (2006 - 38.2%). Review of the year------------------ I am delighted to report, in this sixtieth anniversary year of the Company andin my last Statement as Chairman, a record year of growth for the Group,culminating in the conversion to REIT status. The continuing success of ourdevelopment programme together with a proactive approach to the management ofthe property portfolio, have contributed to a year of considerable progress.Profit before tax increased by 24.9% to £57.46 million, which included an upliftof £43.55 million (14.2%) in the value of the portfolio at the year end, and aprofit over book value of £3.59 million from the successful sale of twoproperties. Adjusted profit before tax, which excludes these and othernon-recurring items, increased by 9.9% to £7.22 million, assisted by growth ingross rental income of £1.54 million to £17.31 million. Following the Extraordinary General Meeting held on 28th February 2007, theGroup elected to become a REIT with effect from 1st April 2007. As a result,corporation tax will no longer be payable on qualifying rental income or gainsfrom disposals, and future valuation increases will not attract a deferred taxcharge. The REIT conversion charge is 2% of the valuation of the propertyportfolio as at 31st March 2007, estimated to be £7.02 million. The benefit ofconversion, included in these results, is a net contribution of £32.16 millionto shareholders' funds as a result of the write back of £39.18 million ofdeferred tax. This is equivalent to 70 pence per share, which is a greaterbenefit than previously anticipated as a result of the increase in the value ofthe property portfolio. In the future the Group will be required to distributeat least 90% of its income profits to shareholders by way of dividend, and tocomply with other requirements of the regime. The level of dividend payable forthe year to March 2008 is likely to increase by not less than 30%, as a resultof the tax saving on income profits. The REIT structure will continue to allowthe Group to operate as a development led investment business, and theadvantageous tax structure will assist earnings. With the benefit of the tax savings on conversion to REIT status together withthe valuation surplus and gains on disposals, shareholders' funds have increasedby 42.2% from £165.96 million to £235.99 million, equivalent to a net assetvalue per share at the year end of 515 pence. In the South East of England, where the majority of the Group's portfolio islocated, rents outside London are still at relatively low levels, havingsuffered as a result of the oversupply of space following the downturn in thetechnology sector some five years ago. The reduction in the availability ofquality buildings to which I referred last year has continued, with the resultthat we are now seeing signs of rental growth for Grade A buildings across ourmarket area and not just in central London, where rents have again improved. Thepotential for rental growth has had a positive effect on the value of theGroup's properties in a number of areas this year, and the quality of ourbuildings and their location will ensure that we continue to benefit withimproving occupier demand. Throughout the year we have maintained our policy of selective acquisition ofproperties with the potential to generate future income and capital growth fromdevelopment, refurbishment and portfolio management. The property market hascontinued to be competitive, and there has been no let up in demand from a widerange of investors throughout the year, which has now pushed prices to the pointwhere, in many cases, income returns are less than the cost of debt finance.With uncertainty over interest rates, it is unlikely that prices will continueto benefit from further yield compression as a result of which investmentdecisions and portfolio performance will become more dependent on rental growthand development skills. Since my last year end report, two properties have been acquired in new centresand a third adjacent to one of our existing holdings, at a combined cost of£24.30 million; none of the properties were widely marketed. The largest ofthese in price terms was Corinthian House, Croydon, which is a 44,170 sq. ftoffice building constructed in the late 1960s, on ground and ten upper floors,close to East Croydon Station and overlooking the major East Croydonregeneration site. The refurbishment of three floors totalling 12,150 sq ft isunderway, and there are encouraging signs that rental levels have picked upsince the property was acquired. Leases extend for another nine years, at whichpoint there will be considerable scope for a redevelopment of the site for aprime office scheme in an area which is set to improve. Since the year end wehave acquired a 60,000 sq ft unit from Yamaha Motors (UK) Ltd on the popularBrooklands Industrial Estate, Weybridge, which is situated close to junction 11of the south western section of the M25. The building was constructed in 1992and is in good condition having been used as a head office and distributionfacility by the vendor, who has taken a leaseback of part for five years. Thisleaves 38,000 sq ft of warehouse floor space to be let short term, andthereafter a refurbishment and re-letting of the whole in five years time. Inthe longer term there may be the potential for redevelopment for higher valueuses as found elsewhere on the estate. Also acquired during the year were two office buildings in Staines known asWatermans Court, totalling 10,770 sq ft, adjacent to our existing holding atLotus Park, and overlooking the River Thames. This acquisition provides secureincome until 2015, with the potential for an increase in rent at the next reviewin 2010. The management of these two buildings has been integrated with LotusPark, where completion of the major refurbishment of Lotus 1 (15,190 sq ft) andLotus 2 (19,600 sq ft) took place last month. The works commenced in September2006 after the tenant surrendered its leases over these buildings, whichcomprised two of the four buildings acquired for £27.65 million in July 2005. Iam pleased to say that a letting of Lotus 1 has been completed on a 15 yearlease with a 10 year term certain at a rent of £425,180 pa to a strong covenant,and this early interest supports our confidence in the property and theimprovements made. Elsewhere within the development programme, the extensive refurbishment of DacreHouse, SW1 (17,025 sq ft), was completed at the end of August. At the interimstage I reported considerable tenant interest, which has led to the letting oftwo of the five office floors and encouragingly, terms have also been agreed inrespect of the remaining three floors which are now in solicitors' hands. Therents achieved have exceeded our expectations and highlight the demand for topquality office buildings within central London. The planning application for the redevelopment of 30/32 Lombard Street EC2 isexpected to be considered by the City Corporation later this month and we arehopeful of a positive outcome. This office scheme is an exciting project for theGroup, being located in a prime area of the City of London, and if planningconsent and other approvals are received on programme, it will be possible tomake a start on site around the middle of next year, subject to marketconditions remaining favourable. The contribution to pre-tax profits this year from the sale of investmentproperties at Chobham and Chancery House, Sutton, was £3.59 million. Thisrepresented a substantial increase over book value and generated net saleproceeds of £22.57 million; the combined profit over historical cost was £15.48million. In both cases we successfully achieved our planning and refurbishmentobjectives, enabling the release of capital for new investment opportunities. Board Changes------------- Having spent the best part of 35 years as Managing Director and latterly asChairman, and having overseen the period of change and renewal of the executiveand non-executive management teams including the retirement of my long standingcolleagues, it is now time for me to stand down and I shall be retiring from theBoard at the conclusion of this year's Annual General Meeting. I leave the Groupin excellent health with an exciting future ahead of it, and I will follow itsfortunes with great interest as a shareholder. I am delighted to say that following the Board's invitation, David Thomas, whojoined us in 2005 as a non-executive Director, will take over from me asChairman. David, who is a chartered accountant with substantial businessexperience, is well qualified to lead the Board and to encourage Simon Perkinsand his highly competent team to even greater heights and in this I have greatconfidence. Future Prospects---------------- The substantial growth in property values seen over the last few years nowappears to be slowing but while there still remains a wide range of investors inthe market, the prospect of a serious downward price adjustment seems unlikely.Performance over the next few years will therefore be more reliant on generatingrental growth from development together with good asset management, which areareas where the Group has consistently demonstrated its skills. As one of fourteen UK REITs so far established, the improvement in the Group'sprofile is likely to increase awareness from investors as well as from withinthe property marketplace itself, assisting in the identification of newopportunities for investment. With this benefit added to the quality of theportfolio and the opportunities it presents, the Board is confident that theGroup will continue to prosper. E.S.G. Lloyd7th June 2007 PROPERTY AND FINANCIAL REVIEW -----------------------------Portfolio Review---------------- The Group concentrates on developing top quality office and industrialbuildings, and undertaking comprehensive refurbishments in established andimproving market areas mainly within London and the South East of England. Theemphasis on quality in design and construction maximises the chances of securinglonger leases to prime tenants and minimises potential future obsolescence. Theweighted average lease length within the portfolio is nine years and 55% of allcontracted rents are paid by Government tenants or those with the highest Dunand Bradstreet credit rating. The Group's portfolio consists of 32 properties with a value at 31st March 2007of £351.27 million (2006 - £303.18 million). The portfolio totals 1.19 millionsq ft, of which 74% has been either developed or extensively refurbished by theGroup and subsequently held and actively managed for long term growth ratherthan being traded on. The balance is generally made up of properties acquiredwith future development potential. Income------ Gross rental income during the year increased by 9.8% to £17.31 million. Netrental income from investment properties, excluding surrender premiums,increased by 11.6% to £16.38 million. A reduction in rents receivable of£770,000 from those properties sold or being refurbished was compensated for by£628,500 of rental income from acquisitions. The increase in rental income waspredominantly due to a full year's rental contribution from Wimbledon Gate, SW19(offices and retail - 58,690 sq ft) and 1 Old Queen Street, SW1 (offices -21,785 sq ft); the Group's two major development projects completed and let atthe end of the last financial year. During the year, the ground floor retailunit at Wimbledon Gate was let on a lease co-terminus with the office floorspace, leaving the scheme fully occupied and income producing. On other previously completed schemes, a letting of the whole of Pegasus Three(offices - 16,400 sq ft) was secured during the year to a good covenant on a 15year unbroken lease. The contracted rent of £377,635 pa represented an improvedrental level for Pegasus Place, where only two floors of Pegasus One, totalling9,966 sq ft, remain available. At Bartley House, Hook (offices - 21,705 sq ft),the ground floor totalling 10,650 sq ft, which has proved difficult to let dueto poor market conditions along the M3 corridor, is now in solicitors' hands asa result of the improving level of demand in that area. Elsewhere within the portfolio, refurbishment work and landscape improvements atOakwood Trade Park, Crawley (53,355 sq ft) and the Three Acre and Five AcreIndustrial Estates in Folkestone (106,215 sq ft) continue to generate improvedrental values on lettings and renewals. The profile of the Folkestone units hasalso been improved by the opening of a major B&Q outlet on adjacent land. At the beginning of the year, 12,400 sq ft was let at Chancery House, Sutton(offices - 54,615 sq ft) following the refurbishment of the common areas andvacant office floors. Rents in the building had remained static for some timealong with low levels of occupational demand. As these new lettings resulted inonly 2,400 sq ft remaining vacant, the decision was taken to market the freeholdof the property and a price of £13.33 million was achieved. This compared with abook value of £5.80 million at the time our joint venture partners' 80% interestwas acquired in 2004, following which the refurbishment was undertaken and thesuccessful letting programme launched. During the year, the opportunity was taken to let Paris House, Petersfield(industrial - 50,025 sq ft) on a five year lease at an average rent of £180,500pa. The planning authority was not prepared to support a residentialredevelopment of the property and the letting will allow time to influenceplanning policies affecting this edge of town centre site, whilst keeping theunit income producing. At the year end the portfolio's annualised rental income was £18.43 million. Thetotal rental value of the portfolio at current market rents is estimated to bein excess of £21 million. Development----------- The major office refurbishments of Dacre House, SW1 (17,025 sq ft) and Lotus 1(15,190 sq ft) and 2 (19,600 sq ft) Staines made good progress during the yearand in both cases generated early letting interest. At Dacre House, havinginstalled a new air conditioning system, surplus plant area was converted intoadditional office space and the reception and office floors were comprehensivelyupgraded. These works were completed last September and the marketing campaignhas now resulted in the letting of two floors totalling 5,165 sq ft, at acombined contracted rent of £236,000 pa. Both leases were completed close to theyear end, since when lettings in respect of the remaining three floors have beenput into solicitors' hands. At Lotus 1 and 2, Staines, the works have includednew roof coverings and external glazing, the addition of new reception areas,and a complete renewal of internal finishes. This refurbishment was completed inMay, but prior to this, terms were agreed in respect of a letting of Lotus 1 toa large international group on a 15 year lease with a tenant break clause at theend of the 10th year at a rent of £425,180 pa. This lease has now completed andthere has been an encouraging response to the marketing campaign which is nowunderway in respect of Lotus 2. The next major scheme under consideration within the portfolio is theredevelopment of 30/32 Lombard Street EC3 (36,140 sq ft). A planning applicationwas submitted last September and, after productive negotiations regarding theproposed design in the context of one of the City's more sensitive architecturalareas, is likely to be considered by the City Corporation later this month witha recommendation for approval. The final design is a striking contemporaryoffice scheme of approximately 60,000 sq ft with traditional materialscomplementing predominantly glazed facades. Flexible leases have been negotiatedwith occupiers within the existing building to facilitate an early start. Valuation--------- The annual external valuation of the Group's portfolio as at 31st March 2007 was£351.27 million, resulting in a £43.55 million surplus over book valuerepresenting an increase of 14.2%. The weight of money, limited stock, andimproved prospects for rental growth all combined to reduce further the yieldspurchasers were prepared to accept, resulting in a steady increase in valuesduring the year. A combination of improved yield and income levels fromlettings, management and future reversions produced a strong result, especiallyfrom the London properties where demand from investors has been particularlygood. The contribution from Dacre House, SW1 and Lotus Park, Staines, whichtogether added £9.36 million, reflects the success of these refurbishmentprojects. Elsewhere, the value of our recent schemes at Pegasus Place, Crawley,1 Old Queen Street, SW1 and Wimbledon, SW19 increased by £10.80 million,demonstrating the success of our policy of developing and maintaining buildingsof quality, particularly in this market. Finance------- On 1st April 2007 McKay Securities PLC converted to REIT status. The Group willremain tax exempt provided it does not breach the specified REIT conditions.Accordingly, the 2007 accounts include a provision of £7.02 million for theconversion charge, which will be paid in four quarterly instalments beginning inOctober 2007. The accounts also include the release of £39.18 million ofdeferred tax, being £24.61 million previously provided for as at 31st March2006, and £14.57 million charged for 2007. At 31st March 2007, the Group's net debt was £110.77 million (2006 - £107.94million) representing 47% of shareholders' funds (2006 - 65%). The reduced levelof gearing is due to an increase in shareholders' funds arising predominantlyfrom the release of the deferred tax following the conversion to REIT status andthe surplus over book cost on re-valuation of the portfolio. The increase indebt in the year was mainly due to the purchase of Watermans Court, Staines andCorinthian House, Croydon and capital expenditure of £5.54 million incurred inthe refurbishments of Lotus Park, Staines and Dacre Street, SW1. After takinginto account the contribution from sales of £22.57 million (2006 - £5.55million), the net cost of investment in the portfolio for the year was £0.94million (2006 - £36.01 million). Total banking facilities available to the Group increased during the year by £7million to £150 million, as a result of the renegotiation of two of the Group'sfacilities. If fully drawn, balance sheet gearing would increase to 64% (2006 -86%). The loan to value ratio as at 31st March 2007 was 32% (2006 - 36%). Netcash flow from operating activities was £1.88 million (2006 - £9.15 million).At the year end, 80% (2006 - 64%) of the Group's facilities had a maturity inexcess of 5 years. Short term flexibility is achieved by overdraft and a varietyof interest rate periods. The tax figure for the year appearing in the Income Statement shows a credit of£16.72 million. This can be analysed between current tax of £2.96 millionpayable, the REIT conversion charge of £7.02 million, a tax credit for the yearof £24.61 million due to the reversal of the deferred tax provision which is nolonger payable under the REIT regime, and a further credit of £2.09 millionrepresenting deferred tax written back on disposals during the year. The currenttax charge as a percentage of adjusted profit before tax is 12.1% mainlyreflecting the benefit of capital allowances claimed on plant and machinery inthe investment portfolio and interest capitalised on developments. Interest cover, based on adjusted profit before tax plus finance costs as aratio to finance costs, was 2.0 (2006 - 2.3). The average cost of borrowing forthe year was 5.8% (2006 - 5.9%). The main financial risks to the Group are tenant default, liquidity risk andinterest rate risk. Tenant default is monitored using Dun and Bradstreet creditchecks for each new tenant, together with ongoing credit checks and strictcredit control. Protection against the latter two risks is provided by financialhedging instruments and at the year end £110 million (99% of net debt at theyear end) was protected by interest rate swaps with maturities ranging between2015 and 2020, compared with £80 million (74%) last year. If bank borrowingfacilities were fully drawn, cover would be 73% (2006 - 56%). This increase inhedging instruments was considered prudent given the Group's increased borrowinglevels and provides strategic protection at competitive levels over the mediumto long term. The Group does not hedge account its interest rate derivatives andtherefore includes the movement in fair value in the Income Statement. S.C. PerkinsA.S. Childs7th June 2007 The summary of the consolidated results of McKay Securities PLC and its subsidiary undertakings (the "Group") for the year ending 31st March 2007 are as follows: GROUP INCOME STATEMENT For the year ended 31st March 2007 2007 2006 --------------------------------- Notes £'000 £'000 Gross rents and service charges receivable 20,295 18,353 Surrender premiums received 101 3,700 --------- --------- 20,396 22,053 Direct property outgoings (3,917) (3,684) --------- --------- Net rental income from investment properties 2 16,479 18,369 Administration costs (4,008) (3,288) --------- --------- Operating profit before gains on investment 12,471 15,081 properties Profit on disposal of investment properties 3,592 167 Movement on revaluation of investment properties 41,967 35,247 --------- --------- Operating profit 58,030 50,495 Finance costs 4 (1,218) (5,344) Finance income 116 50 Share of results of associated undertaking 527 807 --------- --------- Profit before taxation 57,455 46,008 --------- --------- Taxation - charge for the year 5 (15,445) (12,719) - REIT conversion 5 32,164 - --------- --------- 16,719 (12,719) --------- --------- Profit for the year 74,174 33,289 --------- --------- Earnings per share 6 Basic 162.26p 73.06p Diluted 160.28p 72.43p Adjusted earnings per share figures are shown in note 6. Dividends Previous year's final dividend of 6.8p (2006 - 6.2p) paid during the year 3,101 2,824 Interim dividend of 3.6p (2006 - 3.4p) paid during the year 1,648 1,549 Proposed final dividend of 7.4p (2006 - 6.8p) 3,389 3,101 STATEMENT OF RECOGNISED INCOME AND EXPENSEFor the year ended 31st March 2007------------------------------------------ 2007 Group Company £'000 £'000 Actuarial movement on defined benefit pensionscheme 202 202 ---------- ----------Net income recognised directly in equity 202 202Profit for the year 74,174 86,129 ---------- ----------Total recognised income and expense 74,376 86,331 ---------- ---------- 2006 Group Company £'000 £'000 Actuarial movement on defined benefit pensionscheme 370 370Related deferred tax (111) (111) ---------- ----------Net income recognised directly in equity 259 259Profit for the year 33,289 26,935 ---------- ----------Total recognised income and expense for the year 33,548 27,194 ---------- ----------Adoption of IAS 39 285 285Deferred tax on adoption of IAS 39 (83) (83) ---------- ----------Total recognised income and expense 33,750 27,396 ---------- ---------- GROUP BALANCE SHEETFor the year ended 31st March 2007 2007 2006---------------------------------- Notes £'000 £'000 Non-current assetsInvestment properties 351,110 304,687Plant and equipment 48 73Investments 6,092 5,700 ---------- ---------- 357,250 310,460 ---------- ----------Current assetsTrade and other receivables 7 9,571 3,633Cash and cash equivalents 703 1,838 ----------- ----------- 10,274 5,471 ----------- -----------Total assets 367,524 315,931 ----------- -----------Current liabilitiesLoans and other borrowings 8 - (15,016)Corporation tax payable 5 (8,646) (274)Trade and other payables 8 (6,990) (8,260) ----------- ---------- (15,636) (23,550) ----------- ---------- Non-current liabilitiesLoans and other borrowings 8 (111,139) (94,543)Pension fund liabilities (332) (701)Finance lease liabilities (4,427) (4,469)Deferred tax - (26,708) ----------- ----------- (115,898) (126,421) ---------- -----------Total liabilities (131,534) (149,971) ----------- -----------Net assets 235,990 165,960 ---------- ----------- EquityCalled up share capital 9,159 9,122Share premium account 2,495 2,208Capital reserves 49,502 36,065Revaluation reserve 120,139 87,599Retained earnings 54,695 30,966 ----------- -----------Total Equity 235,990 165,960 ----------- ---------- Net asset value per share 9 515p 364p Adjusted net asset value per share 9 506p 421p GROUP CASH FLOW STATEMENTFor the year ended 31st March 2007 2007 2006---------------------------------- £'000 £'000 Operating activitiesProfit before tax 57,455 46,008Adjustments for:Depreciation and other non-cash movements 384 417Profit on disposals of investment properties (3,592) (167)Movement in revaluation of investment properties (41,967) (35,247)Net finance costs 1,102 5,294Share of profit of associate undertaking (527) (807) --------- ----------Cash flow from operations before changes in workingcapital 12,855 15,498Increase in debtors (1,398) (606)Increase/(decrease) in creditors (1,438) 1,636 --------- ----------Cash generated from operations 10,019 16,528Interest paid (6,375) (6,294)Interest received 99 37Corporation tax paid (1,863) (1,126) --------- ---------Cash flows from operating activities 1,880 9,145 --------- --------- Investing activitiesSale of investment properties 22,572 5,547Dividends from sundry investments 1 1Dividends from associated undertaking 135 126Purchase and development of investment properties (22,818) (39,503)Purchase of other fixed assets (19) (52) --------- ---------Cash flows from investing activities (129) (33,881) --------- --------- Financing activitiesProceeds from issue of share capital 324 104Increase in borrowings 1,539 28,572Equity dividends paid (4,749) (4,373) --------- ---------Cash flows from financing activities (2,886) 24,303 --------- --------- Net decrease in cash and cash equivalents (1,135) (433)Cash and cash equivalents at the beginning of the 1,838 2,271year --------- --------Cash and cash equivalents at the end of the year 703 1,838 --------- -------- Notes forming part of the Group financial statements ---------------------------------------------------- 1. The financial information set out in this preliminary announcement does not constitute the Company's statutory accounts for the year ended 31st March 2007 but is derived from those accounts. Statutory accounts for 2006 have been delivered to the Registrar of Companies, and those for 2006 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985. In accordance with Section 230 of the Companies Act 1985 a separate income statement for McKay Securities PLC is not presented. The profit after tax of the Company is £86,129,000 (2006 - £27,855,000). 2. Net rental income from investment properties -------------------------------------------- 2007 2006 £'000 £'000 Gross rents receivable 15,724 15,150 SIC 15 adjustment 1,583 623 --------- --------- Gross rental income 17,307 15,773 Service charges receivable 2,988 2,580 --------- --------- 20,295 18,353 Surrender premium received 101 3,700 Direct property outgoings (3,917) (3,684) --------- --------- 16,479 18,369 --------- --------- The Group engages in only one class of business activity, being property investment and development. Rent receivable under the terms of the leases is adjusted, in accordance with SIC 15, for the effect of any incentives given. 3. Adjusted profit before tax -------------------------- Adjusted profit before tax is the Group's preferred measure to provide a clearer picture of recurring profits from core rental activities before tax, adjusted as set out below. 2007 2006 £'000 £'000 Profit before tax 57,455 46,008 Surrender premium received (101) (3,700) Change in fair value of derivatives (4,206) 263 Movement in revaluation of investment (41,967) (35,247) properties Profit on disposal of investment properties (3,592) (167) Associated undertaking disposals and revaluation (369) (588) movement --------- ---------- Adjusted profit before tax 7,220 6,569 --------- ---------- 4. Finance costs ------------- 2007 2006 £'000 £'000 Interest on bank overdraft and loans 5,943 5,930 Finance lease interest on leasehold property 287 289 obligations Finance arrangement costs 41 15 Other interest - 8 --------- --------- 6,271 6,242 Capitalised interest (847) (1,161) --------- -------- 5,424 5,081 --------- -------- Fair value (gains) / losses on derivatives (4,206) 263 --------- -------- 1,218 5,344 --------- -------- 5. Taxation -------- 2007 2006 £'000 £'000 Analysis of charge in period: Current tax: UK corporation tax on profits for the period 3,344 712 Adjustments in respect of prior periods (380) - -------- -------- 2,964 712 -------- -------- Deferred tax: Origination and reversal of temporary 1,984 1,178 differences On property valuation surpluses 12,590 10,829 Released on property disposals during the year (2,093) - --------- -------- 12,481 12,007 --------- -------- 15,445 12,719 --------- -------- REIT conversion charge 7,025 - Deferred tax released on conversion to REIT (39,189) - status --------- -------- Total tax (credit) / charge in the income (16,719) 12,719 statement --------- -------- Reconciliation to effective rate of tax: Profit on ordinary activities before tax 57,455 46,008 --------- --------- Tax on profit at 30% (2006 - 30%) 17,237 13,802 Effects of: REIT conversion charge 7,025 - Deferred tax released on conversion to REIT (39,189) - status Permanent timing differences (35) 11 Associated company (158) (242) Sales of investment properties (1,219) (79) Movement on revaluation of investment - (773) properties Adjustment to tax charge in respect of prior (380) - years -------- -------- Tax (credit) / charge for period (as above) (16,719) 12,719 -------- -------- Factors affecting future tax rate: McKay Securities PLC converted to Real Estate Investment Trust (REIT) on 1st April 2007 and no corporation tax is expected to become payable on future income or capital gains. The current Group corporation tax of £8,646,000 (2006 - £274,000) represents the tax payable for current and prior periods and the REIT conversion charge provided in the period, less payments made. 6. Earnings per share ------------------ 2007 2006 p p Earnings per share 162.26 73.06 Deferred tax on capital 0.83 2.12 allowances Surrender premium received (0.15) (8.12) Change in fair value of (9.20) 0.59 derivatives Movement in revaluation of (64.27) (53.59) investment properties Profit on disposal of investment properties after (7.08) (0.37) taxation Associated undertaking disposals and revaluation (0.81) (1.29) movement REIT entry charge 15.37 - Write back of deferred tax (82.22) - provision -------- -------- Adjusted earnings per share 14.73 12.40 -------- -------- Earnings per share on ordinary shares are based on earnings after tax of £74,174,000 (2006 - £33,289,000) and 45,711,784 (2006 - 45,561,331) shares, being the weighted average number of ordinary shares in issue during the period. Reconciliation of earnings per share to diluted earnings per share: EPS EPS Number 2007 2006 of shares p p Weighted number of ordinary 45,711,784 162.26 73.06 shares in issue Number of shares under option 1,445,442 (4.97) (2.27) Number of shares that would have (879,580) 2.99 1.64 been issued at fair value --------------- --------- --------- 46,277,646 160.28 72.43 --------------- --------- -------- 2007 2006 p p Diluted earnings per share 160.28 72.43 Deferred tax on capital 0.82 2.10 allowances Surrender premiums received (0.15) (8.05) Change in fair value of (9.09) 0.56 derivatives Movement in revaluation of (63.48) (53.12) investment properties Profit on disposal of investment properties after (6.99) (0.36) taxation Associated undertaking disposals and revaluation (0.80) (1.28) movement REIT entry charge 15.18 - Write back of deferred tax (81.22) - provision -------- -------- Adjusted diluted earnings per 14.55 12.28 share -------- -------- Diluted earnings per share are based on the same earnings after tax and on the weighted average number of shares in issue during the year of 46,277,646 (2006 - 45,962,697) shares, which takes into account the number of potential ordinary shares arising from the exercise of share options. Adjusted earnings per share excludes the after tax effect of profit from the disposal of investment properties, surrender premiums received, the change in the fair value of derivatives and the movement in revaluation of investment properties, as well as the deferred tax provided on capital allowances and investment properties, where no tax payment is expected to crystallise. The 2007 earnings per share is further adjusted for the write back of deferred tax provision on entry into the REIT regime less the entry charge. 7. Trade and other receivables --------------------------- 2007 2006 Group Company Group Company £'000 £'000 £'000 £'000 Rents receivable 8 6 221 23 Amounts due from - 21,884 - 12,903 subsidiary undertakings SIC 15 lease incentives 4,279 4,235 2,695 2,652 Interest rate derivatives 4,228 4,228 22 22 Other debtors and 1,056 577 695 280 prepayments -------- --------- -------- -------- 9,571 30,930 3,633 15,880 -------- --------- -------- -------- All the above debtors are receivable within one year except for lease incentives of £3,998,000 (2006 - £2,443,000), accrued in accordance with SIC 15. 8. Liabilities ----------- 2007 2006 Group Company Group Company Loans and other borrowings £'000 £'000 £'000 £'000 Bank loans 111,490 111,490 109,765 103,415 Loan notes - - 13 13 Bank facility fees (351) (351) (219) (219) ---------- ---------- ----------- ----------- 111,139 111,139 109,559 103,209 ---------- ---------- ----------- ----------- Analysed as follows: Current liabilities - - 15,016 14,616 Non-current liabilities 111,139 111,139 94,543 88,593 ---------- ---------- ----------- ----------- 111,139 111,139 109,559 103,209 ---------- ---------- ---------- ----------- Trade and other payables Rent received in advance 3,528 2,617 3,271 2,392 Other taxation and social 255 255 848 848 security costs Amounts owed to subsidiary - 6,338 - 26,495 undertakings Other creditors and accruals 3,207 2,237 4,141 2,700 -------- --------- ---------- ---------- 6,990 11,447 8,260 32,435 -------- --------- ---------- ---------- The analysis of unsecured loan notes and short term loans, and bank loans which are secured on certain of the freehold and leasehold properties of the Group is as follows: 2007 2006 £'000 £'000 Company Secured bank loans repayable at stated dates between 2011 and 2017 at 111,490 103,415 variable rates Unsecured loan notes - 13 Bank facility fees (351) (219) ----------- ---------- 111,139 103,209 Subsidiary undertakings Secured bank loans - 6,350 ----------- ---------- 111,139 109,559 ----------- ---------- The bank loans are secured against land and buildings with a carrying amount of £289,330,000 (2006 - £217,246,000). 2007 2006 Repayable in: Group Company Group Company £'000 £,000 £'000 £'000 Less than 1 year - - 15,016 14,616 1-2 years - - 5,928 (22) 2-5 years 20,000 20,000 24,334 24,334 5-10 years 91,139 91,139 48,281 48,281 More than 10 years - - 16,000 16,000 ---------- ----------- ---------- ---------- 111,139 111,139 109,559 103,209 ---------- ---------- ---------- ---------- Borrowing facilities The Group has various undrawn committed borrowing facilities. The facilities available in respect of which all conditions precedent had been met were as follows: 2007 2006 £'000 £'000 Expiring in less than 1 year - - Expiring in 1 - 2 years - - Expiring in 2 - 5 years 10,000 5,600 Expiring in 5 - 10 years 28,510 23,610 Expiring in more than 10 - 4,000 years --------- --------- 38,510 33,210 -------- -------- Exposure to credit and interest rate risks arise in the normal course of the Group's business. Derivative financial instruments are used to reduce exposure to interest rate fluctuations. There are no material unrecognised gains and losses on instruments used for hedging. Credit risk Credit evaluations are performed on all tenants looking to enter into a lease or pre-lease agreements with the Group. In certain cases the Group will require collateral to support these lease obligations. These might be in the form of cash rental security deposits, bank rental guarantee or a parent company guarantee. At the balance sheet date there were no significant concentrations of credit risk. The maximum exposure to credit risk is represented by the carrying amount of each financial asset including derivative financial instruments on the balance sheet. The group has no exposure to currency risks. Hedging The Group adopts a policy of ensuring that its exposure to interest rate fluctuations is mitigated by the use of financial instruments. Participating swaps and interest rate swaps have been entered into to achieve this purpose. The swaps mature over the next 14 years, matching the maturity of the related loans and have swap rates ranging from 3.99% to 5.07% and collars ranging from 2.49% to 5.07%. The Group does not hold or issue derivative financial instruments for trading purposes. Swaps for Group and Company Fair Hedged Average Fair value amount Average maturity value adjustment As at 31st March £'000 rate - years £'000 £'000 2007 Interest rate 70,000 4.60% 11.30 (2,122) 3,294 swaps Interest rate 40,000 4.97% 10.47 (2,213) 741 caps Interest rate 40,000 2.98% 10.47 107 171 floors -------- -------- (4,228) 4,206 -------- -------- Fair Hedged Average Fair value amount Average maturity value adjustment As at 31st £'000 rate - years £'000 £'000 March 2006 Interest rate 40,000 5.01% 10.41 1,172 (1,172) swaps Interest rate 40,000 5.01% 10.41 (1,472) 1,472 caps Interest rate 40,000 2.80% 10.41 278 (278) floors -------- -------- (22) 22 -------- -------- In both 2007 and 2006 there was no difference between the book value and the fair value of all the other financial assets and liabilities of the Group and Company. Set out below is the interest rate profile of the Group after taking into account the interest rate hedging instruments: 2007 2006 £'000 £'000 Fixed rate - 6,350 Floating rate 1,138 23,209 Hedged 110,000 80,000 ---------- ---------- 111,138 109,559 ---------- ---------- Weighted average cost of 5.8% 5.9% borrowing ------- ------- The Group does not hedge account its interest rate derivatives and therefore states them at fair value in the income statement. The Group has no liabilities at maturity on the above financial instruments. The above fair values are based on quotations from the Group's banks. 9. Net asset value per share ---------------------------------- 2007 2006 Net asset Net asset Net value Net Value Asset Shares per share Assets Shares per share £'000 £'000 p £'000 £'000 P Basic 235,990 45,793 515 165,960 45,609 364 Deferred tax on capital allowances - - - 6,308 - 14 Deferred tax on revaluation - - - 19,600 - 43 Adjustment to fair value of derivatives (4,228) - (9) (15) - - ----------- --------- ---------- ----------- --------- ------ Adjusted 231,762 45,793 506 191,853 45,609 421 Number of shares under option 3,874 1,553 (8) 3,104 1,479 (7) ---------- -------- ----- ---------- -------- ----- Adjusted diluted 235,636 47,346 498 194,957 47,088 414 ---------- -------- ----- ---------- --------- ----- The net asset value per share at 31st March 2007 disregarding the tax effects on conversion to REIT status would have been 445 pence. 10. The Report and Financial Statements will be posted to shareholders on 26th June 2007 with copies available from the Group's registered office at 20 Greyfriars Road, Reading, RG1 1NL from the same date, and from the Group's website www.mckaysecurities.plc.uk -------------------------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MCKS.L