Half Year Results

McKAY DELIVERS COMPLETED DEVELOPMENT SCHEMES

AND GROWTH IN RENTAL INCOME

McKay Securities PLC, the Real Estate Investment Trust (REIT) specialising in South East and London office and industrial property, today announces its half year results for the six months ended 30 September 2016.

Financial Highlights

· Adjusted profit before tax up 11.8% to £4.42 million (30 September 2015: £3.96 million)

· Gross rental income up 2.4% to £10.42 million (30 September 2015: £10.17 million)

· EPS (EPRA) up 10.3% to 4.3 pence per share (30 September 2015: 3.9 pence per share)

· IFRS loss before tax of £3.78 million (30 September 2015: £34.59 million profit)

· NAV (EPRA) 295 pence per share, down 2.0% (31 March 2016: 301 pence per share)

· Loan to Value ratio of 31.4% (31 March 2016: 28.9%)

· Interim dividend of 2.7 pence per share (2015: 2.7 pence per share)

Portfolio Highlights

· Overall increase in property portfolio value of 3.2% (£12.71 million) to £413.88 million

· 0.7% (£3.07 million) property valuation deficit

· 2.4% (£0.77 million pa) increase in ERV to £32.21 million

· Initial portfolio yield of 5.1%, with reversionary potential of £9.77 million pa, taking the portfolio yield to 7.3%

· Redevelopment schemes in Reading and Redhill completed and being marketed

· Redevelopment of 30 Lombard Street, EC3 on schedule for completion in Q1 2018

Simon Perkins, Chief Executive Officer of McKay, said:

"Delivery of our growth strategy remains on programme, with encouraging progress over the period crystallising and consolidating the significant income potential within our existing portfolio. With our proactive portfolio management, contracted rental income has increased by 6.4% to £22.45 million pa and the full potential rental value of the portfolio has increased by 2.4% to £32.76 million pa.

There is therefore still significant potential in the portfolio, which comes a step closer with the completion of our development schemes in Reading and Redhill. Release of the full 44% portfolio reversion of £9.77 million pa would take our portfolio yield from 5.1% to 7.3% at current values.

The property market generally suffered a loss of confidence following the EU referendum result, but more recently, we have seen markets stabilise and improved recognition in our core markets of the attraction of property as an asset class.

The South East office occupier market remains governed by positive fundamentals, with low levels of supply of Grade A quality space and a limited development pipeline. Yet occupiers are increasingly facing building obsolescence issues that will continue to underpin demand and new requirements.

We are well financed and have the ability to generate growth from the busy programme of development and refurbishment projects and management initiatives within our existing portfolio. The world is a more uncertain place than it was a few years ago, but despite this, McKay is in good shape to continue to deliver value for our shareholders."

-ends-

Date: 15th November 2016

MCKAY SECURITIES PLC

INTERIM RESULTS

15TH NOVEMBER 2016

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CHAIRMAN'S STATEMENT

· Profit before tax, adjusted to exclude unrealised movements in the value of the Group's property portfolio and other non-cash items, increased by 11.8% to £4.42 million for the six month period to 30th September 2016 (30th September 2015: £3.96 million).

· The independent valuation of the Group's property portfolio at 30th September 2016 totalled £413.88 million, resulting in a £3.07 million (0.7%) valuation deficit for the period (30th September 2015: £26.36 million / 7.1% surplus). The negative value of the Group's remaining interest rate hedging instrument increased by £4.59 million to £27.00 million (30th September 2015: £4.74 million decrease).

· Inclusion of these, and other, unrealised items resulted in a loss before tax (IFRS) of £3.78 million (30th September 2015: £34.59 million profit).

· Net asset value per share (EPRA) reduced over the period by 2.0% to 295 pence (31st March 2016: 301 pence). IFRS net asset value per share reduced by 3.9% to 269 pence (31st March 2016: 280 pence).

· The Board has declared an interim dividend of 2.7 pence per share (2015: 2.7 pence).

Overview

In my first statement as Chairman, I am pleased to report that good progress has been made over the period towards our objective of realising the substantial income potential from our existing portfolio in order to increase distributable profits, despite the market reaction to the EU referendum vote.

The result of the referendum, midway through the period, caused a loss of confidence in the property market generally at that time. Since then, the UK economy has fared better than many expected, and capital and rental values have stood up well in our core South East and London markets. A reduction in capital values of just 0.7% and rental growth of 2.5% over the period out-performed market indices and highlights the benefit of the investment we continue to make in upgrading our properties and the resilient characteristics of our portfolio.

As a result of continued letting progress and rent reviews, contracted rental income increased by 6.4% to £22.45 million pa over the period, and rental growth increased the full potential rental value of the portfolio (ERV) to £32.21 million pa.

The potential to crystallise a significant proportion of the 43.5% portfolio reversion of £9.77 million pa has improved with completion of our office development projects at Reading and Redhill, which have a combined rental value of £2.61 million pa. These both now offer high quality, modern business space in established centres and our letting agents have recently started marketing the completed buildings.

This programme has resulted in continued growth in our rental income which increased by 2.4% to £10.42 million (30th September 2015: £10.17 million), despite the loss of income from disposals made last year. This increase was the main contributor to the 11.8% increase in adjusted profit before tax, our measure of recurring earnings.

Market Review

Investment volumes across our markets were lower over the period than in recent times. Whilst this was due in part to the referendum, a slowdown in the pace of investment was expected as the market recovery matured and the prospect of cyclical gains reduced. Property returns remain attractive, and with the devaluation of sterling there has been continued appetite from overseas buyers, particularly in London, as well as the emergence of other buyers outside London, such as local authorities. As a result, the decline in capital values to date has generally been limited, particularly for prime assets with secure income.

Low supply levels of new and grade A buildings in our markets continue to limit occupier choice. This fundamental issue is supporting headline rental growth for the best available floor space. A positive consequence of the uncertainty regarding the implications of the referendum result is the likely constraint on the development pipeline, reducing the risk of oversupply.

Within the South East office market, which accounts for 59.9% of the portfolio by value, the supply of new and grade A buildings remains low at 6.2 million sq ft, representing 7.2% of the total office supply. The vacancy rate for new buildings is lower still at 2.2 million sq ft (2.6%).

For the year to date, occupier take up of floor space within this market totalled 1.62 million sq ft, of which 1.42 million sq ft was in new and grade A buildings. This is the same level as recorded at this stage last year and 14.1% ahead of the five-year average for the same period. With 0.56 million sq ft under offer, occupier take up for the full year is expected to be similar to the 2.13 million sq ft recorded last year, and ahead of the five-year average of 1.88 million sq ft. Continued occupier demand is encouraging, but we anticipate the referendum may result in the short term deferral of larger strategic requirements over 60,000 sq ft. However, there are many positive factors still at play in our markets and the opening of the Elizabeth Line (Crossrail) in 2018 and the likelihood of higher business rates are likely to play an increasingly important part in attracting occupiers from London. In any event, our vacant properties are below 60,000 sq ft, and lease events and building obsolescence are likely to continue to generate new requirements in this smaller size band, which accounted for 79.2% of all occupier take up in 2015.

Within the City of London, the referendum has raised uncertainty regarding future occupier demand, particularly from the banking sector. Take up levels for 2016 are expected to be lower than the above average levels of the last two years, but constrained supply continues to support rental values. Capital values are generally lower, but as with other markets, the extent depends on the nature of the asset.

Portfolio Income and Leasing Activity

Over the period, we completed ten open market lettings with a combined contracted rental value of £0.73 million pa. This was 5.7% ahead of March 2016 ERV, with the work referred to below helping secure new rental highs in our buildings at Croydon, Woking, Brentford and Maidenhead.

At lease break and lease expiry, seventeen out of twenty tenants were retained, which maintained a high retention rate of 85.0% and secured rents of £0.58 million pa. Of this, leases renewed on expiry accounted for £0.25 million pa, which was 0.6% ahead of ERV and 18.5% ahead of the previous passing rent.

After taking this leasing activity into account, portfolio occupancy at the end of the period increased from 92.8% to 93.9%, and from 74.2% to 75.5% with the inclusion of the three development properties referred to below.

The outstanding February 2016 rent review at Wimbledon Gate, Wimbledon was settled during the period at a rent of £2.35 million pa, equivalent to £43.00 psf. Wimbledon has benefited from the ripple effect of higher rental values from central London, and the building, which was constructed by the Group in 2005, remains one of the best in the town. The uplift was a substantial £0.80 million pa (51.6%) over the passing rent and a 13.7% increase over 31st March 2016 ERV.

The portfolio ERV, which ended the period at £32.21 million pa, retains significant potential with vacant properties totalling £1.96 million pa, three development properties totalling £5.94 million pa and potential rental uplifts at rent review and lease expiry of £1.87 million pa.

Refurbishment Projects

Refurbishment of Unit 5 (8,364 sq ft) at Switchback Office Park, Maidenhead completed in early September. Prior to completion, the top floor was pre-let on a 10-year lease at a rent of £0.11 million pa, equating to £26.75 psf. This is the last building to be refurbished on the 37,450 sq ft Park, and the highest rent achieved, leaving the ground floor (4,133 sq ft) as the remaining space to let.

Other portfolio refurbishment work progressed well over the period at Portsoken House, EC3; The Mille, Brentford and 1 Crown Square, Woking, which together represent 71.4% (£1.40 million pa) of the portfolio void. Completed and ongoing improvement works to common areas and vacant floor space have generated gains in ERV's and rents achieved on letting, and marketing is generating encouraging interest.

Following the completion of conversion works at the end of last year, Strawberry Hill House, Newbury has now been leased as a medical Surgery at a rent of £0.26 million pa for 25 years. 

Development Programme

Our current programme consists of three speculative office projects, which all made good progress over the period. When let, these schemes which represent 9.2% of the total portfolio by area and 18.5% by ERV will make a significant contribution to future earnings.

The major refurbishment at 9 Greyfriars Road, Reading (39,620 sq ft) completed in the summer. The scheme has achieved the first ever BREEAM Outstanding rating awarded outside London, and provides occupiers with a high quality, sustainable building less than five minutes walk from the recently upgraded mainline and Elizabeth Line railway station.

At Redhill, our new scheme (50,370 sq ft) on London Road completed shortly after the end of the period. It is the only new office building in Redhill, where vacancy rates are below 5% for good quality modern floor space. It sets a new benchmark in the southern M25 market with excellent environmental credentials and a high quality specification, providing flexible business space close to Redhill station, with excellent links to London and Gatwick.

In both cases, the marketing campaigns are generating viewings and early interest.

In the City of London, demolition of the 1960's office building (35,820 sq ft) at 30 Lombard Street is nearing completion. Construction of the striking replacement building (58,000 sq ft) in this core city location remains on programme for completion in mid-2018.

Valuation

The independent valuation of the Group's portfolio at 30th September 2016 totalled £413.88 million (31st March 2016: £401.17 million). After taking capital expenditure into account, this resulted in a 0.7% deficit for the period of £3.07 million overall. The IPD Monthly Index (All Property) deficit for the period was 3.7%. 

On a sector basis (excluding developments) the valuation result also out-performed IPD with a surplus for South East offices of 0.9% (IPD: deficit 6.2%), a deficit of 0.9% for London offices (IPD: deficit 4.8%), and a deficit of 1.0% for South East industrial properties (IPD: deficit 1.1%).

The portfolio initial yield was 4.7% (March 2016: 4.5%) increasing to 5.1% (March 2016: 5.0%) on the expiry of letting incentives. At ERV, the reversionary yield would be 7.3% (March 2016: 7.4%). The equivalent yield was 6.4% (March 2016: 6.3%).

The outward shift in yield reflects market reaction to the uncertainty surrounding the outcome of the referendum vote. Initially there were concerns that values would fall across all market sectors, triggered by forced sales from many of the open ended funds. However, the market has evolved since and comparable evidence has indicated a more varied picture with some sectors and building types performing better than expected.

The portfolio valuation reflected this. Those properties with longer leases, variable lease expiries and limited outstanding refurbishment expenditure proved more resilient than those with short income and letting risk. Assumptions in relation to the development properties reflected market appetite to letting risk, and at 30 Lombard Street, EC3 also reflected that this project is the least progressed.

In addition, the benefit of recent and ongoing refurbishment work and the Wimbledon rent review was reflected in the 2.5% increase in portfolio ERV over the period, which was also ahead of the IPD Monthly Index increase of 0.7%. These rental gains helped offset the outward movement in yields.

Finance

EPRA net asset value per share, which excludes the negative value of hedging instruments, decreased by 2.0% to 295 pence since 31st March 2016 (301 pence).

IFRS net asset value decreased by £9.12 million to £252.11 million over the period and net asset value per share decreased by 3.9% to 269 pence. This was mainly due to a negative movement of £4.59 million in the value of the interest rate hedging instrument and the £3.07 million valuation deficit referred to above.

Drawn debt increased to £130.00 million (31st March 2016: £116.00 million), primarily due to development and refurbishment expenditure. The ratio of drawn debt to portfolio value (LTV) was 31.4% (30th September 2015: 33.1%), and the gearing ratio to shareholders' funds, adjusted in accordance with banking covenants, was 46.6% (30th September 2015: 49.9%). The average cost of debt increased to 4.78% during the period (31st March 2016: 4.35%) due to a higher proportion of drawn debt at fixed rather than floating rates.

Adjusted profit before tax of £4.42 million was 11.8% (£0.47 million) higher than the corresponding period last year. A significant proportion of this increase was the result of lettings and the settled rent review at Wimbledon Gate. These contributed to an increase of 2.4% in gross rental income for the period which totalled £10.42 million (30th September 2015: £10.17 million). Non recoverable property costs of £1.24 million were marginally lower than the corresponding period last year (30th September 2015: £1.25 million).

Administration costs of £2.98 million for the period were also marginally lower than the corresponding period last year (30th September 2015: £3.00 million).

Net finance costs reduced by £0.16 million to £2.12 million (30th September 2015: £2.28 million) benefitting from the level of capitalised interest increasing to £1.15 million (30th September 2015: £0.76 million).

IFRS profit before tax for the period, prior to any adjustments for unrealised items, shows a £3.78 million loss (30th September 2015: £34.59 million profit). The loss includes the revaluation deficit and the negative movement in the mark to market valuation of the interest rate hedging instrument.

The Board

There have been a number of changes to note over the period, including my own appointment as Chairman. I would like to thank David Thomas, my predecessor, for all his efforts over his eleven years with the Group, and for the healthy state which he has left business in.

We were pleased to welcome Jon Austen to the Board at the beginning of July as an independent non-executive Director. Jon, who qualified as a Chartered Accountant in 1981, has gained extensive experience in the property sector in a number of senior roles and most recently as Group Finance Director of Urban&Civic plc, and has been appointed Chairman of the Audit Committee.

Steven Mew, Portfolio Director, left the Board at the end of September after 15 years with the Group and we wish him well in his new role. Tom Elliott, who has joined us from Land Securities PLC, has taken on Steven's responsibilities.

Dividend

The Board is pleased to declare an interim dividend of 2.7 pence per share, which maintains the level of dividend paid for the same period last year. This will be paid as an ordinary dividend on 5th January 2017.

Outlook

We are fortunate to be in a strong position to grow the value of the portfolio and future earnings through our refurbishment and development initiatives, rather than needing to rely on market momentum alone.

The pace of this growth will be dependent on the health of the economy and in turn, tenant demand. However, with recent indicators suggesting that the economy has held up well, and with our existing portfolio focused in the most resilient economic regions of the UK, we look forward to delivering further shareholder value.

R. Grainger

Chairman

15th November 2016

1 Accounting policies

Basis of preparation

This condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union.

As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, the financial statements have been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated financial statements for the year ended 31st March 2016.

The comparative figures for the financial year ended 31st March 2016 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the Registrar of Companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matter to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

The Board approved the unaudited interim financial statements on 14th November 2016.

Identification of business risks

The Group's principal risks and uncertainties are consistent with those noted in the Annual Report for the year ended 31st March 2016 which include compliance with financial covenants on bank borrowing, tenant default, liquidity, interest rate hedging instruments and interest rate movements on bank borrowing. The Directors consider that the significant areas of judgement made by management that have significant effect on the Group's performance and estimates with a significant risk of material adjustment are valuation of investment properties and financial instruments. These are unchanged from those identified in the Annual Report for the year ended 31st March 2016.

Going concern

The Interim Report has been prepared on a going concern basis, which assumes the Group will be able to meet its liabilities as they fall due, for the foreseeable future. The Directors have prepared cash flow forecasts which show that the cash generated from operating activities will provide sufficient cash headroom for the foreseeable future.

The Group does not have any significant borrowing facilities expiring in the next 12 months. The Group is in full compliance with its borrowing covenants at 30th September 2016 and is expected to be in compliance for the next 12 months.

2 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.

Diluted (loss)/earnings per share is calculated on the same profit after tax and on the weighted average diluted number of shares in issue during the year of 94,377,357 (September 2015: 94,121,948 and March 2016: 94,306,634) shares, which takes into account the number of potential ordinary shares under option. No account has been taken in diluted (loss)/earnings earnings per share of potential ordinary shares in the period to 30th September 2016 where their conversion to ordinary shares would decrease the loss per share but is included to arrive at adjusted diluted earnings per share.

Adjusted (loss)/earnings per share excludes the after tax effect of profit from the disposal of investment properties, surrender premiums received (if any), the change in the fair value of derivatives and the movement in revaluation of investment properties. The EPRA measure includes all of these adjustments, except for surrender premiums which are added back.

In accordance with the Group's accounting policy on properties there was an external valuation at 30th September 2016. These valuations, were carried out by Mellersh & Harding LLP, Chartered Surveyors and Valuers. All valuations were carried out in accordance with the Appraisal and Valuation Standards of RICS, on an open market basis.

The fair value of interest rate derivatives has been split between current and non-current liabilities according to the expected timing of cashflows as follows:

The Group does not hedge account its interest rate derivatives and states them at fair value in the balance sheet based on quotations from the Group's banks, any movement passing through the Consolidated Profit or Loss and Other Comprehensive Income. All financial liabilities are classed as level 2 in accordance with the fair value hierarchy stated in IFRS 13. The fair value of these level 2 contracts are estimated by discounting expected future cash flows using current market interest rates and yield curve over the remaining term of the instrument.

There are no liabilities at maturity and no material unrecognised gains or losses.

In both 2016 and 2015 there was no difference between the book value and the fair value of all the other financial assets and liabilities of the Group.

Statement of the Directors Responsibilities

We confirm that to the best of our knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

· the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

S C Perkins

CEO

G P Salmon

CFO

15th November 2016