Half Yearly Report

Mucklow (A & J) Group plc

Half-Yearly Report

18 February 2015

Embargoed: 7.00am

Financial Summary

for the six months ended 31 December 2014

The interim dividend of £5.89m will be paid on 1 July 2015 to holders registered on 5 June 2015.

For further information please contact:

Rupert Mucklow, Chairman

David Wooldridge, Finance Director

A & J Mucklow Group plc

Tel: 0121 550 1841

Fiona Tooley

TooleyStreet Communications

Tel: 07785 703523

Chairman's Statement

I am pleased to report another strong performance by the Group for the first six months of our financial year. Pre-tax profit increased by 93% and net asset value per share by 9%.

Half-year Results to 31 December 2014

Statutory pre-tax profit for the first six months was £27.4m compared with £14.2m for the corresponding period last year.

The underlying pre-tax profit†, which excludes revaluation movements and profit on the sale of investment and trading properties, was £6.5m (31 December 2013: £6.3m).

EPRA net asset value* per Ordinary share increased by 32p to 390p at 31 December 2014 (30 June 2014: 358p). Shareholders' funds rose to £245.4m (30 June 2014: £225.0m), while borrowings net of cash amounted to £65.4m (30 June 2014: £66.8m). Debt to equity gearing was lower at 27% (30 June 2014: 30%).

Dividend

The Directors have declared an interim dividend of 9.31p per ordinary share, an increase of 3% over last year (31 December 2013: 9.04p). The dividend will be paid as a PID on 1 July 2015 to Shareholders on the register at the close of business on 5 June 2015.

Property Review

The improvement in regional occupier and investment markets that we reported in the previous half year to 30 June 2014 continued through to 31 December 2014, which has resulted in a lower vacancy rate, positive signs of rental growth and further yield compression.

We completed our 116,000 sq ft pre-let development at Apex Park, Worcester during the first half year, which was on time and budget. We also achieved a number of open market lettings on second hand industrial space at the highest rental levels we have achieved for 15 years. 

Property yields are still falling on the back of strong institutional demand and a shortage of investment stock. Our modern property portfolio is now valued on a 7.5% equivalent yield and continues to provide us with a variety of opportunities to add value and increase rental income. 

Regional Occupier Market

Our occupancy rate at 31 December 2014 had risen to 94.3% (30 June 2014: 93.3%) reflecting steady tenant demand for Midlands industrial property and a tight supply of available space. Quoting terms on new lettings have hardened. Rental levels have increased by at least 25p per square foot over the last six months and incentives have been reduced.

The most notable letting during the period was a 36,000 sq ft industrial unit at Redfern Park, Tyseley, Birmingham. The property was acquired with vacant possession in the previous half year for £1.54m, including stamp duty and has been refurbished by us to a high standard at a cost of £0.2m. The property was let in October 2014 on a 20 year lease without any breaks at a rent of £0.21m pa (£5.75 psf), which will provide new evidence for other lettings, rent reviews and lease renewals in the Birmingham area.

Development

Worcester Bosch are now occupying and paying rent (£0.72m pa) on their new 116,000 sq ft distribution depot at Apex Park, Worcester which completed in December 2014. The development has been very successful and we are now looking to progress other development opportunities in the Midlands.

A planning application will be submitted shortly on our 19 acre site at Tyseley, Birmingham. The site will accommodate 350,000 sq ft of industrial and warehouse buildings, ranging in size between 50,000 and 110,000 sq ft. We shall initially be targeting pre-let development when marketing commences.

Regional Investment Market

The Midlands industrial property market has become very popular with Institutional investors looking for an attractive income return with good prospects of rental growth. As a consequence, the equivalent yield on our investment portfolio has seen a 0.4% shift in the last six months from 7.9% to 7.5%, while the initial yield remains virtually unchanged at 6.9%.

We did not buy any investment properties during the first six months, but have subsequently acquired a modern 28,000 sq ft industrial investment at Meridian Park, Leicester for £2.1m. The property is let on a long lease at a rent of £0.15m pa and is located next to the M1 motorway.

Property Valuation

DTZ Debenham Tie Leung Ltd revalued our property portfolio at 31 December 2014. The investment properties and development land were valued at £323.7m (30 June 2014: £298.9m), which resulted in a revaluation gain of £20.9m (6.9%).

The initial yield on the investment properties was 6.9% (30 June 2014: 6.8%). The equivalent yield was 7.5% (30 June 2014: 7.9%). Our industrial property increased in value by 8.4%; offices by 5.8% and retail property by 3.1%.

DTZ Debenham Tie Leung Ltd also revalued our trading properties at 31 December 2014. The total value was £1.9m, which showed an unrecognised surplus of £1.5m against book value.

Finance

Total net borrowings at 31 December 2014 were £65.4m (30 June 2014: £66.8m). Undrawn banking facilities totalled £31.5m, while net debt to equity gearing had reduced to 27% (30 June 2014: 30%).

Principal Risks and Uncertainties

The process for identifying, assessing and reviewing the risks faced by the Group is described in the Principal Risks and Uncertainties section on page 20 of the 2014 annual financial report, which is available on the Company's website. A summary of the principal risks and uncertainties is set out below.

· Investment portfolio - tenant default, change in demand for space and market pricing affecting value.

· Financial - reduced availability or increased cost of debt finance, interest rate sensitivity and REIT compliance.

· People - retention/recruitment.

· Development - speculative development exposure on lettings, cost/time delays on contracts, inability to acquire land and holding too much development land.

In the view of the Board these principal risks and uncertainties are as equally applicable to the remaining six months of the financial year as they were to the six months under review.

Outlook

The value of our property investment portfolio has risen by 15% over the last 12 months, but still offers a very attractive income return and scope for further improvement. The equivalent yield at the peak of the last property cycle in 2007 was 6.0%, compared with the equivalent yield today of 7.5%.

We expect occupier demand and rental levels to continue to grow steadily over the next six months and remain on target for another satisfactory year.

Rupert J Mucklow, Chairman

17 February 2015

† See the investment/development column in the underlying financial performance tables in note 8 for details.

* EPRA (European Public Real Estate Association) net asset value, including the surplus on trading properties and excluding the fair value of financial instruments. See note 9 for details.

Group Condensed Statement of Comprehensive Income

for the six months ended 31 December 2014

All operations are continuing.

Group Condensed Statement of Changes in Equity

for the six months ended 31 December 2014

Group Condensed Balance Sheet

at 31 December 2014

Group Condensed Cash Flow Statement

for the six months ended 31 December 2014

Notes to the Half-Yearly Report

1. Accounting policies

Basis of preparation of half-yearly financial information

The annual financial statements of A & J Mucklow Group plc are prepared in accordance with IFRS's as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting", as adopted by the European Union and the disclosure requirements of the Listing Rules.

The Group's condensed set of financial statements for the period ended 31 December 2014 were authorised for issue by the Board of directors on 17 February 2015. The half-yearly financial information is unaudited but has been reviewed by Deloitte LLP and their report appears on page 18 of this half-yearly report.

The information for the year ended 30 June 2014 does not constitute statutory accounts as defined in Section 434 of the Companies Act 2006. A copy of the statutory accounts for that year has been delivered to the Registrar of Companies. The auditor reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Companies Act 2006.

The condensed set of financial statements are prepared under the historical cost convention, except for the revaluation of investment and development properties and owner-occupied properties and deferred tax thereon and certain financial assets, with consistent accounting policies to the prior year.

As at 31 December 2014 the Group had £31.5m of undrawn banking facilities, comprising the £1.0m overdraft and £30.5m of the £44.0m 2018 Revolving Credit Facility, and had fully drawn down £20.0m from its HSBC 2018 Term Loan. The Group's £1.0m overdraft is the only banking facility due for renewal within 12 months of the date of this document. The Lloyds Bank 2023 £20.0m Term Loan and 2022 £20.0m Term Loan remain fully drawn. Given these facilities, the Group's low gearing level of 27% and £115.9m of unencumbered properties, significant capacity exists to raise additional finance or to provide additional security for existing facilities, should property values fall. The directors have reviewed the current and projected financial position of the Group and compliance with its debt facilities, including a sensitivity analysis. On the basis of this review, the directors continue to adopt the going concern basis in preparing the condensed set of financial statements.

The same accounting policies, presentation and methods of computation are followed in the condensed set of financial statements as applied in the Group's latest annual audited financial statements.

2. Revenue

3. Property Costs

4. Segmental analysis

The Group has two reportable segments: investment and development property and trading property.

4. Segmental analysis (continued)

The property revaluation gain has been recognised as follows:

Segmental information on assets and liabilities, including a reconciliation to the results reported in the Group condensed balance sheet, are as follows:

All operations and income are derived from the United Kingdom and therefore no geographical segmental information is provided.

5. Net finance costs

6. Taxation

There is no deferred tax charge or credit for any of the periods stated.

The Company elected to become a Real Estate Investment Trust (REIT) with effect from 1 July 2007. As a result of this, rental income and capital gains of the REIT business are not subject to tax. The tax charge for the periods shown above represents the tax payable on the non-REIT business, mainly profits on the disposal of trading properties and interest receivable.

7. Dividends

The directors propose an interim dividend of 9.31p (2013: 9.04p) per Ordinary share. This dividend has not been included as a liability in these financial statements.

The interim dividend will be paid on 1 July 2015 to shareholders on the register at the close of business on 5 June 2015.

8. Underlying financial performance

Presented below is a non-statutory analysis of the underlying rental performance before tax, as shown in the investment/development column, which excludes the profit on sale of investment and trading properties and other items (capitalised interest, property revaluation movements and the fair value movement on derivative financial instruments). The directors consider that this further analysis of our statement of comprehensive income gives shareholders a useful comparison of our underlying performance for the periods shown in the condensed set of financial statements.

8. Underlying financial performance (continued)

9. Earnings per share and net asset value per share

Earnings per share

The basic and diluted earnings per share of 43.25p (31 December 2013: 23.52p; 30 June 2014: 66.45p) has been calculated on the basis of the weighted average of 63,253,908 (31 December 2013: 60,268,438; 30 June 2014: 61,250,268) Ordinary shares and a profit of £27.36m (31 December 2013: £14.17m; 30 June 2014: £40.70m).

The European Public Real Estate Association (EPRA) has issued recommended bases for the calculation of earnings and net asset value per share information and these are included in the following tables.

The EPRA earnings per share has been amended from the basic and diluted earnings per share by the following:

9. Earnings per share and net asset value per share (continued)

The Group presents an EPRA earnings per share figure as the directors consider that this is a better indicator of the performance of the Group.

There are no dilutive shares. Options over 105,418 Ordinary shares were granted in the period (2013: 87,606 Ordinary shares) under the 2007 Performance Share Plan. The vesting conditions for these shares have not been met, so they have not been treated as dilutive in these calculations. The fifth three-year award under the 2007 Performance Share Plan vested in the period, with 53,495 Ordinary shares being issued and 69,965 shares lapsed.

Net asset value per share

The net asset value per share of 388p (31 December 2013: 315p; 30 June 2014: 356p) has been calculated on the basis of the number of equity shares in issue of 63,294,833 (31 December 2013: 60,341,338; 30 June 2014: 63,241,338) and net assets of £245.4m (31 December 2013: £190.3m; 30 June 2014: £225.0m).

The EPRA net asset value per share has been calculated as follows:

10. Properties

The properties are stated at their 31 December 2014 fair value and are valued by DTZ Debenham Tie Leung Limited, professionally qualified external valuers, in accordance with the RICS Valuation - Professional Standards published by the Royal Institution of Chartered Surveyors. DTZ Debenham Tie Leung Limited have recent experience in the relevant location and category of the properties being valued. All properties are categorised as Level 3 in the IFRS 13 fair value hierarchy. Included within the Group condensed statement of comprehensive income is £20.9m of valuation gains which represent unrealised movements on investment property.

11. Fair value measurements recognised in the statement of financial position

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which fair value is observable:

· Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets and liabilities;

· Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

· Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Investment properties have been valued using the investment method which involves applying a yield to rental income streams. Inputs include yield, current rent and ERV. For the December 2014 valuation, the yields used ranged from 5.2% to 9.6% (December 2013 - 5.5% to 11.0%; June 2014 - 5.3% to 10.5%). Valuation reports are based on both information provided by the company, e.g. current rents and lease terms which is derived from the company's financial and property management systems and is subject to the company's overall control environment, and assumptions applied by the valuers, e.g. ERVs and yields. These assumptions are based on market observation and the valuers professional judgement.

An increase or decrease in rental values will increase or decrease valuations, and a decrease/increase in yields will increase/decrease the valuation. There are interrelationships between these inputs as they are determined by market conditions. The valuation movement in a period depends on the balance of those inputs. Where the inputs move in opposite directions (yields decrease and rental values increase), the valuation movement is magnified. If the inputs move in the same direction (yields increase and rental values decrease), they may offset each other.

The fair value of the mortgage receivables is determined by discounting the expected future value of repayments. Interest rate caps are externally valued based on the present value of future cash flows estimated and discounted based on the applicable yield curves derived from quoted interest rates at the balance sheet date.

There were no transfers in categories in the current or prior period.

12. Related party transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.

Responsibility Statement

We confirm that to the best of our knowledge:

a) the condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting";

b) the half-yearly report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

c) the half-yearly report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transaction and changes therein).

Signed on behalf of the Board who approved the half-yearly report on 17 February 2015.

Rupert J Mucklow

Chairman

David Wooldridge

Finance Director

Independent Review Report to A & J Mucklow Group plc

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 31 December 2014 which comprises the Group condensed statement of comprehensive income, the Group condensed statement of changes in equity, the Group condensed balance sheet, the Group condensed cash flow statement and related notes 1 to 12. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting," as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 31 December 2014 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditor

Birmingham, United Kingdom

17 February 2015