Half Yearly Report

McKay Securities PLC

City Profile

Simon Perkins, Managing Director

Simon Courtenay

Alan Childs, Finance Director

020 7448 3244

0118 950 2333

Details of the programme for the payment of the interim dividend are as follows:

Ex-dividend date 1st December 2010

Record date 3rd December 2010

Interim dividend payment 13th January 2011

The Directors have declared an interim dividend of 2.7 pence per share, (2009 - 2.7 pence per share), which will be paid as a Property Income Distribution (PID).

CHAIRMAN'S STATEMENT

Results for the six month period to 30th September 2010.

Profit before tax, adjusted to exclude non recurring profit on sales, surrender premiums, and unrealised movements in the value of both the Group's property portfolio and its interest rate hedging instruments was £2.52 million, compared with £4.12 million for the six month period to 30th September 2009. Earnings per share (EPRA) was 6.56 pence (2009 - 9.01 pence).

The external valuation of the Group's property portfolio at 30th September 2010 was £205.82 million, representing a 0.41% reduction (£0.86 million) in book value for the half year period. The Group's interest rate hedging instruments declined in value by a further £14.14 million to a negative value of £36.67 million. With the inclusion of these unrealised movements, the Group reported a loss before tax of £12.12 million (2009 - £1.85 million profit).

Net asset value per share (EPRA) was 231 pence, a reduction of 1.3% from 234 pence reported at 31st March 2010. Basic net asset value per share reduced from 195 pence to 163 pence mainly on account of the negative movement in the interest rate hedging instruments.

The Board has declared an interim dividend of 2.7 pence per share (2009 - 2.7 pence).

Review

The property market has been more stable over the period than at any point since the end of 2007 and our continued focus on generating and maintaining income from the Group's existing portfolio of high quality properties has been productive. This has been supported by an improvement in sentiment across the office and industrial markets of the South East and central London, which continue to be the focus of the Group's activities. Capital values of prime property, which remain in demand from a wide variety of investors, improved during the period in central London and remained steady elsewhere. Although these opportunities remain in short supply, capital growth has been tempered by investor caution over the pace of the economic recovery. As we anticipated earlier in the year, values for secondary assets outside central London, with short income streams requiring capital expenditure, have continued to fall over the period in response to the low level of rental values now being established. Encouragingly, the pace of decline in rental values has slowed, and the third calendar quarter of 2010 has seen an increase in the quantity of space let across all of the Group's markets compared with the first two quarters of the year. 

My statement in June noted that property disposals made in the last financial year had strengthened the Group's balance sheet, but as a consequence would result in lower earnings in subsequent periods as a result of the reduced level of income. In the absence of acquisitions, the results for the period reflect this, and adjusted profit before tax for the half year was £2.52 million, compared with £4.12 million for the corresponding period in 2009. Of the £1.60 million difference, income from those properties sold accounted for £1.14 million and the Group's interest charge increased by £0.35 million to £2.90 million (30th September 2009 - £2.25 million), as a result of costs associated with the Group's interest rate hedging position. A review of future finance costs taking into account the Group's hedging instruments is set out in the Finance section below.

The continuation of abnormally low interest rates has had a negative effect on the value of the Group's hedging instruments over the period. The market value of these instruments is calculated at the end of each period against longer term interest rates, which over the last six months fell by close to 1%. Accounting standards require these market movements to be included in the Consolidated Statement of Comprehensive Income, which has resulted in the large adverse unrealised movement in headline profit and the loss before tax reported for this period.

Across the Group's markets, and particularly outside central London, occupiers have continued to look for cost effective solutions in a challenging corporate environment, increasing the importance of owning good lettable buildings. The overall level of occupier take up has increased this year compared with 2009, which looks to be the low point of the current cycle. Within the Western Corridor, office demand over the period has been concentrated in towns along the M4 Motorway, where the completion of four large transactions has significantly improved take up levels. The supply of Grade A floor space in a number of these centres continues to reduce and the increasing mismatch between supply and demand is beginning to put upward pressure on rental values, although this varies considerably between centres.

Compared with the same period last year, gross rents received (including surrender premiums) from retained properties within the portfolio improved by £0.33 million to £8.40 million, and total contracted rent (net of ground rents) increased by 2.12% to £16.49 million. Our tenants have generally proved resilient to date; in excess of 90% of rents continued to be paid within seven days of the due date and 66% of total contracted rents are paid by tenants with a net worth in excess of £15 million. There were two business failures during the period, and one other tenant put into administration shortly after the end of the period; the combined income from these three tenants represented 2.5% of contracted rental income from the portfolio. 

During the period, thirteen open market lettings were completed at a total annual contracted rent of £0.65 million. The most significant of these were achieved at 30/32 Lombard Street, EC3 and Portsoken House, EC3, which represented two of the largest portfolio voids at the beginning of the period. At 30/32 Lombard Street, the ground, first and sixth floors were let at a combined contracted rent of £134,750 pa, resulting in the building being fully occupied. To protect the Group's flexibility for future redevelopment, the terms agreed maintained the ability to gain possession at the end of 2012. Rental values for the best new schemes in the City of London continue to increase. As a result, the prospects for the Group's redevelopment of 30/32 Lombard Street, which will replace the existing 30,000 sq ft building with a top quality 60,000 sq ft office headquarters in a first class location in the heart of the City, continue to improve.

At Portsoken House, 15,060 sq was let to a single tenant at a contracted rent of £284,360 pa. When leases expired in the building at the end of 2008 tenants were retained in 20,000 sq ft and the remaining 24,500 sq ft was upgraded along with the reception and common areas. The quality of refurbishment attracted the tenant, and there is encouraging interest in the remaining 9,440 sq ft of vacant refurbished space.

Where the Group's properties had a lease expiry or break clause, a high level of tenant retention was maintained with 67% remaining in occupation. The passing rent of the largest building vacated, Eastgate House, Fleet (13,984 sq ft) was £268,250 pa, where the occupier exercised a break clause to consolidate elsewhere. A refurbishment of this building will complete in February 2011, improving the quality of the asset and the chances of securing an early new letting.

These open market lettings and tenant retentions were achieved at, or in excess of rental assumptions, excluding those at 30/32 Lombard Street where the rents achieved were lower but reflected savings on refurbishment costs and the retention of development flexibility.

The total portfolio void was reduced by the lettings achieved from 11.6% (by rental value) to 7.4%, but as a result of break clauses and lease expiries ended the period at 10.3% (£1.82 million pa). Three of the Group's vacant properties at Fleet, Poyle and Maidenhead account for half this void, and a proactive approach to marketing these and smaller void properties will be maintained.

We continue to appraise earnings enhancing acquisition opportunities with the potential for capital gain through active management, refurbishment or development. However, no acquisitions were made during the period as we considered that the risks associated with the uncertain occupier market were not sufficiently reflected in market values. There are also signs that lending banks are coming to terms with their distressed loan books, and we anticipate that an increasingly hard line to reduce their exposure will result in more stock coming to the market. It took six years in the early 1990's for banks to reduce their exposure, and with that in mind we will remain selective.

Valuation

The independent valuation of the Group's property portfolio as at 30th September 2010 totalled £205.82 million, representing a 0.4% (£0.86 million) reduction in book value, disregarding the SIC 15 lease incentive accounting adjustment of £0.12 million. The best performing properties were those where lettings took place over the period, with Portsoken House, EC3 and 30/32 Lombard Street, EC3 increasing by 10.7% and 11.8% respectively. Gains within the portfolio were offset by the negative impact of void and re-letting assumptions on properties with potential letting risk. These portfolio movements compare with an increase of 2.4% in the IPD Monthly Index (All Property). The City and West End office segments had a significant influence on this with increases of 7.6% and 6.2% respectively, where demand from overseas investors and rental growth prospects both had a positive effect on values.

At 30th September 2010, the initial yield of the portfolio was 6.9% (March 2010 - 7.0%) increasing to 7.6% (March 2010 - 7.5%) on contracted rents once letting incentives expire. The true equivalent yield was 7.8% (March 2010 - 7.8%).

Finance

The Group continues to have access to banking facilities totalling £185.00 million, of which £155.00 million is secured for at least 5 years. Compliance has been maintained with all covenants over the period, maintaining low margins, flexible terms and no near term refinancing risk.

Net debt at 30th September 2010 was £90.21 million (September 2009 - £108.34 million), with the reduction due to the disposal of investment properties in the second half of last year. The ratio of net debt to portfolio value (LTV) was 43.8% (September 2009 - 49.8%), and the gearing ratio to shareholder's funds, adjusted in accordance with banking covenants, was 83.2% (September 2009 - 108.5%).

Financial hedging instruments remain in place to protect the Group against high interest rates in respect of a notional sum of £155.00 million. The Group first entered into such instruments in 2003, and maintained a programme of renewing and amending the terms of the instruments through to 2008, when interest rates were close to 5%, prior to the rapid and unprecedented drop to the current 0.5% base rate. The terms secured for the current instruments have allowed the Group to maintain a low weighted average cost of debt, which increased for the current period to 5.9% (30th September 2009 - 4.1%), reflecting the negative effect of lower interest rates on the hedging structures. However, the weighted average rate of the instruments will increase from the current level of 3.3% to 4.7% as contracted swap rates revert to higher levels from Spring 2011 onwards. Payments between the counterparties are based on the difference between the swap rates and three month libor. Therefore, the current three month libor rate indicates that there is likely to be a further significant increase in cash payments at that time, and a correspondingly higher finance cost to the Group.

As forward swap rates continued to fall over the period, the mark to market value of these instruments as at 30th September 2010 declined in value by a further £14.14 million to a negative value of £36.67 million. When financial markets begin to assume higher forward rates, there will be an increase in the value of these instruments, reversing the negative movements seen to date. Market expectations of future interest rate rises continue to be deferred. At present there is no consensus on how long the current low interest rate environment will prevail and therefore, the extent to which the cost of the hedging instruments will impact on earnings and dividend cover next year and in subsequent periods. We will continue to keep the alternatives available to us under review with our advisors. 

Dividend

The Board is pleased to declare an interim dividend of 2.7 pence per share, which remains unchanged from the same period last year. This will be paid as a Property Income Distribution (PID) on 13th January 2011 to shareholders on the register on 3rd December 2010.

Future Prospects

After a period of relative market stability and an increase in the letting volumes achieved by the Group, continued recovery in occupier demand is needed for sustained growth in rental and capital values. It is likely that the cuts in Government expenditure will slow the pace of this recovery, although it will take some time for the full impact to be known. The Group's South East and central London markets are likely to prove more resilient than in other regions. Although future earnings will reflect the potentially adverse effect of the Group's hedging instruments on finance costs, with a portfolio of good quality buildings within these markets, the Group is well placed to benefit as occupational markets recover.

Our proactive approach to the retention of income from our tenants and the generation of new income from existing properties will remain our focus. Despite the business climate remaining challenging, the prospects for a more active approach to development and for acquisitions are kept under constant review. This approach emphasises our core values which remain unchanged.

D.O. Thomas

Chairman

24th November 2010

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

----------------------------------------------------------------------------------------

6 months

6 months

12 months 

to 30th

to 30th 

to 31st 

September

September 

March

2010

2009 

2010

(Unaudited)

(Unaudited)

(Audited)

Notes

£'000

£'000 

£'000 

Gross rents and service charges receivable

9,550

10,726

19,988

Surrender premiums received

467

-

221

Direct property outgoings

(2,496)

(2,381)

(4,611)

---------- 

--------- 

---------

Net rental income from investment properties

3

7,521

8,345

15,598

Administration costs

(1,725)

(1,761)

(4,155)

---------- 

--------- 

---------

Operating profit before investment property

disposals and revaluation movements

5,796

6,584

11,443

Profit on disposal of investment properties

11

1

236

Movement in revaluation of investment properties

7

(972)

(5,050)

6,739

---------- 

--------- 

---------

Operating profit

4,835

1,535

18,418

Net finance costs - finance costs

6

(2,899)

(2,550)

(5,497)

- finance income

Fair value (losses)/gains on derivatives

6

8

15

(14,141) 

14

2,801

24

2,296

(17,025) 

265

(3,177)

Share of results of associated undertaking

68

53

141

---------- 

---------

----------- 

(Loss)/profit before taxation

(12,122) 

1,853

15,382

Taxation

4

-

-

-

---------- 

----------

----------

(Loss)/profit for the period

(12,122) 

1,853

15,382

---------- 

---------

----------- 

Other comprehensive income:

Actuarial movement on defined benefit pension

Scheme

-

-

(101) 

---------- 

---------

---------

Total comprehensive (loss)/income for the period

(12,122)

1,853 

15,281 

(Loss)/earnings per share

5

Basic

(26.46)p

4.05p

33.59p

Diluted

(26.59)p

4.05p

33.17p

Adjusted earnings per share figures are shown in note 5

GROUP BALANCE SHEET

-------------------------------------

As at

As at

As at

30th 

30th

31st 

September

September

March

2010

2009

2010

(Unaudited)

(Unaudited)

(Audited)

Notes

£'000

£'000

£'000

Non-current assets

Investment properties

7

204,630 

215,428 

204,896 

Plant and equipment

14 

25 

16 

Investments

2,372 

2,260 

2,304 

-----------

-----------

-----------

207,016 

217,713 

207,216 

-----------

-----------

-----------

Current assets

Trade and other receivables

7,157 

7,170 

6,313 

Cash and cash equivalents

2,837 

2,791 

677 

-----------

--------

--------

9,994 

9,961 

6,990 

-----------

-----------

-----------

Total assets

217,010 

227,674 

214,206 

-----------

-----------

-----------

Current liabilities

Loans and other borrowings

(13,000)

- 

(13,000)

Trade and other payables

(8,942)

(8,530)

(7,869)

Finance lease liabilities

(286)

(286)

(286)

Interest rate derivatives

8

(4,068)

(3,648)

(3,297)

----------

--------

----------

(26,296)

(12,464)

(24,452)

----------

--------

---------

Non-current liabilities

Loans and other borrowings

(78,177)

(110,604)

(76,141)

Pension fund liabilities

(1,093)

(1,003)

(1,096)

Finance lease liabilities

(4,123)

(4,123)

(4,123)

Interest rate derivatives

8

(32,606)

(18,379)

(19,235)

----------

-----------

-----------

(115,999)

(134,109)

(100,595)

----------

-----------

-----------

Total liabilities

(142,295)

(146,573)

(125,047)

----------

-----------

-----------

Net assets

74,715 

81,101 

89,159 

----------

----------

----------

Equity

Called up share capital

9,176 

9,159 

9,159 

Share premium account

2,478 

2,495 

2,495 

Capital reserve

49,889 

61,191 

49,878 

Revaluation reserve

10,024 

(12,601)

10,996 

Retained earnings

3,148 

20,857 

16,631 

----------

----------

-----------

Total equity

74,715 

81,101 

89,159 

----------

----------

-----------

Net asset value per share

10

163p

177p

195p

EPRA net asset value per share

10

231p

218p

234p

GROUP CASH FLOW STATEMENT

------------------------------------------------

6 months

6 months 

12 months

to 30th 

to 30th

to 31st 

September

September

March

2010

2009

2010

(Unaudited)

(Unaudited)

(Audited)

£'000

£'000

£'000

Operating activities

(Loss)/profit before tax

(12,122) 

1,853 

15,382 

Adjustments for:

Depreciation

4

11 

22 

Other non-cash movements

396

372 

639 

Profit on disposal of investment properties

(11)

(1)

(236)

Movement in revaluation of investment properties

972 

5,050 

(6,739)

Net finance costs

17,025 

(265)

3,177 

Share of profit of associate undertaking

(68)

(53)

(141)

--------

------

---------

Cash flow from operations before changes in working capital

6,196 

6,967 

12,104 

Increase in debtors

(926)

(529)

(275)

Increase in creditors

304 

455 

63 

----------

--------

---------

Cash generated from operations

5,574 

6,893 

11,892 

Interest paid

(2,196)

(1,637)

(5,055)

Interest received

15 

14 

24 

Corporation tax paid

- 

(1)

- 

----------

-------

--------

Cash flows from operating activities

3,393 

5,269 

6,861 

----------

-------

--------

Investing activities

Sale of investment properties

11 

3,826 

27,331 

Dividends from sundry investments

1 

1 

1 

Dividends from associated undertaking

- 

- 

45 

Purchase and development of investment properties

(724)

(1,983)

(2,150)

Purchase of other fixed assets

(2)

(2)

(4)

---------

----------

----------

Cash flows from investing activities

(714)

1,842 

25,223 

---------

----------

----------

Financing activities

Increase/(decrease) in borrowings

2,000 

(5,530)

(27,031)

Equity dividends paid

(2,519)

- 

(5,586)

----------

--------

---------

Cash flows from financing activities

(519)

(5,530)

(32,617)

----------

--------

---------

Net increase/(decrease) in cash and cash equivalents

2,160 

1,581 

(533)

Cash and cash equivalents at beginning of period

677 

1,210 

1,210 

----------

---------

---------

Cash and cash equivalents at end of period

2,837 

2,791 

677 

----------

---------

---------

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Attributable to equity holders of the parent company

Share capital

£'000

Share premium

£'000

Revaluation reserve

£'000

Capital reserve £'000

Retained earnings £'000

Total equity £'000

At 1st April 2009

9,159

2,495 

(6,676)

60,315 

13,772 

79,065 

Profit for the year

-

- 

- 

- 

15,382 

15,382 

Other comprehensive income:

Transfer surplus on

revaluation of properties

-

- 

6,739 

- 

(6,739)

- 

Transfer share of surplus on

revaluation of properties

in associated undertaking

-

- 

55 

- 

(55)

- 

Transfer on disposal of

investment properties

-

- 

10,642 

(10,437)

(205)

- 

SIC 15 historic valuation

transfer

-

- 

236 

- 

(236)

- 

Actuarial loss on defined

benefit pension scheme

-

- 

- 

- 

(101)

(101)

---------

---------

---------

---------

---------

---------

Total comprehensive income

for the year

-

- 

17,672 

(10,437)

8,046 

15,281 

Dividends paid in year

-

- 

- 

- 

(5,586)

(5,586)

Fair value of share based

payments

-

- 

- 

- 

399 

399 

---------

---------

---------

---------

---------

---------

At 31st March 2010

9,159

2,495 

10,996 

49,878 

16,631 

89,159 

Loss for the period

-

- 

- 

- 

(12,122)

(12,122)

Other comprehensive income:

Transfer deficit on 

revaluation of properties

-

- 

(972)

-

972 

- 

Transfer on disposal of

Investment properties

-

- 

- 

11 

(11)

- 

---------

----------

---------

---------

----------

----------

Total comprehensive loss for

the period

-

- 

(972)

11 

(11,161)

(12,122)

Dividends paid in period

-

- 

- 

- 

(2,519)

(2,519)

Fair value of share based

payments

-

- 

- 

- 

197 

197 

Exercise of share options

17

(17)

- 

- 

- 

- 

---------

---------

---------

---------

---------

---------

At 30th September 2010

9,176

2,478 

10,024 

49,889 

3,148 

74,715 

---------

---------

---------

--------

--------

---------

6 months

6 months 

12 months

to 30th 

to 30th

to 31st 

September

September

March

2010

2009

2010

(Unaudited)

(Unaudited)

(Audited)

£'000

£'000

£'000

(Loss)/profit before tax

(12,122) 

1,853 

15,382 

Surrender premiums received

(467) 

‑

(221)

Change in fair value of derivatives

14,141 

(2,801)

(2,296)

Movement in revaluation of investment properties

972 

5,050 

(6,739)

Profit on disposal of investment properties

(11)

(1)

(236)

Associated undertakings' disposals, revaluation movement and taxation

11 

22 

38

---------- 

-------- 

-------- 

Adjusted profit before tax

2,524 

4,123 

5,928 

---------- 

-------- 

-------- 

3

Net rental income from investment properties

6 months

6 months 

12 months

to 30th 

to 30th

to 31st 

September

September

March

2010

2009

2010

(Unaudited)

(Unaudited)

(Audited)

£'000

£'000

£'000

Gross rents receivable

7,813 

8,859 

16,796 

SIC15 adjustment

116 

 357 

321 

---------- 

----------

--------- 

Gross rental income

7,929 

9,216 

17,117 

Service charges receivable

1,621 

1,510 

2,871 

---------- 

---------- 

--------- 

9,550 

10,726 

19,988 

Surrender premiums received

467 

- 

221 

Direct property outgoings

(2,496)

(2,381)

(4,611)

---------- 

---------- 

--------- 

7,521 

8,345 

15,598 

---------- 

---------- 

--------- 

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 SIC15, for the effect of any incentives given.

4

Taxation

6 months

6 months 

12 months

to 30th 

to 30th

to 31st 

September

September

March

2010

2009

2010

(Unaudited)

(Unaudited)

(Audited)

£'000

£'000

£'000

Total tax in the Statement of Comprehensive Income

- 

- 

- 

---------

--------

----------

Reconciliation of standard rate of tax to effective rate of tax:

(Loss)/profit before taxation

(12,122)

1,853 

15,382 

---------

-------

---------

Tax(credit)/ charge at full rate of 28% (2010 - 28%)

(3,394)

519 

4,307 

Effects of:

REIT tax exemption

3,411 

(505)

(4,234)

Permanent differences

- 

- 

(116)

Other timing differences

2 

1 

4

Associated company

(19)

(15)

39

---------

-----

---------

Tax for period (as above)

- 

- 

- 

---------

-----

---------

5

Earnings per share

6 months

6 months 

12 months

to 30th

to 30th 

to 31st

September

September

March

2010

2009

2010

p

p

p

Basic (loss)/earnings per share

(26.46)

4.05 

33.59 

Change in fair value of derivatives

30.86 

(6.12)

(5.01)

Movement in revaluation of investment properties

2.12 

11.03 

(14.72)

Surrender premium received

(1.02)

- 

(0.48)

Profit on disposal of investment properties

(0.02)

- 

(0.51)

Associated undertaking disposals and revaluation movement

0.02 

- 

0.08 

---------

--------

--------

Adjusted earnings per share

5.50 

8.96 

12.95 

---------

--------

-------

Basic (loss)/earnings per share on ordinary shares is calculated on the loss in the half year of £12,122,000 (2009 - profit: £1,853,000) and 45,816,698 (2009 - 45,792,655) shares, being the weighted average number of ordinary shares in issue during the period.

6 months

6 months

to 30th

to 30th

September

September

2010

2009

Weighted number of ordinary shares in issue

45,816,698 

45,792,655 

Number of shares under option

3,514,354 

3,050,769 

Number of shares that would have been issued at fair value

(3,745,224)

(3,348,964)

---------------

---------------

Diluted weighted average number of ordinary shares in issue

45,585,828 

45,494,460 

---------------

---------------

6 months

6 months 

12 months

to 30th

to 30th 

to 31st

September

September

March

2010

2009

2010

p

p

p

Diluted (loss)/earnings per share

(26.59)

4.05 

33.17 

Effect of dilutive potential ordinary shares under option

-

0.02 

- 

Change in fair value of derivatives

31.02 

(6.16)

(4.95)

Movement in revaluation of investment properties

2.13 

11.10 

(14.53)

Surrender premium received

(1.02)

- 

(0.47)

Profit on disposal of investment properties

(0.02)

- 

(0.51)

Associated undertaking disposals and revaluation movement

0.02 

- 

0.08 

---------

--------

--------

Adjusted diluted earnings per share

5.54 

9.01 

12.79 

----------

--------

--------

EPRA earnings per share

6.56 

9.01 

13.26 

----------

--------

---------

6

Net Finance costs

6 months

6 months 

12 months

to 30th

to 30th 

to 31st

September

September

March

2010

2009

2010

(Unaudited)

(Unaudited)

(Audited)

£'000

£'000

£'000

Interest on bank overdraft and loans

(2,720)

(2,372) 

(5,139)

Finance lease interest on leasehold property obligations

(143)

(143)

(285)

Finance arrangement costs

(36)

(35)

(73)

---------

--------

---------

Finance costs

(2,899)

(2,550)

(5,497)

Interest receivable

15 

14 

24 

Fair value (losses)/gains on derivatives

(14,141)

2,801 

2,296 

--------

--------

--------

(17,025)

265 

(3,177)

--------

---------

----------

7

Investment properties

6 months

6 months

12 months

to 30th

to 30th 

to 31st

September

September

March

2010

2009

2010

(Unaudited)

(Unaudited)

(Audited)

£'000

£'000

£'000

At 1st April 2010

204,896 

222,338 

222,338 

Additions - development

726 

1,834 

1,905 

Revaluation (deficit)/surplus

(856)

(4,693)

7,060

Adjustment for rents recognised in advance under

SIC15

(116)

(357)

(85)

Disposals

- 

(3,674)

(26,282)

Amortisation of grossed up headlease liabilities

(20)

(20)

(40)

-----------

-----------

-----------

At 30th September 2010

204,630 

215,428 

204,896 

-----------

-----------

-----------

Adjustment for grossing up of headlease liabilities

(3,966)

(4,006)

(3,986)

Adjustment for rents recognised in advance under

SIC15

5,156 

5,973 

5,040 

-----------

-----------

-----------

Adjusted valuation at 30th September 2010

205,820 

217,395 

205,950 

-----------

-----------

-----------

8.

Interest Rate Derivatives

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 31 years, subject to counterparty bank break options from 2014, and have swap rates ranging from 3.99% to 5.17% and collars of 3.00% to 5%. Provision is made within the terms of the financial instruments for the counterparty bank to terminate the instruments by invoking credit breaks in 2016/2017. If such a credit break were exercised, a payment would be made between the parties dependent on market value at that time. The instruments also provide the counterparty bank with additional break options. Should these breaks be exercised, there would be no payment liability on the Group. The Group does not hold or issue derivative financial instruments for trading purposes.

As at 30th September 2010 (Unaudited)

Hedged amount

£'000

Average rate

Average1 maturity - years

Fair value £'000

Fair value adjustment £'000

Interest rate swaps

25,000

4.12%

4.25

(5,355)

(2,314)

Interest rate caps

130,000

5.00%

1.08

108 

(166)

Interest rate floors

130,000

3.06%

1.08

(3,014)

766

Forward start interest rate swaps

115,000

4.86%

5.86

(28,413)

(12,437) 

----------

----------

(36,674)

(14,141)

----------

-----------

As at 30th September 2009 (Unaudited)

Interest rate swaps

25,000

4.12%

5.25

(3,021)

320 

Interest rate caps

130,000

5.00%

2.08

563 

272 

Interest rate floors

130,000

3.06%

2.08

(4,296)

(512)

Forward start interest rate swaps

115,000

4.86%

6.86

(15,273)

2,721 

----------

----------

(22,027)

2,801 

----------

---------

As at 31st March 2010 (Audited)

Interest rate swaps

25,000

4.12%

4.75

(3,040)

301 

Interest rate caps

130,000

5.00%

1.58

275 

(16)

Interest rate floors

130,000

3.06%

1.58

(3,791)

(7)

Forward start interest rate swaps

115,000

4.86%

6.36

(15,976)

2018 

-----------

----------

(22,532)

2,296 

----------

----------

1 to expiry or break whichever is the earlier

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:

As at 30th September 2010 (Unaudited) £'000

As at 30th September 2009 (Unaudited) £'000

As at 31st March 2010 (Audited) £'000

Current

(4,068)

(3,648)

(3,297)

Non-current

(32,606)

(18,379)

(19,235)

----------

----------

----------

(36,674)

(22,027)

(22,532)

----------

---------

----------

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 Statement of Comprehensive Income. All financial liabilities are classed as level 2 in accordance with fair value hierarchy stated in IFRS 7. 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 2010 and 2009 there was no difference between the book value and the fair value of all the other financial assets and liabilities of the Group and the Company.

9

Dividends

6 months

6 months 

12 months

to 30th

to 30th 

to 31st

September

September

March

2010

2009

2010

(Unaudited)

(Unaudited)

(Audited)

£'000

£'000

£'000

Final dividend

Year ended 31st March 2010

2,519

-

-

Year ended 31st March 2009

-

-

4,350

Interim dividend

Year ended 31st March 2010

-

-

1,236

----------

----------

----------

2,519

-

5,586

----------

----------

----------

The final dividend of 5.5 pence per share (£2,519,000) for the year ended 31st March 2010 was paid on 5th August 2010. 

The Directors have declared an interim dividend of 2.7 pence per share (2009 - 2.7 pence per share).

Since becoming a REIT, the Group is required to distribute at least 90% of qualifying income profits each year as a Property Income Distribution (PID), and the interim dividend of 2.7 pence per share will be paid as part of this distribution. Further REIT information is available on the Company's website.

10 Net asset value per share

30th September 2010

30th September 2009

31st March 2010

Net

Net

Net

asset

Asset

Asset

value

value

Value

Net

per

Net

per

Net

Per

Assets

Shares

share

assets

Shares

Share

assets

Shares

Share

£'000

'000

p

£'000

'000

p

£'000

'000

p

Basic

74,715

45,879 

163 

81,101 

45,793 

177 

89,159

45,793

195 

Number of

shares

under option

3,429

3,756 

(6) 

4,545

3,489 

(3)

3,144

3,232 

(7) 

-----------

--------

------

-----------

---------

-----

----------

---------

------

Diluted

78,144

49,635 

157 

85,646

49,282 

174 

92,303

49,025

188 

Adjustment for fair value of

derivatives

36,674 

_ 

74

22,027 

- 

44 

22,532 

- 

46 

---------

---------

-------

----------

--------

-------

-----------

---------

------

EPRA NAV

114,818

49,635

231

107,673

49,282

218

114,835

49,025

234

Adjustment for fair value of derivatives

(36,674)

-

(74)

(22,027)

- 

(44) 

(22,532)

- 

(46)

----------

---------

------

----------

--------

------

-----------

---------

------

EPRA NNNAV

78,144 

49,635

157 

85,646

49,282

174 

92,303 

49,025

188 

----------

--------

------

---------

--------

------

-----------

---------

------

11

Disclaimer

The Interim Report of McKay Securities PLC for the six months to 30th September 2010 has been drawn up and presented for the purposes of complying with English law. If any issue were to arise in relation to any liability under or in connection with the Interim Report for the six months to 30th September 2010, it would also be determined in accordance with English law.

12

Interim Report

The Interim Report is being posted to all shareholders on 3rd December 2010. Copies are available to members of the public from the Company's registered office at 20 Greyfriars Road, Reading, Berkshire RG1 1NL, and on the Company's website at www.mckaysecurities.plc.uk.

13

Identification of business risks

The risks facing the Group are broadly consistent with those outlined on page 24 of the 2010 Report and Financial Statements.