17th Feb 2009 07:00
Warner Estate Holdings PLC ("the Group")
Interim Management Statement
17th February 2009
Business Review
The property market remains a challenging environment as valuations continue to fall and the general economy moves deeper into recession. The Group continues to focus on those actions that reduce debt and costs, whilst maintaining recurring profitability and cash flow.
The Group's profitability is in line with expectations, with the exception of income from its investment in the Apia Regional Office Fund ("Apia"). Recurring profit from the wholly owned property investment business, investments in joint ventures and the asset management business is ahead of that in the equivalent period last year. However, distributions from the Group's investment in Apia have been reduced owing to the losses on disposals within that Fund. The impact of these reduced distributions more than offsets the improved performance in other parts of the business with the result that the Group's overall recurring profit for the nine months to 31 December 2008 is £1.4million below that of the same period last year.
However, as reported at the interim results presentation in November, cost savings and other initiatives will improve profitability in the current financial year and deliver an annualised improvement to recurring profit of £3million p.a. These savings come primarily from the wholly owned property investment business and its supporting functions.
Cash collection remains strong with over 96% of rents collected within 28 days of the December 2008 quarter day within both the wholly owned and the total managed portfolios. As announced with the interim results, the net proceeds from disposals arising since the half year have been used to reduce the Group's net debt, which was £323million at 31 December 2008, down from £349million at the half year.
Wholly Owned Portfolio
The Group has made good progress in managing its wholly owned portfolio. Although the level of voids has increased from 3.8% at 30 September 2008 to 6.2% at 31 December 2008 (IPD benchmark: 10.4%), void units have been let at 8% above ERV for £0.4million p.a., offsetting rent of £0.8million p.a. from leases which have expired and not been renewed. Rent reviews and lease renewals have increased income by £0.3million p.a., only 2% below ERV and 22% above the previous rent.
Since the half year, seven properties, totalling £34.7million, have been sold from the wholly owned portfolio at an average price of 5.1% below September 2008 values. A further vacant building has exchanged, subject to planning, for consideration of £3.0million, in line with its September 2008 value. Two significant lettings have been achieved, both to Waitrose. At Weston-super-Mare, a 34,200 sq. ft. store has been let for 36 years, with a tenant break at 21 years, for almost £0.7million p.a. At Waterside, the phase two extension to the Hale Leys shopping centre in Aylesbury, a 30,900 sq. ft. store has been pre-let, subject to planning, for 20 years at over £0.6million p.a. which, together with the Debenhams pre-letting in December 2007, means that this proposed extension is 45% forward committed with both anchor tenants in place.
Joint Ventures and Funds
The Group's share of recurring profit from its 50% investment in four joint ventures ("JVs"), Agora Shopping Centres, Agora Max Shopping Centres, Greater London Offices and Radial Distribution, and that arising from the asset management business are in line with expectations and ahead of the equivalent period last year. Although the core asset management fees arising from the Ashtenne Industrial Fund and Apia are down on the prior year, as they are linked to falling gross asset values, this reduction has been more than offset by other fees and cost saving initiatives across the rest of the asset management business. The carrying value of the Group's investment in JVs as at 30 September 2008 was £39.7million. The debt in each one of these is non recourse. The decline in property values and the maturing of certain facilities has led to discussions with each of the JV lenders to establish the most appropriate form of financing structures for the JVs. The Board will provide further information on the progress of these discussions in due course.
Finance Review
In the Group's interim results statement for the half year ended 30 September 2008 it was announced that discussions with the Group's relationship banks had commenced regarding the renewal of the Group's facilities in respect of its wholly owned property portfolio (the "Facilities") and that actions had been initiated to ensure that the Group continued to remain in compliance with its banking covenants. These actions included increasing certain loan to value covenants to create more headroom under certain of the Group's Facilities.
However, since 30 September 2008, and in line with the overall trend in the UK property investment market, the Group has continued to experience further declines in the value of its property portfolio. This has further increased the pressure on the Group's valuation related banking covenants. Furthermore, the significant fall in interest rates has had a material impact on the Group's interest rate hedging of its Facilities. These hedges, when 'marked to market' as at 31 December 2008, were £20.8million 'out of the money' as against the 30 September net liability of £2.0million.
Interest cover is satisfactory. The Group's rental income stream remains resilient with an income cover ratio, as at 31 December 2008, of passing rent to interest of 1.8:1. The strength and breadth of the business is such that the Group is not overly dependent on any particular sector or tenant. Although there has been an increase in requests, predominantly from retail tenants, to move to monthly payments, tenant defaults and provisions were 0.7% of passing rent at 31 December 2008, compared to an average of 0.8% over the previous twelve months.
The Group appointed Rothschild in late November 2008 both to assist in the discussions with its lenders in relation to the Facilities and associated covenants and to advise the Board on the most appropriate capital structure for the Group, taking into account the requirements of all relevant stakeholders. Discussions continue with each lender on a range of options to resolve valuation related covenant issues and the Board will provide further information on progress in due course.
Since 31 December 2008, as part of these discussions and in line with the planned reduction in debt, £75million of hedging, representing £14.8million of the £20.8million liability referred to above, has been cancelled for just under £12million, to be settled on 29 May 2009. Falling interest rates, combined with the cancellation of these hedges, have reduced the Group's average cost of debt to 3.94% (September 2008: 4.71%).
For further information contact:
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Warner Estate Holdings PLC |
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Philip Warner, Chairman |
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Michael Stevens, Property Director |
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Mark Keogh, Finance Director |
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Tel: 020-7907-5100 |
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Web: www.warnerestate.co.uk |
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City Profile |
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Simon Courtenay William Attwell |
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Tel: 020-7448-3244 |
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Any statements made in this announcement that are not based on current or historical facts are forward-looking in nature. These forward-looking statements speak only as at the date of this announcement. Warner Estate expressly disclaims any obligations or undertaking (other than reporting obligations imposed on it in relation to its listing on the official list of the London Stock Exchange plc) to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any changes in the Group's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.
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