19th Jun 2007 16:25
McKay Securities PLC19 June 2007 McKAY SECURITIES PLC INTERIM MANAGEMENT STATEMENT To meet the requirements of the Disclosure and Transparency Rules, set out beloware the Chairman's Statement and the Property and Financial Review previouslyissued on 7th June 2007 as part of the Group's Preliminary Announcement ofResults for the year to 31st March 2007. These statements cover the significantdevelopments and events since 31st March 2007. Contact McKay Securities PLC - 0118 950 2333Simon Perkins, Managing DirectorAlan Childs, Finance Director 19th June 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 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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