8th Sep 2006 07:01
ING UK Real Estate Income Trust Ltd08 September 2006 8 September 2006 ING UK Real Estate Income Trust Limited Re: Interim Report and Consolidated Financial Statements for the period from 1January to 30 June 2006 On 7 September 2006, the Directors of ING UK Real Estate Income Trust Limitedapproved the Company's Interim Report and Consolidated Financial Statements forthe period from 1 January to 30 June 2006. Please find below a full copy of the Interim Report and Consolidated FinancialStatement. (a link to a PDF version can be found at the end of the announcement) Group Summary ING UK Real Estate Income Trust Limited ("the Company") is a closed-ended,Guernsey registered, Investment Company. The Company has three subsidiaries; INGUK Real Estate (Property) Limited, ING UK REIT (SPV) Limited and ING (UK) ListedReal Estate, (together "the Group") whose results are consolidated, and oneSpecial Purpose Entity, ING (UK) Listed Real Estate Issuer Plc, whose resultsare consolidated under SIC 12. The subsidiaries were incorporated to provide atax efficient structure. The investment portfolio is managed by ING Real EstateInvestment Management (UK) Limited, a member of the ING Group. The Group waslisted on the London and Channel Islands' Stock Exchanges on the 25 October 2005and currently has nearly 800 investors. The Group's aim is to provide shareholders with an attractive level of incometogether with the potential for capital growth. It will invest both directly and indirectly in an investment portfoliocomprising UK, Isle of Man and Channel Islands properties and will focusinitially on five principal commercial property sectors: office, retail,industrial, retail warehouse and leisure. It is the present intention that theGroup's borrowings will be limited to a maximum of 50% of gross assets. Financial Highlights and Performance Summary > Share price rose by 6% during the period 1 January 2006 to 30 June 2006 from 108.5 pence to 114.75 pence > Two dividends of 1.16 pence per share and 1.5625 pence per share were paid in February and May 2006 respectively > Net asset value per share rose to 117.4 pence, reflecting a gain of 11.6% during the period > Gross property assets increased from GBP 505.6 million to GBP 553.7 million > Shareholders' funds rose to GBP 358.1 million from GBP 320.8 million > The consolidated profit for the period was GBP 45.6 million, including unrealised investment gains of GBP 38.3 million > Net income increased to GBP 7.3 million for the period Chairman's Statement On behalf of the Board, I am pleased to report that the Group has continued todeliver on its objectives. These consolidated accounts show good performanceover the six month period ending 30 June 2006. The Net Asset Value per share hasincreased by 11.6% to 117 pence and, in addition, dividend payments have beenmade totalling 2.72 pence per share. With increasing interest rates, the Group is fortunate to have fixed its cost ofdebt until 2013 at an attractive all-in rate of 5.1%. In accordance withrecognised accounting practices, the fair value of the interest rate swap usedto fix the cost of debt is accounted for through the Income Statement. The property portfolio has now increased in value to over GBP 553 million andhas delivered an income return over the period of 3.3%, ahead of the IPDQuarterly All Property Index (at 2.4%), with a total return of 9.3%, on anungeared basis, marginally behind the index at 9.6%. During the period, the Group made its first acquisition which has furtherincreased its Central London Office weighting. This area of the market isexpected to perform strongly in the short/medium term although the 'lowyielding' nature of this type of investment makes it more difficult to sourceopportunities that meet the Group's income objective. In terms of investor relations, I am pleased to announce the launch of theGroup's website, which will allow shareholders easy access to informationconcerning the Group. This is available to view at www.ingreit.co.uk. Conditions in the UK property market remain favourable and on a one, three andten year basis the sector has outperformed both equities and gilts, whilstcontinuing to offer the highest income return. In recent years, much of this performance has been through yield compression butthis will not continue indefinitely; as this weakens, income growth will play anincreasingly important role in delivering strong returns. Investor demand for property assets shows little sign of weakening and tenantdemand, particularly in the office sector, is improving. Stock selection andproactive management of any portfolio will be crucial in delivering performance.I am confident that the Group is well positioned on a sector basis and isdemonstrating its ability to continue to deliver on its objectives. Nick ThompsonChairman of the Board7 September 2006 Investment Manager's Commentary THE UK PROPERTY MARKET The IPD Quarterly All-Property Index total return over the six months to June2006 was 9.6%. Although rental growth continues to improve steadily,yield-driven capital appreciation is still the main driver of total returns.Capital values increased a further 6.9% per annum in the first six months of theyear. Offices are currently the best performing property sector with returns averaging11.6% over the last six months. Total returns in the central London markets arehigher than the sector average due to the benefits of significant recent rentalvalue uplifts. Retailer turnover has recently shown renewed life but tradingconditions remain tough for occupiers. Nevertheless, rental values have held upwell and retail property returns have averaged 8.7% in the year to date.Industrial property returns over the last six months slightly edged ahead ofretail at an average 9%. Furthermore industrial stock still offers an incomeadvantage over the other property sectors. UK economic growth increased by 0.8% in the second quarter, taking the annualgrowth rate back above the long-term trend, generally considered to be around2.5% per annum. The improvement was primarily on the service side of the economyincluding distribution, financial & business services but perhaps mostsurprisingly, as noted above, retail sales. Looking ahead, although concernsexist regarding a possible US and global economic weakening, the vast majorityof forecasters still anticipate that the UK economy will continue to see growthat or above trend over the next 18 months. This has highly positive implicationsfor commercial property rental growth. CPI annual inflation, the Government's target measure, rose to 2.5% per annum inJune, the highest level since the start of the official series in 1997. Combinedwith economic growth, surprisingly on the upside this quarter, the interest rateoutlook has now shifted upward. This underpinned the Bank of England's decisionto increase base rates by 25 basis points to 4.75% in early August. Althoughproperty investment is no longer readily self-financing, investors are stillprepared to forgo income to gear-up on the capital growth component of totalreturn. Whilst there are signs that investment transactions have slowed in 2006 againstlast year's levels, investor appetite shows little sign of dissipating. Highproperty investment demand, particularly ahead of the launch of on-shore REITswithin the UK in January 2007, has resulted in reduced investment availabilityand continued strong capital appreciation. Despite increasing rental growth, thecapital appreciation has resulted in a further dilution of the incomedistribution yield available to new property fund investors. However, in thecoming years we anticipate that purely yield driven capital appreciation willsubside and rents will re-establish themselves as the primary driver of propertyfund performance. (Source: IPD Quarterly Index, ONS) PORTFOLIO ACTIVITY As at 30 June 2006 the value of the Group's portfolio was GBP 553.7 million withan annual net income of GBP 32.3 million showing a running yield at a propertylevel of 5.8%. The portfolio comprises 56 properties with an average unexpiredlease term approaching nine years. The void level at 30 June 2006 represented4.1% of total income (excluding Watford where the Group benefits from a rentguarantee until August 2007). During the period, the Group made its first acquisition, completing on thepurchase of a multi-let office building located within the City of London. Theproperty, known as Boundary House, Jewry Street, London EC3 became the sixthlargest asset and was acquired reflecting a net initial yield of 5.2% and acapital value of approximately GBP 360 per sq ft. The property offerssignificant scope to enhance value from both a recovering central London officemarket as well as active management and refurbishment initiatives, with a rangeof lease expiries over the next three years. In our last report, we advised of the fire at the Magna Park property. We arepleased to confirm that the property is fully rebuilt and the tenant, TNT, hasnow reoccupied the building and recommenced rental payments. The Group'sinsurers covered the loss of the rental income over the period and therebuilding costs. The Group has taken a number of surrenders of occupational leases. This hasenhanced both value and income, by achieving lettings at rents and timescalesahead of expectations. Proactive management of the portfolio remains critical and we are continuallyspeaking with tenants to ensure that we can maximise opportunities when theyarise. The portfolio has a number of lease expiries within the short tomedium-term and we are working hard to ensure tenant retention as well asmaximising opportunities should units become vacant. Following the period end, the additional debt facility contained within thesecuritisation structure was utilised. An additional GBP 25 million of debt wasissued in the form of AAA rated Reserve Notes which has been fully hedged until30 January 2013. The total debt on the portfolio has increased to GBP 225million at an effective all in rate of 5.1%. Subsequent to the period end the Group acquired another central London office -Notcutt House, Southwark Bridge Road, London, SE1. The purchase price of GBP 7million reflects a net initial yield of 5.75%. The property was refurbished in2001 and is let to a single tenant until September 2016. The Group also disposedof a retail property at Gorgie Park Road, Edinburgh for GBP 3.6 million, well inexcess of the June valuation of GBP 2.98 million. We continue to search for suitable acquisitions that meet the Group's objectivesand, where appropriate, disposing of assets that do not. ING Real Estate Investment Management (UK) Limited 7 September 2006 Portfolio Statistics GEOGRAPHICAL As at 30 June 2006 the regional weightings of the property portfolio, as apercentage of current capital value, are summarised as follows: Central London 7.9%South East & Greater London 35.9%Midlands 18.1%South West 4.6%North 17.7%Wales 7.2%Scotland 4.1%Northern Ireland 2.9%Offshore UK 1.6% SECTOR As at 30 June 2006 the sector weightings of the property portfolio, as apercentage of current capital value, are summarised as follows: Offices 41.4%Industrial 21.5%Retail 20.7%Retail Warehouses 9.1%Leisure 7.3% COVENANT STRENGTH The covenant strength as at 31 March 2006 is summarised as follows (based as apercentage of current passing rent): Portfolio IPD Quarterly benchmarkNegligible and Government risk 32.2% 37.6%Low risk 32.0% 33.6%Low-medium risk 9.2% 8.5%Medium-high risk 15.9% 8.1%High risk 4.5% 6.5%Ineligible/not matched 6.2% 5.7% Covenant strength data is produced by IPD and, as at 18 August 2006, is notavailable for 30 June 2006. LEASE EXPIRY As at 30 June 2006 the length of the leases to the first termination issummarised as follows (based as a percentage of current net annual rent): < 5 years 37.7%5-10 years 23.7%10-15 years 28.4%15-25 years 8.2%> 25 years 2.0% LIST OF PROPERTIES BY VALUE BAND Properties in excess of GBP 20 million Predominant UseColchester Business Park, The Crescent, Colchester Office36-42 Frodsham Street and Frodsham Square, Chester RetailUnit 5320, Magna Park, Lutterworth IndustrialPhase II, Parc Tawe, Link Road, Swansea Retail Warehouse Properties between GBP 15 million and GBP 20 millionScottish Provident Buildings, Donegall Square West, Belfast RetailRegency Wharf, Broad Street, Birmingham LeisureLincoln Place (Block 2),Farringdon Road, London EC1 OfficeBoundary House, Jewry Street, London, EC3 OfficeScorpio Inns Pub Portfolio Leisure Properties between GBP 10 million and GBP 15 millionScots Corner, High St/Institute Rd, Birmingham RetailAngouleme Way Retail Park, Bury Retail WarehouseAngel Gate Office Village, City Road, London EC1 OfficeArena Court, Crown Lane, Maidenhead Office401 Grafton Gate East, Milton Keynes Office17/19 Fishergate, Preston RetailUnit 2, Ravensback Business Park, Redditch IndustrialThe Business Centre, Molly Millars Lane, Wokingham Industrial171 Bath Road, Slough Office Properties between GBP 5 million and GBP 10 millionDownmill Road, Bracknell IndustrialWaterside Park, Longshot Lane, Bracknell Office9/12 St James Parade, Bristol OfficeLongcross Court, Newport Road, Cardiff OfficeCity Link House & Tolley House, Addiscombe Road, Croydon Office72/78 Murraygate, Dundee RetailQueens House,17/29 St Vincent Place, Glasgow OfficeLeys House, 86/88 Woodbridge Road, Guildford Office6/12 Parliament Row, Hanley RetailUnits 1-3, 18/28 Victoria Lane, Huddersfield RetailProvident House, Ballacottier Business Park, Isle Of Man OfficeWaterside House, Kirkstall Road, Leeds Office1-3 Chancery Lane, London WC2 Office134/152 Balham High Road, London, SW12 RetailStrathmore Hotel, Arndale Centre, Luton LeisureUnits 1-13 Dencora Way, Sundon Park, Luton IndustrialHeron Industrial Estate, Spencers Wood, Reading IndustrialHaynes Way, Swift Valley Industrial Estate, Rugby IndustrialTrident House, 42/48 Victoria Street, St Albans OfficeNorthampton Business Park, 800 Pavilion Drive, Northampton OfficeAtlas, Third Avenue, Globe Park, Marlow OfficeEaster Court, Gemini Park, Warrington Industrial3 The Boulevard, Croxley Green, Watford Office1 Boulevard Shire Park, Welwyn Garden City OfficeLawson Mardon Buildings, Kettlestring Lane, York Industrial Properties under GBP 5 millionUnit 1 Oakwell Park Industrial Estate, Birstall IndustrialRiverside Business Centre, Aberdeen OfficeWren House, Hedgerows Business Park, Chelmsford OfficeMerchants House, Crook Street, Chester OfficeKwik Save, Gorgie Park Road, Edinburgh Retail477 Alexandra Parade, Glasgow Retail593/599 Fulham Road , London SW6 RetailTrafford Park, Ashburton Road East, Manchester Industrial9/17 Western Road, Mitcham Retail Warehouse40 Garsington Road, Oxford Industrial69/75 Queensway, 2-12 Park Place, Stevenage Retail7&9 Warren Street, Stockport RetailGlobe House, Madeira Road, West Byfleet Office Unaudited Consolidated Income Statement for the period from 1 January to 30 June 2006 1 January to 30 June 2006 15 Sept to 31 Dec 2005 (unaudited) Notes Income Capital Total Total GBP 000s GBP 000s GBP 000s GBP 000sIncomeRental income 4 14,044 - 14,044 7,152Service chargerecharged to tenants 872 - 872 737Other operating income 1,750 - 1,750 60Total operating income 16,666 - 16,666 7,949 Gains and Losses onInvestmentsUnrealised gains onrevaluation ofinvestment properties - 32,092 32,092 18,371Unrealised gain oninterest rate swap - 6,230 6,230 -Total gains oninvestments - 38,322 38,322 18,371 ExpensesProperty managementfee (2,443) - (2,443) (848)Property expenses (1,508) - (1,508) (66)Service charge cost ofproperties (872) - (872) (737)Amortisation offinance costs (145) - (145) (8)Swap arrangement fee - - - (247)Other (651) - (651) (133)Total operatingexpenses (5,619) - (5,619) (2,039) Profit before financecosts and tax 11,047 38,322 49,369 24,281 Bank and depositinterest receivable 643 - 643 191Loan interest expense (4,739) - (4,739) (1,915)Total finance costs (4,096) - (4,096) (1,724) Profit before tax 6,951 38,322 45,273 22,557Tax 7 300 - 300 (300)Profit for the period 7,251 38,322 45,573 22,257Dividends (8,304) - (8,304) -Retained earnings (1,053) 38,322 37,269 22,257 Earnings per share 8Basic (p) - - 14.9 7.3Diluted (p) - - 14.9 7.3 The total column of this statement represents the Group's Income Statement,prepared in accordance with International Financial Reporting Standards. Thesupplementary revenue return and capital return columns are both prepared underguidance published by the Association of Investment Trust Companies. All itemsin the above statement derive from continuing operations. Notes 1 to 21 formpart of these financial statements. Unaudited Consolidated Statement of Changes in Equity for the period ended 30 June 2006 Share Share Distributable Retained Total Capital Premium Reserves Earnings GBP 000s GBP 000s GBP 000s GBP 000s GBP 000sProfit for theperiod from15 Septemberto 31 December2005 - - - 22,257 22,257Issue of sharecapital - 298,544 - - 298,544Transfer - (298,544) 298,544 - -Balance as at31 December2005 - - 298,544 22,257 320,801Profit for theperiod from1 January to30 June 2006 - - - 37,269 37,269Balance as at30 June 2006 - - 298,544 59,526 358,070 All income is attributable to the equity holders of the parent company. Thereare no minority interests. By way of a special resolution dated 30 September2005, the amount standing to the credit of the share premium account wascancelled and transferred to a distributable reserve. See Note 18. Unaudited Consolidated Balance Sheet as at 30 June 2006 Assets Notes 30 June 2006 31 December 2005 GBP 000s (unaudited) GBP 000sNon-current assetsInvestment properties 10 553,746 505,630Total non-current assets 553,746 505,630Current assetsReceivables 11 4,809 4,638Cash and cash equivalents 12 12,999 32,696Total current assets 17,808 37,334Total assets 571,554 542,964Current liabilitiesAccrued expenses and deferred income 14 (10,962) (11,812)Other payables 15 (8,752) (10,351)Total current liabilities (19,714) (22,163)Non-current liabilitiesBorrowings 13 (193,770) (200,000)Total non-current liabilities (193,770) (200,000)Total liabilities (213,484) (222,163)Net assets 358,070 320,801Ordinary share capital 17 - -Distributable Reserve 18 298,544 298,544Retained earnings 59,526 22,257Shareholders' funds 358,070 320,801Net Asset Value per share GBP 1.17 GBP 1.05 The interim report was approved by the Board of Directors on 7 September 2006and signed on its behalf by: Trevor Ash Robert Sinclair Unaudited Consolidated Cash Flow Statement for the period from 1 January to 30June 2006 1 January to 30 June 15 Sept to 31 Dec 2006 2005 GBP 000s (unaudited) GBP 000sProfit before tax 45,273 22,557Adjusted forInterest received (643) (191)Interest paid 4,739 1,656Amortisation of financecosts 145 8Realised and unrealisedsurplus on investmentproperties and interestrate swap (38,322) (18,371)Operating profit beforeworking capital changes 11,192 5,659Increase in trade andother receivables (316) (2,689)(Increase)/decrease intrade and other payables (2,907) 21,864Net cash flows fromoperating activities 7,969 24,834Cash flows from investingactivitiesPurchase of investmentproperties (16,024) (487,259)Interest received 643 191Net cash flows frominvesting activities (15,381) (487,259)Cash flows from financingactivitiesEquity raised - 305,000Proceeds from long termborrowings - 200,000Issue costs of borrowingand equity raising - (8,414)Interest paid (3,981) (1,656)Dividends paid (8,304) -Net cash flows fromfinancing activities (12,285) 495,121Net (decrease)/increasein cash and cashequivalents (19,697) 32,696Cash and cash equivalentsat beginning of period 32,696 -Cash and cash equivalentsat end of period 12,999 32,696 Notes to the Unaudited Consolidated Financial Statements for the period ended 30 June 2006 1. GENERAL INFORMATION ING UK Real Estate Income Trust Limited was incorporated on 15 September 2005and is registered as a closed ended Guernsey investment company (The address ofthe registered office is given on page 28). The interim consolidated financial statements are prepared for the period from 1January to 30 June 2006. The comparable period is 15 September 2005 to 31December 2005. The first accounting period and audited financial statements ofthe Group will be prepared under International Financial Reporting Standards forthe period ending 31 December 2006. These financial statements are presented in pounds sterling being the currencyof the primary economic environment in which the Group operates. No Company only information has been provided because in the opinion of theDirectors this would not give a materially different view than for the Group. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of accounting The financial statements of the Group have been prepared in accordance withInternational Financial Reporting Standards ("IFRS"), which comprise standardsand interpretations approved by the International Accounting Standards Board("IASB"), and International Accounting Standards and Standing InterpretationsCommittee interpretations approved by the International Accounting StandardsCommittee ("IASC") that remain in effect; and to the extent that they have beenadopted by the European Union. At the date of approval of these financial statements, the following standard,which has not been applied in these financial statements, was in issue but notyet effective: IAS34 Interim Financial Reporting. The financial statements have been prepared on the historical cost basis, exceptfor the revaluation of investment properties. The principal accounting policiesadopted are set out below. Where presentational guidance set out in theStatement of Recommended Practice ('SORP') for investment trusts has been issuedby the Association of Investment Trust Companies ('AITC') in December 2005 andis consistent with the requirements of IFRS, the Directors have sought toprepare the financial statements on a basis compliant with the recommendationsof the SORP. Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Group and entities controlled by the Group made up to 30 June. Control isachieved where the Group has the power to govern the financial and operatingpolicies of an investee entity so as to obtain benefits from its activities. Allintra-group transactions, balances, income and expenses are eliminated onconsolidation. The results of ING (UK) Listed Real Estate Issuer Plc areconsolidated in accordance with SIC 12, "Consolidation-Special PurposeEntities". Presentation of the income statement In order to better reflect the activities of an investment trust company and inaccordance with guidance issued by the AITC, supplementary information whichanalyses the income statement between items of a revenue and capital nature hasbeen presented alongside the income statement. Investment properties Following the initial recognition at cost, land and buildings are carried at arevalued amount which is the fair value at the date of the revaluation. Fairvalue is determined by reference to market-based evidence, which are the amountsfor which the assets could be exchanged between a knowledgeable willing buyerand a knowledgeable willing seller in arm's length transactions as at thevaluation date. The fair value of investment property is based on valuation by an independentvaluer who holds a recognised and relevant professional qualification and whohas recent experience in the location and category of the investment propertybeing valued. Movements in fair value are included in the income statement. An item of investment property is derecognised upon disposal or when no futureeconomic benefits are expected to arise from the continued use of the asset. Anygain or loss arising on derecognition of the asset (calculated as the differencebetween the net disposal proceeds and the carrying amount of the item) isincluded in the income statement in the year the item is derecognised.Properties are not depreciated. Realised and unrealised gains on investment properties have been presented ascapital items within the income statement. The loan from ING (UK) Listed Real Estate Issuer Plc has a first rankingmortgage over all the properties. See Note 13. In line with industry practice, properties are held in nominee companies. Leases An operating lease is a lease other than a finance lease. Lease income isrecognised in income on a straight-line basis over the lease term. Indirectcosts incurred in negotiating and arranging an operating lease are added to thecarrying amount of the lease asset and recognised as an expense over the leaseterm on the same basis as the lease income. The financial statements reflect the requirements of SIC15, "Operating Leases -Incentives" to the extent that they are material. Lease income and expenses have been presented as revenue items in the incomestatement. Income and expenses Income and expenses are included in the income statement on an accruals basis.All of the Group's income and expenses are derived from continuing operations. Revenue is recognised to the extent that it is probable that the economicbenefit will flow to the Group and the revenue can be reliably measured. Property operating costs include the costs of professional fees on letting andother nonrecoverable costs. The income charged to tenants for property service charges and the costsassociated with such service charges are shown separately in the incomestatement to reflect that notwithstanding this money is held on behalf oftenants occupying the properties, the ultimate risk for paying and recoveringthese costs rests with the property owner. Cash and cash equivalents Cash includes cash in hand and cash with banks. Cash equivalents are short-term,highly liquid investments that are readily convertible to known amounts of cashwith original maturities in three months' or less and that are subject to aninsignificant risk of change in value. Trade receivables Trade receivables are stated at their nominal amount as reduced by appropriateallowances for estimated irrecoverable amounts. Interest bearing loans and borrowings All loans and borrowings are initially recognised at cost, being the value ofthe consideration received net of issue costs associated with the borrowing.After initial recognition, interest-bearing loans and borrowings aresubsequently measured at amortised cost using the effective interest ratemethod. Amortised cost is calculated by taking into account any issue costs, andany discount or premium on settlement. Gains and losses are recognised in theincome statement when the liabilities are derecognised, as well as through theamortisation process. Finance Costs Finance costs incurred relating to the arrangement of the loan are written offto the income statement over the term of the loan. Other assets and liabilities Other assets and liabilities are not interest bearing and are stated at theirnominal value. Taxation The Group is exempt from Guernsey taxation on income derived outside Guernseyunder the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. A fixed annualfee of GBP 600 is payable to the States of Guernsey income tax authorities inrespect of this exemption. No charge to Guernsey taxation will arise on capital gains. The Directors intend to conduct the affairs of the Group such that themanagement and control of the Group is not exercised in the United Kingdom andthat the Group does not carry on a trade in the United Kingdom. Accordingly theGroup will not be liable to United Kingdom taxation on its income or capitalgains other than certain income deriving from a United Kingdom source. The Group is subject to United Kingdom taxation on income arising on theProperty Portfolio after deduction of allowable debt financing costs andallowable expenses. Principles for the cash flow statement The cash flow statement has been drawn up according to the indirect method,separating the cash flows from operating activities, investing activities andfinancing activities. The net result has been adjusted for amounts in the incomestatement and movements in the balance sheet which have not resulted in cashincome or expenditure in the period. The cash amounts in the cash flow statement include those assets that can beconverted into cash without any restrictions and without any material risk ofdecreases in value as a result of the transaction. Dividends that have beenproposed and declared are included in the cash flow from financing activities. 3. RISK MANAGEMENT The Group invests in commercial properties in the United Kingdom, the Isle ofMan and the Channel Islands. The following describes the involved risks and theapplied risk management. Real estate risks The yields available from investments in real estate depend primarily on theamount of revenue earned and capital appreciation generated by the relevantproperties as well as expenses incurred. If properties do not generatesufficient revenues to meet operating expenses, including debt service andcapital expenditures, the Group's revenue will be adversely affected. Revenuefrom properties may be adversely affected by the general economic climate, localconditions such as oversupply of properties or a reduction in demand forproperties in the market in which the Group operates, the attractiveness of theproperties to tenants, the quality of the management, competition from otheravailable properties and increased operating costs (including real estatetaxes). In addition, the Group's revenue would be adversely affected if a significantnumber of tenants were unable to pay rent or its properties could not be rentedon favourable terms. Certain significant expenditure associated with each equityinvestment in real estate (such as external financing costs, real estate taxesand maintenance costs) generally are not reduced when circumstances cause areduction in revenue from properties. By diversifying in regions, sectors, risk categories and tenants, the Managerexpects to lower the risk profile of the portfolio. Risks of leverage The Group has external borrowings in connection with its investments to increasethe potential equity performance. Although the use of leverage may enhancereturns and increase the number of investments that can be made, it may alsoincrease the risk of loss. This includes the risk that available funds will beinsufficient to meet required payments and the risk that existing indebtednesswill not be able to be refinanced or that terms of such refinancing will not beas favourable as the terms of existing indebtedness. Interest rate risk The following table sets out the carrying amount, by maturity, of the Group'sfinancial instruments. Less than one year 1 to 5 years More than 5 years Total GBP 000s GBP 000s GBP 000s GBP 000sAssetsCash and cashequivalents 12,999 - - 12,999Interest rateswap - - 6,230 6,230LiabilitiesTerm loan - - 200,000 200,000 Credit risk Credit risks, or the risk of counter parties defaulting, are controlled by theapplication of credit approvals, limits and monitoring procedures. Whereappropriate, the Group obtains collateral in the form of rent deposits. Theextent of the Group's credit exposure is represented by the aggregate balance ofamounts receivable, reduced by the effect of any netting arrangements withcounter parties. Liquidity risk Liquidity risk arises from the possibility that customers may not be able tosettle obligations within the normal terms of trade. To manage this risk, theGroup periodically assesses the financial viability of customers. 4. RENTAL INCOME Rent receivable is stated exclusively of Value Added Tax and arose wholly fromcontinuing operations in the United Kingdom, the Isle of Man and the ChannelIslands. 5. BUSINESS AND GEOGRAPHICAL SEGMENTS The Directors are of the opinion that the Group, through its subsidiaryundertakings, operates in one reportable industry segment, namely real estateinvestment, and across one primary geographical area, namely the United Kingdom,the Isle of Man and the Channel Islands and therefore no segmental reporting isrequired. The portfolio consists of 55 commercial properties, comprising office,retail, industrial and leisure sectors, and one Public House Portfolio (the "PubPortfolio"). 6. STAFF NUMBERS AND COSTS The Group has no employees. 7. TAX The (credit)/charge for the period is: 2006 2005 GBP 000s GBP 000s UK income tax at 22% on UK rental income (300) 300 8. EARNINGS PER SHARE From continuing operations, the calculation of the basic and diluted earningsper share is based on the following data: Earnings for the purposes of basic earnings per share being net GBP 45,573,000profit attributable to equity holders:The average number of shares in issue during the period: 305,000,000 9. SUBSIDIARIES ING UK Real Estate Income Trust Limited owns 100% of the share capital of: > ING UK Real Estate (Property) Limited, PO Box 255, Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3QL; and > ING (UK) REIT (SPV) Limited, PO Box 255, Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3QL. ING UK Real Estate (Property) Limited and ING (UK) REIT (SPV) Limited own 100%of the units in ING (UK) Listed Real Estate, a Guernsey Property Unit Trust (The"GPUT"). The subsidiaries and the GPUT were incorporated to provide a tax efficientstructure for the Group to invest in the underlying property investments. Under the principles of SIC 12 the Group has consolidated the results of theSpecial Purpose Entity ("the SPE") detailed below. The Group does not own anyshare capital of the SPE: ING (UK) Listed Real Estate Issuer Plc, c/o SPVManagement Limited, Tower 42 (Level 11), International Financial Centre, 25 OldBroad Street, London EC2N 1HQ. The SPE was incorporated to provide funding to the Group though a securitisationagreement. See note 13. 10. INVESTMENT PROPERTIES 2006 2005 GBP 000s GBP 000s At start of period 505,630 -Additions 16,024 487,259Surplus on revaluation 32,092 18,371At end of period 553,746 505,630 The investment properties were valued by King Sturge, Chartered Surveyors, as at24 June 2006, on the basis of open market value in accordance with the Appraisaland Valuation Manual of the Royal Institute of Chartered Surveyors. The historical cost of investment property included in the valuation above wasGBP 503,283,000. The loan facility is secured by a first ranking fixed charge over all propertiesheld. In relation to the Scorpio Inns Pub Portfolio, the tenant has options topurchase one third of the pub properties in 2006, one half in 2011 and thebalance in 2016. The option price has been accounted for in the above valuation.The current option has been exercised and will take effect before the end ofOctober 2006. 11. RECEIVABLES 2006 2005 GBP 000s GBP 000s Trade debtors 3,005 2,609Capitalised finance costs 1,804 1,949Other receivables - 80 4,809 4,638 The unamortised loan arrangement costs as at 30 June 2006 are GBP 1,804,000.These are amortised over the life of the loan. For the period ended 30 June 2006GBP 145,000 (period ended 31 December 2005: GBP 8,000) of these costs werewritten off to the income statement. 12. CASH AND CASH EQUIVALENTS 2006 2005 GBP 000s GBP 000sCash at bank and in hand 5,277 9,761Short term deposits 7,722 22,935 12,999 32,696 Cash at bank and in hand earns interest at floating rates based on daily bankdeposit rates. Short-term deposits are made for varying periods of between oneday and one month depending on the immediate cash requirements of the Group, andearn interest at the respective short-term deposit rates. The fair value of cashand cash equivalents is GBP 12,999,000. 13. INTEREST BEARING LOANS AND BORROWINGS Type Rate 2006 2005 Maturity % GBP 000s GBP 000s DateFixed 4.805 200,000 200,000 Jan 2013 On 20 December 2005 the Group entered into a seven year fixed rate loan with ING(UK) Listed Real Estate Issuer PLC (the 'Issuer'), a newly set up SpecialPurpose Vehicle which, back-to-back, issued GBP 200 million of AAA seven yearfloating rate loan notes to the debt market. The loan has a fixed interest rateof 4.805% and can be repaid at any time. The debt proceeds were used to repaythe GBP 200 million bridge loan which was due to expire in April 2006. TheIssuer has entered into an interest rate swap in order to fix the interestpayable on its loan notes. The fair value of this interest rate swap at 30 June2006 was GBP 6,230,000 (31 December 2005: GBP nil). Under the terms of the securitisation documents the Group has an obligation tothe Issuer in respect of any amounts due or payable under the swap agreement. Asthe Group consolidates the results of the Issuer under the principles of SIC 12,the Group has accounted for the fair value of the swap. 14. ACCRUED EXPENSES AND DEFERRED INCOME 2006 2005 GBP 000s GBP 000sProperty management fees 1,182 848Other accruals 1,988 3,416Deferred rental income 7,792 7,548 10,962 11,812 15. OTHER PAYABLES 2006 2005 GBP 000s GBP 000sVAT liability - 2,367Trade creditors - capital expenses 5,600 7,700Other 3,152 284 8,752 10,351 16. CONTINGENCIES AND CAPITAL COMMITMENTS There are none as at 30 June 2006. (Period ended 31 December 2005: GBP Nil) 17. ORDINARY SHARE CAPITAL Authorised: 305 million of ordinary shares of nil par value. Issued and fully paid: 305 million ordinary shares of nil par value. 18. SHARE PREMIUM AND DISTRIBUTABLE RESERVE Share Distributable Share Distributable Reserve Premium Reserve Premium 2005 2006 2006 2005 GBP 000s GBP 000s GBP 000s GBP 000sBalance at start ofperiod - 298,544 - -Premium arising onissue of equity shares - - 305,000 -Expenses of issue ofequity shares - - (6,456) -Transfer todistributable reserve - - (298,544) 298,544Balance at end ofperiod - 298,544 - 298,544 By way of a special resolution dated 30 September 2005, the amount standing tothe credit of the share premium account was cancelled and transferred to adistributable reserve. 19. DIVIDENDS The dividends paid in the current period are as follows: GBP 3,538,000 (1.16pence per ordinary share) paid in February 2006 relating to the period 25October to 31 December 2005, GBP 4,766,000 (1.5625 pence per ordinary share)paid in May 2006 relating to the quarter ended 31 March 2006. (Period ended 31December 2005: GBP nil). A further interim dividend of 1.5625 pence per ordinary share in respect of thequarter ended 30 June 2006 has been approved and paid in August 2006. Under IFRSthese financial statements do not reflect this dividend. 20. RELATED PARTY TRANSACTIONS Under the terms of the Investment Management Agreement, ING Real EstateInvestment Management (UK) Limited (the "Investment Manager") receivesremuneration for property management and administration services. The managementfee is payable quarterly in arrears and is equal to the aggregate of thefollowing: a) one quarter of 90 basis points of gross property assets up to and includingGBP 600 million b) one quarter of 82.5 basis points of gross property assets in excess of GBP600 million and up to and including GBP 800 million c) one quarter of 75 basis points of gross property assets in excess of GBP 800million d) one quarter of 40 basis points of cash assets ING Real Estate Investment Management (UK Funds) Limited (the "Fund Manager") ispaid a quarterly fee of GBP 150,000 per annum by the Group in respect of theadministration services. This is deducted from the fee referred to above. Duringthe period the Investment Manager and Fund Manager were paid a total of GBP2,443,000 in respect of the above services. ING UK Real Estate Income Trust Limited has no controlling parties. 21. EVENTS AFTER THE BALANCE SHEET DATE A dividend of GBP 4,766,000 (1.5625 pence per share) was approved by the Boardon 10 August 2006. On 6 July 2006 a further GBP 25 million of debt was drawn down under thesecuritisation structure which was established in December 2005. This was issuedin the form of AAA rated Reserve Notes and has been fully hedged until 30January 2013. INDEPENDENT REVIEW REPORT ING UK REAL ESTATE INCOME TRUST LIMITED ("The Group") Introduction We have been instructed by the Group to review the financial information for thesix months ended 30 June 2006 which comprise the consolidated income statement,the consolidated balance sheet, the consolidated statement of changes in equity,the consolidated cash flow statement and related notes 1 to 21. We have read theother information contained in the interim report and considered whether itcontains any apparent misstatements or material inconsistencies with thefinancial information. This report is made solely to the Group in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the Group those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone other thanthe Group, for our review work, for this report, or for the conclusions we haveformed. Director's responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures are consistent withthose applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed. As disclosed in note 1, the next annual financial statements of the Fund will beprepared in accordance with International Financial Reporting Standards asadopted for use in the EU. Accordingly, the interim report has been prepared inaccordance with the recognition and measurement criteria of IFRS and thedisclosure requirements of the Listing Rules. Review work performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2006. Deloitte & ToucheChartered Accountants7 September 2006 Group Information DirectorsNicholas Thompson (Chairman)Trevor AshDavid BlightJohn GibbonRobert Sinclair Investment and Property ManagerING Real Estate InvestmentManagement (UK) Limited6th Floor60 London WallLondon EC2M 5TQ Fund Administrator, Registrar and SecretaryNorthern Trust International FundAdministrationServices (Guernsey) LimitedPO Box 255, Trafalgar CourtLes BanquesSt. Peter PortGuernsey GY1 3LQ Receiving Agent and UK Transfer/ Paying AgentComputershare Investor Services PlcPO Box 859The PavilionsBridgewater RoadBristol BS99 1XZ Tax AdvisersDeloitte and Touche LLPHill House1 Little New StreetLondon EC4A 3TR Registered OfficeTrafalgar CourtLes BanquesSt. Peter PortGuernsey AuditorsDeloitte & ToucheRegency CourtGlategny EsplanadeSt Peter PortGuernsey GY1 3HW Property ValuersKing Sturge LLP30 Warwick StreetLondon W1B 5NH Solicitors to the Group: As to English Law Norton RoseKempson HouseCamomile StreetLondon EC3A 7AN As to Guernsey Law Carey OlsenPO Box 987 New StreetSt Peter PortGuernsey GY1 4BZ Please find below a link to the Interim Report and Consolidated FinancialStatements of the Company. http://www.rns-pdf.londonstockexchange.com/rns/6728i_-2006-9-7.pdf Enquiries: The Company SecretaryNorthern Trust International Fund Administration Services (Guernsey) LimitedTrafalgar CourtLes BanquesSt Peter PortGuernseyGY1 3QL 01481 745439 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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