12th Sep 2007 07:01
ING UK Real Estate Income Trust Ltd12 September 2007 ING UK REAL ESTATE INCOME TRUST (The "Company"/ "Group") The ING UK Real Estate Income Trust Limited has today announced interim resultsfor the six months to 30 June 2007. FINANCIAL HIGHLIGHTS > Consolidated profit before tax for the six months ended 30 June 2007 ("the period") was £34.4 million, including unrealised gains of £25.9 million. > £9.7 million of this unrealised gain arises from the fixing of interest on borrowings. > Total net asset value per share of 133 pence compared to 126 pence at 31 December 2006, reflecting a 5.74% gain during the period. > Retained profit including property revaluations was £24.0 million for the period. > Shareholders' Funds rose from £418.3 million to £442.3 million for the period. > Two dividends totalling 3.125 pence per share were paid in February and May 2007. > Total expense ratio of 0.96% (calculated as the total annualised expenses as a proportion of total assets less current liabilities). OPERATIONAL HIGHLIGHTS > Gross property assets increased from £702.2 million to £715.5 million, delivering an ungeared total return of 5.1% over the period, ahead of the IPD Quarterly Index. > Performance principally driven through exposure to office market and active asset management initiatives. > One acquisition, of an asset adjacent to an existing holding, was made in the period. Rental terms have already been agreed ahead of expectations. > In line with strategy, two smaller assets were sold during the period, both realising profit ahead of valuation. 30 June 2007 30 June 2006Net asset value £442.3 million £358.0 millionNet asset value per share 133 pence 117 pencePre-tax profit for the period (inc unrealised £34.4 million £45.3 milliongains)Net income for the period £8.3 million £7.3 millionEarnings per share 10.4 pence 14.9 pence For further information: The Company Secretary Northern Trust International Fund Administration Services (Guernsey) LimitedTrafalgar CourtLes BanquesSt Peter PortGuernseyGY1 3QLTel: 01481 745439Fax: 01481 745085 ING Real Estate Investment Management (UK) LimitedSelina Sasse, 020 7767 5756, [email protected] Stott, 020 7767 5648 [email protected] Financial DynamicsDido Laurimore/Stephanie Highett, 020 7831 3113 ING UK REAL ESTATE INCOME TRUST LIMITED ING UK Real Estate Income Trust Limited is a closed-ended, Guernsey registeredinvestment company, launched on the London and Channel Islands' Stock Exchangeson the 25 October 2005. With approximately 800 investors, the Company, togetherwith several subsidiaries including a Guernsey unit trust and four Jersey unittrusts which beneficially hold title to the properties, comprise "the Group". GROUP OBJECTIVE The Group aims to provide shareholders with an attractive level of incometogether with the potential for capital growth. It can invest both directly andindirectly in an investment portfolio comprising UK, Isle of Man and ChannelIslands properties. The Group's focus is on five principal commercial propertysectors: office, retail, retail warehouse, industrial and leisure. It is thecurrent intention of the Group to limit borrowings to a maximum of 50% of grossassets. The investment portfolio is managed by ING Real Estate Investment Management(UK) Limited. Chairman's Statement This Interim Report and Accounts covers the six months from 1 January 2007 to 30June 2007. I am pleased to advise that the Group has continued to make furtherprogress, delivering a pre-tax profit for the period of £34.4 million. The net asset value of the Group has increased from £418.3 million to £442.3million, or 133 pence per share from 126 pence per share, which represents anincrease of 5.74% over the period. In addition, dividends of £10.4 million havebeen paid, reflecting 3.125 pence per share for the reporting period. The property portfolio has delivered a total return of 5.1% in the six monthsunder review, out-performing the IPD Quarterly Benchmark which returned 4.9%over the same period. The assets continue to deliver an income returnsignificantly ahead of the IPD Benchmark. The Group has benefited from fixing the interest payable on its borrowingswhich, in current market conditions, has continued to have a positive impact onthe net asset value. While the Group's portfolio has out-performed industry benchmarks and deliverednet asset value growth, the Board is acutely aware that, like many othercompanies within the peer group, its shares are currently trading at a discountto their underlying net asset value. Whilst the discounts on Guernsey InvestmentCompanies are less than many of the newly formed UK Real Estate InvestmentsTrusts, the Board is closely monitoring the level of such discount. Although it has not yet done so, the Board has in place a strategy for therepurchase of shares when it is able. However, with the portfolio being valuedquarterly there are only limited trading windows in which it can operate arepurchase programme. Combined with a tight capital structure, and the relativeilliquidity of the underlying real estate, the Group has, to date, chosen to usesale proceeds to reduce borrowings. The turbulence in the financial markets over the summer months has affected bondand equity pricing and the property market is starting to see signs of outwardyield movement as a result of this structural re-pricing of risk. Nevertheless,the occupational real estate market remains sound and still offers positiverental value growth. The Group's primary focus remains on growing the underlying income. This will beachieved through a reduction of debt costs, realisation of asset managementinitiatives and the sale of assets with lower income and weaker total returnprospects. The Board was delighted that Tjeerd Borstlap's appointment to the Board wasconfirmed at the recent Annual General Meeting. Whilst the governance issuesaround his appointment are fully recognised, given his role as Chief FinancialOfficer of ING Real Estate Investment Management, we welcome the contribution heis making to our affairs, both through his experience and professionalism. He isalso able to provide a helpful focus for the Board on our issues. Together wepolice the governance issues robustly and consequently Tjeerd does not sit onthe Audit or Management Engagement committees. The portfolio remains well balanced and benefits from a secure income streamwith an average lease length in excess of eight years. We expect the InvestmentManager to continue to deliver performance in this more challenging environmentand, as a Board, remain fully cognisant of the spectrum of opportunitiesavailable to deliver shareholder value. Nicholas ThompsonChairman of the Board11 September 2007 Investment Manager's Review ECONOMIC OVERVIEW: GDP growth over the year to June 2007 was robust at 3% per annum and slightlyabove the 2.8% per annum recorded for the calendar year 2006. Financial andbusiness services (FBS) growth continues to be a major driver, expanding atalmost double the pace of the rest of the UK economy. This has positiveimplications for property rental growth, particularly in the office sector. Onthe consumer side, signals remain mixed with the full effects of previousinterest rate increases yet to fully materialise. While surveys suggest consumerconfidence may be declining, mortgage approvals and retail sales held firm overthe three months to June. The annual CPI inflation rate stood at 1.9% per annum in July, a reduction from2.4% per annum the previous month. Current inflationary concerns are partlyglobal in nature focused on energy and food price increases. However, to date wehave been largely insulated from the full effects of dollar denominatedcommodity price increases by the strength of Sterling. While inflation stilllooks set to ease during the remainder of 2007, CPI is not expected to beconsistently below 2% until the second quarter of 2008. The RPI inflation atJuly was 3.8%. The Bank of England raised the base rate by a further 25 basis points to 5.75%in July. The outlook for interest rates has become less clear in recent weeks,due to the turmoil in the financial markets following the US sub-prime mortgagecrisis. ING Financial Markets' view is that one more rate rise, to a peak of 6%,is likely this year. However, the recent market volatility indicates a pauseuntil the final quarter of 2007 and a number of market commentators now believethat rates will peak at 5.75%. The current monetary tightening cycle dependsupon higher borrowing costs dragging GDP growth back towards trend level.Furthermore, given commodity price increases, it will be important that ourcurrency maintains a degree of parity against the US Dollar. It is also worthnoting that investor concerns relating to UK interest rates during July may bebeginning to moderate with Sterling swap rates starting to ease downwards inAugust. UK PROPERTY MARKET OVERVIEW: The IPD Quarterly Index registered a total return of 12.7% for the 12 months toJune 2007, compared to a figure of 18% per annum at the beginning of the year.Performance is strongest in the office sector at 18.3% per annum followed byindustrial and retail at 12.4% and 9.4% respectively. This compares with 18.4% per annum from the FT All Share and -1.0% from 5 to 15year Gilts over the same period. June 2007 Total Returns - Property, Equities and Gilts +------------------+--------------+------------------------+-------------------+| | IPD Monthly| Equities - All Share|Gilts - 5 to 15 yrs|+------------------+--------------+------------------------+-------------------+|1 month | 0.7%| -0.8%| -1.2%|+------------------+--------------+------------------------+-------------------+|3 months | 2.1%| 4.5%| -2.4%|+------------------+--------------+------------------------+-------------------+|6 months | 4.4%| 7.6%| -2.9%|+------------------+--------------+------------------------+-------------------+|12 months | 12.4%| 18.4%| -1.0%|+------------------+--------------+------------------------+-------------------+|Per annum | | | |+------------------+--------------+------------------------+-------------------+|3 years | 17.1%| 18.9%| 3.5%|+------------------+--------------+------------------------+-------------------+|5 years | 15.3%| 12.2%| 3.9%|+------------------+--------------+------------------------+-------------------+|10 years | 13.4%| 7.6%| 6.0%|+------------------+--------------+------------------------+-------------------+|20 years | 11.6%| 9.5%| 8.5%|+------------------+--------------+------------------------+-------------------+ Source: IPD, June 2007. PROPERTY MARKET OVERVIEW (CONTINUED) Property yield-driven capital appreciation is beginning to reverse with therecent financial markets turbulence. A year ago falling property yields aloneadded over 13% per annum to capital values during the preceding 12 months. Thisyear yield movements have added approximately 4% to the value of the average UKproperty portfolio (IPD Monthly), which is a more conservative increase. Thisdeceleration in yield reduction explains why capital growth, and therefore totalreturns, is now moderating from an unsustainable 18 to 19% over the last threeyears. In our view, the financial turmoil in the credit and equity markets hasincreased the risk free rate, making investors more risk averse. This isaffecting all asset classes, not just property. As a consequence we are alreadyseeing some small increases in property valuation yields and expect these tocontinue through to 2008. Market activity has been slow during the summer periodand there have been a very limited number of transactions to provide hardevidence of this shift in sentiment. September and October are expected toprovide a clearer picture of the market. Nevertheless, robust economic growth remains a positive indicator for theoccupational element of the UK commercial property market because GDP growth(currently a very healthy 3% per annum to June 2007) is a major driver of rentaluplifts. These rental increases will offset some of the impact from the rise inyields and, in addition, property performance can be enhanced through activemanagement initiatives such as refurbishment, change of use and tenantengineering. An often overlooked benefit to UK property is the stabilising effect that upwardonly rent review clauses have on income security. This practice insulates theincome stream from most of the underlying volatility in the rental market. As aresult, a continuously growing income stream is a long run benefit few outsidethe UK property market fully appreciate. GROUP PORTFOLIO PERFORMANCE For the period ending 30 June 2007, the underlying Net Asset Value of the Groupgrew from £418.3 million to £442.3 million, reflecting an increase of 5.74%.Other than its cash holdings, the Group invests solely in direct real estate andhas no indirect property investments. This property portfolio delivered anungeared total return of 5.1%, compared to the IPD Benchmark return of 4.9% overthe period. Relative to IPD, the property portfolio remains biased towards the officesector, with a lower retail weighting. This has had a positive effect onperformance which has been principally driven through the office sector and theimplementation of active management initiatives. The portfolio is structured sothat the retail element has direct exposure to the supermarket sub-sector whichhas also performed well over the period. At 30 June 2007, the value of the Group's portfolio was £715.5 million with anannual net income of £39.8 million, which reflects a running yield at propertylevel of 5.6%. The portfolio comprises 61 properties with an average unexpiredlease term of 8.66 years. The void level at 30 June 2007 represented 3.6% oftotal income. ACQUISITIONS AND DISPOSALS During the period, the Group completed one acquisition of a single vacantindustrial unit in Harlow. The unit measured 2,152 sq.m. (23,168 sq.ft.) and thepurchase price was £2.6 million. The property is adjacent to the recentlyacquired Riverway Industrial Estate and is currently being refurbished. Lettingterms have already been agreed ahead of those envisaged at purchase, which willhave a positive effect on the previously acquired adjacent estate. The Group has disposed of two properties including the smallest asset in theportfolio, Oakwell Park Trading Estate, Birstall, which was sold for £1.21million in January. Two detached warehouse units at Trafford Park in Manchesterwere sold for £5.76 million in April. Both sales were in line with the existingstrategy, to reduce the number of smaller assets in the portfolio which havelittle or no active management potential or where asset management initiativeshad been exhausted. The sales realised a profit 4.1% ahead of their precedingvaluation and 16% above valuation at launch. BORROWINGS The Group's borrowings are fixed, and consequently, have not been directlyaffected by the recent rises in the cost of debt. The debt is held in twoseparate tranches, the majority of which is securitised. Proceeds from saleshave been used to reduce gearing in the more expensive tranche. The weightedaverage cost of debt is 5.37% including the relevant amortised set up costs. The Group issued a total of £225 million of AAA rated loan notes on the debtmarket, with interest payable on the initial £200 million at 4.795% and further£25 million at 5.3804%, both fixed by way of an interest rate swap. These loannotes are repayable on 31 January 2013. The Group also has a loan with JP Morgan with a balance of £87.3 million at 30June 2007. Interest is payable on this loan at 6.0%, also fixed by way of aswap. This loan is repayable on 4 December 2009. A further loan repayment of£5.3 million was made on 31 July 2007. ASSET MANAGEMENT HIGHLIGHTS Asset management remains vital to delivering performance across the portfolioand a number of initiatives are being considered throughout the majority ofproperties. Achievements over the period include: Longcross Court, Cardiff Through the engineering of a number of lease surrenders, the Group facilitatedthe re-letting of the third and fourth floors. The letting will complete towardsthe end of 2007, when the building will have been refurbished. City Link House, Croydon The Group re-geared a lease to the Royal Bank of Scotland, one of the principaltenants, for a new term of 15 years and at an enhanced rental level. Angel Gate, London Following a successful letting campaign, the void rate on the multi let officespace has reduced from 40% on acquisition to a position where all availablespace is now let. 593-599 Fulham Road, London Two of the office floors have now been let following surrender, refurbishmentand a letting campaign. In addition an assignment of the retail lease (groundfloor and basement) has been facilitated to HSBC. As a result of these initiatives, the underlying valuation of these assetsincreased by 18% over the period. STRATEGY The key aim is to continue the strong active management of the portfolio,increasing income and facilitating capital growth, by means of leaserestructuring and identifying opportunities through close tenant liaison. Theportfolio has a number of lease expiries over the short- to medium-term and workto renew and re-gear leases continues where possible. It is intended that a number of selective disposals will be made during thesecond half of the year in order to further reduce gearing and enhance therelative income position by reducing the higher debt costs within the portfolio. OUTLOOK Economic fundamentals remain supportive of rental value growth, which iscurrently running at 3.8% per annum at 31 July 2007 (IPD Monthly). Set againstthis we are expecting some outward yield movement in the short term, reflectinginvestors' attitude to risk, which will reduce the current negative yield gapbetween the IPD Initial Yield of 4.6%, at 31 July 2007, and 10 year governmentGilts currently yielding circa 5%. UK real estate still offers a secure and stable income stream, diversificationbenefits, a strong residual value and relatively low volatility compared toother asset classes. The portfolio remains well diversified in terms of the number of assets,tenants, regions and sectors; it is also biased towards the office sector whichwe expect to be the best performing sector. Across the portfolio we are seeingpositive results on many lettings, rent reviews and lease renewals. It continuesto offer an attractive income return, ahead of the IPD Index, and activemanagement will continue to deliver enhanced returns looking forward. ING Real Estate Investment Management (UK) Limited 11 September 2007 Financial Statements UNAUDITED CONSOLIDATED INCOME STATEMENTFOR THE PERIOD FROM 1 JANUARY TO 30 JUNE 2007 1 Jan to 1 Jan to 15 Sept 30 June 30 June 2005 to 31 2007 2006 Dec 2006 Unaudited Unaudited Audited Income Capital Total Total Total £000 £000 £000 £000 £000 IncomeRental income 19,862 - 19,862 14,044 39,329Service charges recharged to 1,729 - 1,729 872 6,074tenantsOther operating income 1,128 - 1,128 1,750 4,661Total operating income 22,719 - 22,719 16,666 50,064 Gains and losses on investmentsRealised gains arising on - 179 179 - 4,572disposal of investmentpropertiesUnrealised gains arising on - 16,202 16,202 32,092 70,421disposal of investmentpropertiesUnrealised gains on interest - 9,653 9,653 6,230 8,727rate swapsTotal gains on investments - 26,034 26,034 38,322 83,720 ExpensesProperty operating expenses (1,545) - (1,545) (1,508) (2,572)Service charge costs (1,729) - (1,729) (872) (6,074)Management expenses (3,259) - (3,259) (2,443) (5,977)Other operating expenses (1,011) - (1,011) (796) (1,607)Total operating expenses (7,544) - (7,544) (5,619) (16,230) Profit before finance costs and 15,175 26,034 41,209 49,369 117,554tax Finance costsInterest receivable 862 - 862 643 1,617Interest payable (7,702) - (7,702) (4,739) (12,549)Total finance costs (6,840) - (6,840) (4,096) (10,932) Profit before tax 8,335 26,034 34,369 45,273 106,622Tax - - - 300 (460) Profit for the period 8,335 26,034 34,369 45,573 106,162Dividends (10,360) - (10,360) (8,304) (17,835)Retained earnings (2,025) 26,034 24,009 37,269 88,327 Earnings per shareBasic 10.4p 14.9p 34.4pDiluted 10.4p 14.9p 34.4p The total column of this statement represents the Group's Income Statement,prepared in accordance with International Financial Reporting Standards. Thesupplementary income return and capital return columns are both prepared underguidance published by the Association of Investment Companies. All items in theabove statement derive from continuing operations. All income is attributable to the equity holders of the parent company. Thereare no minority interests. UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE PERIOD FROM 15 SEPTEMBER 2005 TO 30 JUNE 2007 Share Share Distributable Retained Total Capital Premium Reserve Earnings Account £000 £000 £000 £000 £000 Balance as at 15 September - - - - -2005Net profit for the period - - - 106,162 106,162Dividends paid - - - (17,835) (17,835)Issue of ordinary shares - 337,198 - - 337,198Issue costs - (7,199) - - (7,199)Transfer to distributable - (298,610) 298,610 - -reservesBalance as at 31 December 2006 - 31,389 298,610 88,327 418,326 Net profit for the period - - - 34,369 34,369Dividends paid - - - (10,360) (10,360)Balance as at 30 June 2007 - 31,389 298,610 112,336 442,335 UNAUDITED CONSOLIDATED BALANCE SHEETAS AT 30 JUNE 2007 30 June 2007 30 June 2006 31 Dec 2006 Unaudited Unaudited Audited £000 £000 £000 Non-current assetsInvestment properties 715,531 553,746 702,167Total non-current assets 715,531 553,746 702,167 Current assetsAccounts receivable 5,175 4,809 7,437Cash and cash equivalents 33,929 12,999 37,873Total current assets 39,104 17,808 45,310 Total assets 754,635 571,554 747,477 Current liabilitiesAccounts payable and accruals (18,426) (19,714) (24,428)Total current liabilities (18,426) (19,714) (24,428) Non-current liabilitiesLoans and borrowings (293,874) (193,770) (304,723)Total non-current liabilities (293,874) (193,770) (304,723) Total liabilities (312,300) (213,484) (329,151) Net assets 442,335 358,070 418,326 EquityOrdinary share capital - - -Share premium account 31,389 - 31,389Distributable reserve 298,610 298,544 298,610Retained earnings 112,336 59,526 88,327 Total equity 442,335 358,070 418,326 Net asset value per share 1.33 1.17 1.26 UNAUDITED CONSOLIDATED CASH FLOW STATEMENTFOR THE PERIOD FROM 1 JANUARY TO 30 JUNE 2007 1 Jan to 30 1 Jan to 30 15 Sept June 2007 June 2006 2005 to 31 Unaudited Unaudited Dec 2006 Audited £000 £000 £000 Profit before tax 34,369 45,273 106,622 Adjusted for:Interest received (862) (643) (1,617)Interest paid 7,702 4,739 12,549Realised and unrealised gains on (26,034) (38,322) (83,720)investmentsAmortisation of finance costs 280 145 331Operating profit before working capital 15,455 11,192 34,165changes Decrease/(increase) in trade and other 1,981 (316) (4,930)receivables(Decrease)/increase in trade and other (6,001) (2,907) 23,968payables (4,020) (3,223) 19,038 Net cash inflow from operating activities 11,435 7,969 53,203 Cash flows from investing activitiesPurchase of investment properties (4,018) (16,024) (652,930)Disposal of investment properties 7,035 - 25,756Interest received 862 643 1,617Net cash inflow/(outflow) from investing 3,879 (15,381) (625,557)activities Cash flows from financing activitiesEquity raised - - 337,198Proceeds from long term borrowings - - 738,000Repayment of long term borrowings (1,196) - (424,550)Issue costs of borrowing and equity - - (10,037)raisingInterest paid on loans (7,702) (3,981) (12,549)Dividend paid (10,360) (8,304) (17,835)Net cash (outflow)/inflow from financing (19,258) (12,285) 610,227activities Net (decrease)/increase in cash and cash (3,944) (19,697) 37,873equivalents Cash and cash equivalents at beginning of 37,873 32,696 -period Cash and cash equivalents at end of 33,929 12,999 37,873period This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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