Preliminary Results Dec 2009

RNS Number : 1518L

Close High Income Properties PLC

30 April 2010

 

Close High Income Properties Plc

 

PRELIMINARY RESULTS

For the year ended 31 December 2009

 

 

SUMMARY

 

·; Ordinary Share net asset value fell from 41.44 pence per share to 29.19 pence per share as at 31 December 2009, a decrease of 29.56%, due to underlying weakness in UK commercial property values.

 

·; In the quarter ended 31 March 2010 the value of the property portfolio increased by £1.5 million to £111.7 million resulting in a net asset value of 31.28 pence per share.

 

·; Successful refinancing of the Company's loan facilities with Nationwide and Bank of Scotland in October 2009 and April 2010 respectively.

 

·; Strategic review undertaken by Board resulting in proposals agreed with Alpha Real Capital Group to raise £4.75 million of Convertible Unsecured Loan Stock and appoint a new Property Investment Adviser to the Company.

 

·; Board to recommend Continuation Vote at forthcoming Annual General Meeting.

 

 

CHAIRMAN'S STATEMENT

 

Introduction

2009 proved to be another challenging year for commercial property investment. Whilst the headlines focused on the recovery in the capital values of prime commercial property recorded towards the end of the year, for most in commercial property the year was again dominated by the impact of the recession on the occupier market. Rental values have come under pressure as a result of weak occupier demand and heightened levels of business failure. Despite this background, the Group's Property Investment Adviser has made significant efforts to preserve and improve the quality of the Company's income.

 

In February 2010 the Company received expressions of interest from two credible parties seeking to make offers for the Company. However, following the conclusion of a strategic review undertaken by the Board's appointed adviser PricewaterhouseCoopers ("PwC") and having taken into account the Property Investment Adviser's assessment of the projected performance of the Company's portfolio, together with the investment preferences of the Company's major shareholder, the Board determined that the offers would not provide full value for shareholders. All discussions with the interested parties have therefore ceased by mutual consent. As part of the strategic review, the Company also considered a proposal put forward by the Alpha Real Capital Group ("Alpha Real") through which the Company would raise additional capital and appoint a new Property Investment Advisor. These proposals have now been agreed in principle between the Board and Alpha Real and will, if implemented, involve the issue by the Company of £4.75 million of Convertible Unsecured Loan Stock ("CULS") alongside changes to the management of the Company, as described below.

 

The Company has successfully completed the refinancing of the Group's loan agreements with its two lenders; Bank of Scotland Plc ("Bank of Scotland") and Nationwide Building Society ("Nationwide") following the Loan to Value ("LTV") breaches that occurred on 31 December 2008. In October 2009 the Group refinanced its loan agreements with Nationwide in respect of its two subsidiaries, CHIP (Two) Limited and CHIP (Six) Limited. On 19 April 2010 the Group refinanced its loan agreements with Bank of Scotland in respect of its other subsidiary companies. Further detail on the Company's banking arrangements is set out below and in Note 14 to the Financial Statements.

The Company and the Property Investment Adviser believe that the continuation of the Company for a further three years, combined with the proposed Alpha Real fundraising and management changes (to be implemented in July 2010 subject to shareholder approval), represent the best alternative available to the Company to generate additional shareholder value. A three year extension to the Company's life will allow the portfolio to benefit from the anticipated recovery in occupier and investment demand for secondary industrial property, and to benefit further from active asset management initiatives to be pursued by the new Property Investment Adviser. Together the Board believes that these factors should have a positive impact on the net asset value of the Company. A winding-up or a sale of the Company would, by contrast, only be likely to realise the Company's current net asset value at best.

 

Furthermore, the Board anticipates that a combination of the increased certainty over the Company's financial position and the improvement in the asset management of the portfolio would narrow the discount to the net asset value ("NAV") per share at which the Company's shares have traded in recent months.

 

A circular will be sent to shareholders in June 2010 containing full details of the proposed fundraising and management changes. Shareholders will be asked to vote on these proposals, and on the continuation of the Company for a further three years, at the AGM to be held in July 2010.

 

Investment Performance

During the year, the Group's property portfolio fell in value by 9.6% to £110.3 million. The NAV of the Ordinary Shares fell by 29.56% over the year from 41.44 pence per share to 29.19 pence per share.

 

Since 30 September 2009 the Group has experienced two successive quarterly uplifts of the property portfolio. The uplift in the valuation of the property portfolio was £2.6 million or 2.4% for the quarter to 31 December 2009 and a further £1.5 million or 1.3% for the quarter to 31 March 2010. These capital uplifts can largely be attributed to improved sentiment in the market. Record low interest rates and high yield premiums, combined with an improvement in economic sentiment have helped to increase demand for higher risk asset classes, including commercial property. As at 31 March 2010, the Group's property portfolio is valued at £111.7 million and the last two quarterly valuation uplifts have helped to increase the NAV of the Ordinary shares by 9.6% to 31.28 pence per share over the six month period ended 31 March 2010.

 

The Property Investment Adviser has continued to make good progress in actively managing the properties in difficult circumstances. Voids levels rose over the course of year from 12.3% to 18.9%, but improved in the final quarter of 2009 to 17.9%. Void levels increased again in the first three months of 2010 to 18.3%. However the Property Investment Adviser believes that voids have reached a level at which they will now stabilise and begin to reduce. According to the UK Investment Property Databank ("IPD") index, void levels for industrial property stand at an average of 17.2% and for office property at 16.0% as at 31 December 2009.

 

Success has been had in reducing the level of expenses in what formerly constituted the "D" Ordinary Share Portfolio, improving net income. A refurbishment programme has been undertaken over the course of 2009 and is already delivering value with nearly half of the refurbished units let. Unsurprisingly, given the level of competition for tenants, new lettings have been at rental levels lower than those made in 2008. However, the Board believes that once tenants are in place, relationships can be formed with the Property Investment Adviser and rental levels increased over the medium term.

 

No acquisitions or sales were made during the year. The Board, in conjunction with the Property Investment Adviser, will continue to monitor the Portfolio for properties which could be sold. However, the Board is mindful that the investment market for the Company's assets remains thin and is likely to remain so while concerns relating to the outlook for the occupier market persist and investors struggle to secure bank debt on non-prime assets. Any demand for the Company's assets that does exist would likely focus on its better let properties; the sale of which could compromise the Group's ability to comply with its banking covenants and therefore the Board's ability to increase shareholder value over the medium term. All potential disposals will therefore be considered in the wider context of the impact they would have on the performance of the portfolio in aggregate over the medium rather than short term.

 

Debt and Banking Facilities

During the period from June 2007 to September 2009 the Group's property portfolio fell by 41% on a like for like basis for properties held during this period. During this period the Group sold properties to the value of £34.1 million and repaid debt of £32.4 million. By way of comparison the IPD index fell by 44% from its peak in June 2007 to its trough in July 2009.

 

As a result of these substantial declines in capital values and the illiquidity in the investment markets, which prevented the Group from selling additional assets, the Group breached its LTV covenants within its loan agreements on 31 December 2008.

 

The Board has since successfully completed the refinancing of the Group's banking agreements with its two lenders Nationwide and Bank of Scotland. All of the refinanced loan facilities place restrictions over the term of the facilities on the amount of capital expenditure improvements that can be funded from surplus rental income. They also restrict the distribution of income from the subsidiaries to the Company, thereby restricting the payment of dividends to the Company's shareholders.

 

Further details on the refinancings are provided in Note 14 to the financial statements, including details of a waiver received from Nationwide in respect of a breach of LTV covenant as at 31 March 2010 on CHIP (Six) Limited.

 

Expressions of Interest, Strategic Review, Equity Raise and the Appointment of a New Property Investment Adviser

In February 2010 the Board received expressions of interest from two credible parties seeking to make offers for the Company, or certain of its assets. In the context of these indicative offers and the continuation vote due in summer 2010, the Board sought the assistance of independent external advice from PwC and conducted a strategic review of the options available to the Group to maximise value for shareholders. The Board provided the prospective bidders with additional information relating to the Group's property assets and banking facilities in order that indicative offers could be put forward for consideration by the Board.

 

As part of the strategic review, the Company also considered a proposal put forward by Alpha Real to raise additional capital alongside the appointment of a new Property Investment Adviser. The key elements of the Alpha Real proposal are:

 

·; the subscription of £4.75 million of CULS to be issued by the Company. The CULS can be converted within a 3 year period into ordinary shares at 31 pence per share, representing 15-17% of the enlarged share capital of the Company; and

 

·; the appointment of a new Property Investment Adviser to the Group: being a joint venture between the existing Property Investment Adviser's group, and Alpha Real. The new Property Investment Adviser will appoint a new fund manager, Tom Pissarro, responsible for the Company's business plan. Further details of Alpha Real and Tom Pissarro are given below.

 

Having considered the terms of the indicative offers put forward by the prospective bidders, and the terms of the Alpha Real proposal, and having taken into account the Property Investment Adviser's assessment of the projected performance of the Company's portfolio, together with the investment preferences of the Company's major shareholder, the Board determined that the Alpha Real proposal offered superior long-term value for the Company's shareholders and consequently, all discussions with the prospective bidders ceased by mutual consent. The Board believes that the Alpha Real proposal:

 

·; provides additional capital to the Company to allow capital expenditure in the portfolios which otherwise would be constrained by the cash sweeps and tight capital expenditure limits put in place by the Company's lending banks;

 

·; provides working capital to allow the portfolio to withstand fluctuations in income without placing an undue strain on the limited cash resources of the Company;

 

·; provides capital on terms which are not materially dilutive to NAV per share;

 

·; brings in additional management resource at fund manager level; and

 

·; provides capital to grant additional headroom for future banking negotiations

 

Alpha Real Capital

Alpha Real is a UK-based real estate funds management group with over £600 million of assets under management. Its Partners are successful and highly experienced UK real estate investors, including the following individuals:

 

·; Phillip Rose (Partner) - over 25 years real estate investment, non-executive director of Great Portland Estates plc and Hermes Property Unit Trust, CEO of Alpha Real Capital.

 

·; Philip Gower (Partner) - founded Antler Property Investments, Chairman of Rockmount Capital, UK real estate investor for 40 years.

 

·; Sir John Beckwith (Partner) - founded London & Edinburgh Property Trust, Property Mezzanine Partners, Europa Capital Partners.

 

Alpha Real has significant experience of raising equity from public markets and has raised circa £200 million to date for UK listed property funds.

 

Tom Pissarro MRICS (43) - proposed fund manager

Tom has over 20 years UK commercial property investment, financing and asset management experience. He has been a main Board Director of Antler Property since 1999, an Alpha Group company, responsible for UK investment, portfolio strategy and asset management. He was previously a Director at Fletcher King Plc where he commenced his career and qualified as a Chartered Surveyor.

 

Tom was a Director and the Asset Manager of the Access Fund (an English limited partnership), a £50 million high yielding single and multi let industrial and office portfolio which was realised in 2006 generating a high total return to investors. Tom has been responsible for managing £700 million of investments over the last 7 years, including £141 million of single and multi let industrial properties.

 

Merger of Share Companies

The conversion of the "D" Ordinary Shares into Ordinary Shares took place on 30 December 2009 at the ratio of four Ordinary Shares for every eleven "D" Ordinary Shares held at the close of business on 29 December 2009. A total of 9,369,128 new Ordinary Shares of £0.01 each were issued to facilitate the merger, increasing the number of Ordinary Shares in existence to 84,095,207.

 

Results and Dividends

The consolidated loss of the Group for the year ended 31 December 2009 was £15,266,135 (31 December 2008: loss of £49,039,791). This loss includes an unrealised loss on revaluation of investment properties of £13,645,291 (2008: £50,044,066) and an unrealised loss on interest swap liabilities of £3,117,771 (2008: £nil).

 

The NAV of the Ordinary Shares fell by 29.56% over the year from 41.44 pence per share to 29.19 pence per share.

 

The Company paid no distributions during the year. The Board is aware of the importance of the dividend to shareholders and is focused on its attempts to reinstate distributions. However, for the foreseeable future the Board's priority must be to ensure that the Group complies fully with its refinanced loan agreements. As such, surplus income is likely to be held in reserve or used to reduce the Group's overall debt and therefore it is unlikely that the dividend will be reinstated in the short to medium term.

 

Cancellation of Shares

The Company did not undertake any share buy backs during the year. The Board believes that any surplus cash should be primarily applied to ensuring the Group complies with its refinanced banking covenants. As a result, although the Board will continue to monitor the discount the Company's shares trade at, it is unlikely that the Company will engage in share buy backs in the foreseeable future.

 

Future Prospects

The Board stated in the Annual Report and Consolidated Financial Statements for the year ended 31 December 2008 its view that it would be detrimental to shareholders' interests for the Company to be wound up at the time of the continuation vote in mid 2010. Having conducted a strategic review of the Company's options in the period February to April 2010, the Board remains of this opinion.

 

In the last two years the UK commercial property market has suffered its most serious correction in capital values in 20 years and the economy its largest retrenchment in over 50 years. While the investment for prime, well-let property has recovered, investor demand for non-prime assets remains weak and banks remain reticent to lend against such assets.

 

The Company's portfolio value has stabilised since September 2009 and there has been some modest improvement in secondary commercial property yields since that date. However, occupier demand remains weak and pressure on rental income continues. On a positive note, since its year end, the value of the Group's property portfolio increased by £1.5 million or 1.3% to £111.7 million in the quarter ended 31 March 2010. As a result, the NAV per share of the Company has increased by a further 7.2% to 31.28 pence per share at 31 March 2010.

 

The Board believes that the successful refinancing of the Group's loan facilities, the raising of additional equity on favourable terms for existing shareholders and the appointment of the new Property Investment Adviser will create a strong platform from which to rebuild shareholder value.

 

Full details of the Alpha Real proposal will be contained in a circular to be sent to shareholders in June 2010. Shareholders will be asked to approve these proposals, alongside a vote to continue the Company for a further three years, at the AGM to be held in July 2010.

 

 

Jonathan Clague

Chairman

29 April 2010

 

 

DIRECTORS' REPORT

 

The Directors present herewith the Annual Report and Consolidated Financial Statements of the Company and its subsidiaries (together "the Group") for the year ended 31 December 2009.

 

The Company

 

The Company is an Isle of Man closed-ended investment company and was incorporated on 10 June 2002. Its principal activity is that of investment in commercial property. The Company's shares are traded on the London Stock Exchange.

 

The Directors confirm that:

 

·; no one property represents more than 15% of the gross assets of the Group;

·; income receivable from any one tenant, or tenants within the same group, in any one financial year does not exceed 20% of the total rental income of the Group; and

·; the proportion of the Group's property portfolio which is unoccupied or not producing income or which is in the course of substantial redevelopment or refurbishment does not exceed 25% of the value of the portfolio.

 

Results and dividends

The consolidated loss after taxation of the Group for the year ended 31 December 2009 amounted to £15,266,135 (31 December 2008: loss of £49,039,791). This loss includes an unrealised loss on revaluation of investment properties of £13,645,291 (31 December 2008: loss of £50,044,066).

 

The Company paid no dividends during the year.

 

Directors

The Directors of the Company who served during the year and their interests in the share capital of the Company are shown below:

 

	Ordinary Shares at 31 December 2009	Ordinary Shares at 31 December 2008
Jonathan David Clague	30,000	30,000
Geoffrey Paul Raineri Black	20,000	20,000
Donald Lake	49,000	49,000
Philip Peter Scales	-	-

 

The Company will hold an AGM in July 2010 at which time shareholders will vote on whether to continue the investment activities of the Company for a proposed further three years. However due to the uncertainty that existed at 31 December 2009 regarding the refinancing of the loan facilities with Bank of Scotland these loans remain classified under "Current Liabilities" in the Consolidated Statement of Financial Position. As the loan facilities with Nationwide were successfully re-negotiated in October 2009 these loans have been reclassified as "Non-Current Liabilities".

 

Company Secretary

 

Martin Katz served as Secretary throughout the year.

 

Going concern

 

The Directors confirm that the Group continues to be a going concern as it believes it has reasonable grounds to believe that the proposed resolution for the investment activities of the Company to be extended for a further three years would be approved by shareholders at the forthcoming AGM of the Company as disclosed in note 1.

 

Auditors

 

In accordance with section 12(2) of the Companies Act 1982, Ernst & Young LLC have indicated their willingness to continue in office.

 

Jonathan Clague

Chairman

29 April 2010

 

 

PROPERTY INVESTMENT ADVISER'S REPORT

 

Introduction

As expected, 2009 proved a difficult year in which to manage the Company's property assets. The worst and longest recession in over 50 years resulted in weak tenant demand and a heightened level of corporate failure.

 

In this climate the Group continues to benefit from the diversified nature of its tenant base. The Group has in excess of 520 tenants spread across the country ensuring that the Group is not overly exposed to the success or failure of any one particular tenant.

 

The Group let 76 units during the year at an initial rent of circa £900,000, which will rise to in excess of £1 million when the various stepped rent increases begin to vest. New lettings have typically been completed at rental levels lower than in 2008 reflecting weak demand and the increased competition for tenants. However, achieving new lettings removes the liability to the Group for empty rates and standing costs such as non recoverable service charges and utilities.

 

Despite the letting activity discussed above, voids rose during the course of the year reflecting the economic environment and the significant number of tenants who entered administration or receivership during the year. The void rate increased from 12.3% as at 31 December 2008 to 18.9% at the peak in September 2009. Encouragingly void levels had declined to 17.9% as at 31 December 2009. Although void rates have increased in the recent months, it is not anticipated they will increase significantly above this level going forward.

 

Although the Group benefited from the introduction of the one year concession for properties, or units within properties, with a rateable value of less than £15,000 (which has been extended for a further year to 2010/11 and increased to £18,000), the impact of rising voids levels on the Group's property portfolio has been compounded by the Government's previous decision to reform empty rates legislation. This reform saw the exemption on office properties curtailed and the indefinite exemption on industrial properties limited to six months, creating increased holding costs for vacant properties.

 

Where units have become vacant, we have continued the policy of improving properties and refurbishing vacant units. During the year in excess of £1million was spent on refurbishing 54 units and common areas within buildings. The Group is witnessing the benefits of the programme with 22 of the 54 units let at a combined initial rent of £420,000, with a number of leases including provisions for stepped rental increases.

 

Progress has also been made with regards to reducing the level of irrecoverable expenses associated within what formerly constituted the "D" Ordinary Share Portfolio and the level of historical arrears across the entire Portfolio.

 

The table below summarises some of the property portfolio's key statistics as at 31 December 2009

 

	Portfolio	Portfolio
	2009	2008
Average annual rental per tenant	£19,945	£22,288
Average length of lease remaining	2.5 years	3.6 years
Average rental per square metre	£63.13	£63.53
Largest tenant by rental value	Scotts Limited	Scotts Limited
Longest unexpired lease term	13.5 years	14.5 years

 

UK Economic Review

The UK economy contracted by 4.9% in 2009 and by circa 6% in the six quarters to Q3 2009, making this recession the most severe since the 1930s. However, the economy emerged from recession in Q4 2009 delivering quarter-on-quarter growth of 0.4%.

 

Both the manufacturing and service sectors posted quarter-on-quarter gains in Q4 2009 on the back of higher retail sales and motor trades, which has benefited from the car scrappage scheme, and an increase in Government services.

 

Although the recovery is not forecast to be strong, the outlook for the UK economy is more positive than was the case 12 months ago. The rate of corporate insolvency was 20% lower in Q1 2010 than it was in Q1 2009.

 

Manufacturing and Service Purchasing Managers' Indices have been in positive territory in 2010 implying expansion. Fears over a potential double dip have receded and growth is expected to be positive in Q1 2010, despite the increase in VAT at the start of year and the adverse weather conditions.

 

Unemployment increased over the year rising to 7.9%. However, distinct from the recessions experienced during the last 30 years, unemployment appears to have stabilised more quickly and increased to a lesser extent than had been expected, given the decline in economic output. Firms appear more willing than in previous recessions to horde labour so as to better position themselves for the recovery. Employers have been assisted by workers' willingness to accept more flexible working schedules and wage reductions. In addition part-time work has also increased, while the public sector has continued to increase headcounts.

 

The level of spare capacity within firms may mean that employers are slower to recruit than has been the case during previous post recession recoveries. However, after remaining broadly flat in 2010, Oxford Economic Forecasting now predicts a pick up in Financial and Business Service employment, a key driver of office rents, from 2011 onwards with 237,000 net jobs being created.

 

Manufacturing output, a key driver of demand for industrial property space, is forecast by Oxford Economic Forecasting to recover more quickly than employment. The sector should benefit from a pick up in the inventory cycle. During the recession many firms halted or scaled back production and liquidated stocks to generate cash flow in order to remain solvent. Firms are now once again beginning to restart or increase production in order to increase inventories. An improvement in credit availability should assist firms in this process.

 

Assisted by the weakness of sterling, UK net exports of goods and services are expected to rise. However, to date the contribution made by net exports to growth has disappointed. Although there are signs of a global economic recovery, this has centred on Asian and emerging economies, while the performance of the UK's main trading partner - the Eurozone - has remained sluggish. Exporters have also used the depreciation in the value of sterling to rebuild margins and profitability rather than increase market share.

 

Risks to the recovery do still remain, although are more balanced than they were six or twelve months ago.

 

Households remained constrained and are expected to continue to attempt to reduce indebtedness. The household savings ratio has risen by 9 percentage points from its low in 2007. The rise in household savings combined with limited scope for increases in take home pay means that households will not be in a position to drive the economy forward. However, the rise in UK house prices recorded by the major housing indices over the last six months is symbiotic of an improvement in consumer confidence.

 

The government balance sheet also remains heavily constrained. Tax revenues have fallen markedly, while spending has risen as welfare payments have increased. The public sector deficit is forecast to hit 13% in 2010/11. Both major political parties have committed themselves to expenditure cuts, while debt interest payments are rising. Fiscal policy will act as a drag on growth while the public finances are being brought back under control.

 

Concerns over rising inflation appear to be overplayed. Although the Consumer Price Index registered a sharp increase in December 2009 and has been above its 3% target during Q1 2010, the Bank of England had forecast a temporary rise in inflation following the increase in VAT and the depreciation of Sterling. The Bank has stated that it believes these effects to be "one offs" and have indicated that interest rates will not need to rise as a consequence so long as inflationary expectations remain grounded. In addition, the level of spare capacity within the economy will also act to further limit potential inflationary pressures. Over the medium term Government fiscal policy - which will effectively be taking money out of the economy - will have a similar impact as increases in interest rates and should limit the extent of interest rate rises.

 

Oxford Economic Forecasting predicts the UK economy will grow by 1.1% in 2010 which will accelerate in 2011 and 2012 to 2.3 and 2.7 respectively reflecting the level of spare capacity within the economy.

 

UK Commercial Property Review and Outlook

UK commercial property confounded expectations in 2009 by delivering positive total returns. Forecasts published by the Investment Property Forum's Consensus Forecast in March and May 2009 had suggested negative total returns of 11.2% and 15.3% respectively. Instead, returns moved into positive as capital values rose by 8.8% in the five months to December 2009. This trend has continued into Q1 2010 with capital values, according to the Investment Property Databank (IPD) rising by an additional 3.9%.

 

Capital values rose as record low interest rates and high yield premiums combined with an improvement in economic and investor sentiment increased allocations to risky asset classes, including property. Quantitative easing also resulted in increased allocations to property as gilts were withdrawn from the market.

 

However, it is important to place this recovery into context.

 

First, capital values recovered from a low base and the market at December 2009 remains 36.91% below its aggregate peak valuation of June 2007.

 

Secondly, the recovery has been heavily skewed towards prime properties let on long leases to tenants offering strong covenants. The improvements in capital values reported by IPD are not indicative of the performance of the wider market.

 

Prime property appreciated to the extent that it did because the UK's system of upward only increases at rent review offers investors who have purchased properties with tenants secured on long leases protection against adverse developments in the wider occupier market. Investor risk assessment is therefore principally limited to whether the tenant remained solvent.

 

Non-prime or secondary property has not recovered to nearly the same extent. Typically let on shorter leases to weaker tenants, secondary properties are more exposed to the occupier markets. As a result the recovery in the secondary property has traditionally lagged that of prime property.

 

However, as detailed in the economic outlook, growth in manufacturing output and financial and business sector employment should provide a more positive backdrop for the Company's assets over the medium term. Rental growth is however expected to remain weak reflecting the overhang of vacant space.

 

In the short term valuations are likely to stabilise or increase as a result of the lack of available stock on the market. The principal net sellers of property over the past two years were listed property trusts and institutions, which include REITs and open-ended investment funds. However the pressure to dispose of further assets has reduced with REITs trading at premiums to underlying net asset value and investment funds once again experiencing net inflows.

 

The key risk to the investment market is posed by the lenders' attempts to reduce the size of their balance sheets and their relative exposure to commercial property. Over the medium term it is likely that this will result in a number of existing property loans not being refinanced and the disposal of a number of assets in cases where no new lender can be found. It is likely there will be a "debt shortfall" with existing lenders having neither the capacity nor the desire to refinance the £133bn of UK commercial property debt set to mature before 2012.

 

However, as a result of low interest rates, borrowers have continued to be able to meet debt repayment obligations. This has meant that lenders have been able to approach the deleveraging process in a more controlled manner than was the case during the last correction when high interest rates meant that loans were not profitable and lenders had little option but to foreclose and fire sell assets. Lenders today are acutely aware that large scale fire-sales of repossessed property would likely further depress values and damage their own balance sheets. As a result this course of action is unlikely.

 

 

 

 

Peter Roscrow

Close Investments Limited

Property Investment Adviser

29 April 2010

 

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 December 2009

 

							2009	2008
							£	£
INCOME
Rental income from investment properties							10,767,120	13,224,642
Other income							72,185	132,334
							10,839,305	13,356,976
EXPENDITURE
Property Investment Adviser's management fee							(617,695)	(1,160,166)
Property expenses							(2,275,709)	(2,789,948)
Other expenses							(236,821)	(309,688)
							(3,130,225)	(4,259,802)
Losses from investments
Realised loss on disposal of investment properties							-	(1,414,701)
Unrealised loss on revaluation of investment properties							(13,645,291)	(50,044,066)
							(13,645,291)	(51,458,767)
Net operating loss for the year before finance costs							(5,936,211)	(42,361,593)
Unrealised loss on interest rate swaps							(3,117,771)	-
Interest receivable							14,359	624,510
Interest payable and similar charges							(6,226,512)	(7,302,708)
							(9,329,924)	(6,678,198)
Net loss from ordinary activities before taxation							(15,266,135)	(49,039,791)
Taxation on ordinary activities							-	-
							-	-
Net loss from ordinary activities after taxation attributable to members							(15,266,135)	(49,039,791)
Other comprehensive losses
Cashflow hedges							-	(5,365,121)
Total comprehensive losses for the year attributable to members							(15,266,135)	(54,404,912)
Earnings per share (shown in pence)
Basic loss for the year attributable to ordinary equity holders							(18.15)	(48.80)
of the parent

 

 

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2009

 

					2009	2008
ASSETS					£	£
NON-CURRENT ASSETS
Investment properties					110,270,000	122,050,000
					110,270,000	122,050,000
CURRENT ASSETS
Trade and other receivables					1,978,011	3,590,798
Cash and cash equivalents					3,183,803	2,195,623
					5,161,814	5,786,421
Total assets					115,431,814	127,836,421
EQUITY AND LIABILITIES
NON-CURRENT LIABILITIES
Bank loans					28,448,065	-
					28,448,065	-
CURRENT LIABILITIES
Interest rate swap contracts					3,117,771	4,943,343
Trade and other payables					4,224,105	4,175,002
Bank loans					55,098,000	83,851,411
					62,439,876	92,969,756
Total liabilities					90,887,941	92,969,756
EQUITY
Share capital	- Ordinary				840,951	747,259
	- "D" Ordinary				-	257,651
	- Deferred				214,095	50,136
Distributable capital reserve	- Ordinary				93,622,536	70,188,239
	- "D" Ordinary				-	23,434,297
Capital redemption reserve	- Ordinary				39,925	39,925
Revenue reserves					(70,173,634)	(54,907,499)
Hedge reserves					-	(4,943,343)
					24,543,873	34,866,665
Total equity and liabilities					115,431,814	127,836,421

 

 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 December 2009

 

		2009	2008
		£	£
Operating activities
Loss before tax		(15,266,135)	(49,039,791)
Adjustment to reconcile profit before tax to net cash flows
Decrease in value of investment properties		13,645,291	50,044,066
Realised loss on sale of investment properties		-	1,414,701
Finance income		(14,359)	(624,510)
Finance expense		6,226,512	7,302,708
Amortisation of bank arrangement fees		304,630	70,642
Decrease in debtors		1,612,787	597,250
(Decrease)/increase in creditors		(164,080)	104,736
Unrealised loss on swap agreements		3,117,771	-
Tax refunded		-	54,668
Net deposits received/(repaid)		2,309	(32,133)
Net cash flows from operating activities		9,464,726	9,892,337
Investing activities
Interest received		14,359	624,510
Payment for purchase of properties/Capital expenditure		(1,620,663)	(2,248,345)
Proceeds from sale of properties		-	27,295,872
Net cash flows from investing activities		(1,606,304)	25,672,037
Financing activities
Dividends paid		-	(6,291,408)
Interest paid		(6,260,266)	(7,303,665)
Bank loans repaid		(439,137)	(28,240,000)
Bank loans drawndown		-	3,750,000
Bank arrangement fee paid		(170,839)	-
Net cash flows from financing activities		(6,870,242)	(38,085,073)
Net increase/(decrease) in cash		988,180	(2,520,699)
Cash at 1 January		2,195,623	4,716,322
Cash at 31 December		3,183,803	2,195,623

 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2009

	Share Capital	Capital Reserve	Capital Redemption Reserve	Hedge Reserve	Retained profit	Total
	£	£	£	£	£	£
As at 1 January 2008	1,055,046	97,909,559	39,925	421,778	(5,867,708)	93,558,600
Net loss for the year	-	-	-	-	(49,039,791)	(49,039,791)
Capital distributions	-	(4,287,023)	-	-	-	(4,287,023)
Movement on unrealised losses on interest rate swaps	-	-	-	(5,365,121)	-	(5,365,121)
As at 31 December 2008	1,055,046	93,622,536	39,925	(4,943,343)	(54,907,499)	34,866,665
Net loss for the year	-	-	-	-	(15,266,135)	(15,266,135)
Movement on unrealised losses on interest rate swaps	-	-	-	4,943,343	-	4,943,343
Cancellation of "D" Ordinary Shares on conversion	(257,651)	-	-	-	-	(257,651)
Issue of new Ordinary Shares arising from conversion	93,692	-	-	-	-	93,692
Issue of deferred shares arising from conversion	163,959	-	-	-	-	163,959
As at 31 December 2009	1,055,046	93,622,536	39,925	-	(70,173,634)	24,543,873

 

 

The capital reserve includes the distributable capital reserve for the Ordinary Share Class and the "D" Ordinary Share Class.

 

 

COMPANY STATEMENT OF FINANCIAL POSITION

As at 31 December 2009

 

									2009	2008
ASSETS									£	£
NON-CURRENT ASSETS
Investments in subsidiaries									3	3
									3	3
CURRENT ASSETS
Trade and other receivables									23,310,845	33,603,473
Cash and cash equivalents									1,267,069	1,344,566
									24,577,914	34,948,039
Total assets									24,577,917	34,948,042
EQUITY AND LIABILITIES
CURRENT LIABILITIES
Trade and other payables									34,044	81,377
									34,044	81,377
EQUITY
Share capital		- Ordinary							840,951	747,259
		- "D" Ordinary							-	257,651
		- Deferred							214,095	50,136
Distributable capital reserve		- Ordinary							93,622,536	70,188,239
		- "D" Ordinary							-	23,434,297
Capital redemption reserve		- Ordinary							39,925	39,925
Revenue reserves									(70,173,634)	(59,850,842)
									24,543,873	34,866,665
Total equity and liabilities									24,577,917	34,948,042

 

 

 

COMPANY STATEMENT OF CASH FLOWS

For the year ended 31 December 2009

 

		2009	2008
		£	£
Operating activities
Loss before tax		(10,322,792)	(57,517,024)
Adjustments to reconcile profit before tax to net cash flows
Unrealised losses on investments		-	8,506,198
Provision for intercompany loans		12,440,627	54,676,929
Finance income		(2,285,331)	(5,829,083)
Finance expense		657	1,354
(Increase)/decrease in debtors		(18,565)	25,221
Decrease in creditors		(62,254)	(14,898)
Net cash flows from operating activities		(247,658)	(151,303)
Investing activities
Interest received		993,017	4,514,315
Interest paid		(657)	(1,354)
Net cash flows from investing activities		992,360	4,512,961
Financing activities
Dividends paid		-	(6,291,408)
Loans made to group companies		(1,040,000)	(5,868,710)
Loans repaid from group companies		217,801	8,354,999
Net cash flows from financing activities		(822,199)	(3,805,119)
Net (decrease)/increase in cash		(77,497)	556,539
Cash at 1 January		1,344,566	788,027
Cash at 31 December		1,267,069	1,344,566

 

 

COMPANY STATEMENT OF CHANGES IN EQUITY

For the year ended 31 December 2009

	Share Capital	Capital Reserve	Capital Redemption Reserve	Retained profit	Total
	£	£	£	£	£
As at 1 January 2008	1,055,046	97,909,559	39,925	(2,333,818)	96,670,712
Net loss for the year	-	-	-	(57,517,024)	(57,517,024)
Capital distributions	-	(4,287,023)	-	-	(4,287,023)
As at 31 December 2008	1,055,046	93,622,536	39,925	(59,850,842)	34,866,665
Net loss for the year	-	-	-	(10,322,792)	(10,322,792)
Cancellation of "D" Ordinary Shares on conversion	(257,651)	-	-		(257,651)
Issue of new Ordinary Shares arising from conversion	93,692	-	-		93,692
Issue of deferred shares arising from conversion	163,959	-	-		163,959
As at 31 December 2009	1,055,046	93,622,536	39,925	(70,173,634)	24,543,873

 

The capital reserve includes the distributable capital reserve for the Ordinary Share Class and the "D" Ordinary Share Class.

 

 

AN EXTRACT FROM THE NOTES TO THE FINANCIAL STATEMENTS

 

1. Operations

The Company was incorporated in the Isle of Man on 10 June 2002. It is a closed-ended investment company and was formed primarily for investment in UK commercial property. The aim of the Company and its subsidiaries (together "the Group") is to provide a high level of income together with the prospect of long-term capital growth. The Group has no employees.

 

At the AGM of the Company, which will be held to consider the financial statements in respect of the year ended 31 December 2009, the Directors will propose an ordinary resolution to Shareholders regarding the continuation of the Company's investment activities for a further three years. If that resolution is not passed, it is intended that an orderly disposal programme would be instituted, leading to a return of capital to investors. The AGM is scheduled to be held in July 2010.

 

Going concern

The annual report and consolidated financial statements have been prepared on the going concern basis on the assumption that the proposed resolution regarding the continuation of the Company, as referred to above, is passed.

 

In concluding that it is appropriate to adopt the going concern basis in preparing the financial statements, the Directors have reviewed cash flow projections to March 2013. The projections included the assumption that the resolution regarding the continuation of the Company will be passed by the members.

 

The uncertainty regarding the shareholder vote indicates that there is material uncertainty over the continuation of the Group which may cast significant doubt about the Group's ability to continue as a going concern. As a result the audit report contains an Emphasis of Matter in relation to going concern. However, whilst recognising this uncertainty, the Directors believe that the members will resolve the continuation of the Company. It is therefore appropriate to prepare the financial statements on a going concern basis. The financial statements do not reflect any adjustments which would have to be made should this not be the case.

 

 

14. Bank loans

As at 31 December 2009

		Initial loan	Arrangement fees	Amortisation of arrangement fees	2009
		£	£	£	£
A	Nationwide loan	9,715,084	(29,277)	3,082	9,688,889
A	Nationwide loan	18,875,000	(141,563)	25,739	18,759,176
	Due after more than one year	28,590,084	(170,840)	28,821	28,448,065
B	Bank of Scotland loan	20,063,000	(325,669)	325,669	20,063,000
B	Bank of Scotland loan	35,035,000	(226,291)	226,291	35,035,000
	Due within one year	55,098,000	(551,960)	551,960	55,098,000
	Total	83,688,084	(722,800)	580,781	83,546,065

 

As at 31 December 2008

		Initial loan	Arrangement fees	Amortisation of arrangement fees	2008
		£	£	£	£
A	Nationwide loan	10,059,221	(22,500)	22,500	10,059,221
A	Nationwide loan	18,875,000	(276,871)	141,509	18,739,638
B	Bank of Scotland loan	20,158,000	(325,669)	257,035	20,089,366
B	Bank of Scotland loan	35,035,000	(226,291)	154,477	34,963,186
	Due within one year	84,127,221	(851,331)	575,521	83,851,411

 

A Nationwide Building Society loans

A facility agreement has been entered into between Nationwide Building Society and Chip (Two) Limited whereby Nationwide Building Society has made available a term loan facility for up to £9.8 million. Following the breach of the LTV covenant on 31 December 2008 Chip (Two) Limited successfully completed the refinancing of its loan facility on 8 October 2009. Of the total loan of £9.7 million, £8.0 million has been fixed at the rate of 2.79% plus a margin of 2.5% per annum. The remaining loan amount of £1.7 million is subject to interest at LIBOR plus a margin of 2.5% per annum. The facility is repayable on 23 October 2012. The LTV covenant has been waived until 1 April 2010 after which an event of default (as defined in the facility agreement) is triggered if, inter alia, the amount of the loan facility exceeds 75% before 31 March 2011 and 65% thereafter of the value of the properties over which Nationwide has security. The facility is secured by a legal charge and debenture over the property assets of Chip (Two) Limited. As at 31 December 2009 the LTV stood at 67.5%. Following the DTZ valuations as at 31 March 2010 the LTV stands at 64.9%

 

A facility agreement has been entered into between Nationwide Building Society and Chip (Six) Limited whereby Nationwide Building Society has made available a term loan facility for up to £18.9 million. Following the breach of the LTV covenant on 31 December 2008 Chip (Six) Limited successfully completed the refinancing of its loan facility on 13 October 2009. Of the total loan of £18.9 million, £18.0 million has been fixed at the rate of 2.79% plus a margin of 3.5% per annum. The remaining loan amount of £0.9 million is subject to interest at LIBOR plus a margin of 3.5% per annum. The facility is repayable on 1 March 2013. The LTV covenant has been waived until 1 April 2010 after which an event of default (as defined in the facility agreement) is triggered if, inter alia, the amount of the loan facility exceeds 90% before 31 March 2012 and 85% thereafter of the value of the properties over which Nationwide has security. The facility is secured by a legal charge and debenture over the property assets of Chip (Six) Limited. As at 31 December 2009 the LTV stood at 91.5%.

 

Following the DTZ valuations as at 31 March 2010 the LTV ratio of CHIP (Six) Limited stands at 91.3% against a covenant of 90.0%. Following discussions with Nationwide the LTV covenant has been waived until 1 July 2010 for a fee of £5,000. At this time the LTV shall not exceed 90.0%. The Board is confident, based on discussions to date with Nationwide, that terms to remedy this breach will be concluded in the waiver period.

 

Both revised Nationwide facilities require Chip (Two) Limited and Chip (Six) Limited to use surplus rents to reduce part of the outstanding debt on a quarterly basis and that the Interest Cover Ratio shall not be less than 160% (gross) and 110% (net) respectively.

 

In addition Chip (Two) Limited and Chip (Six) Limited were required to deposit £200,000 and £250,000 respectively in a blocked account over which Nationwide has sole signing rights. Withdrawals from these blocked accounts will be permitted only at Nationwide's sole discretion. The funds placed in these blocked deposit accounts have been included in "Cash and Cash Equivalents" in the Consolidated Statement of Financial Position.

 

Chip (Two) Limited and Chip (Six) Limited are each limited to capital expenditure of £10,000 per quarter under the new facility agreement.

 

B Bank of Scotland loans

The Group had entered into two separate loan facility agreements with the Bank of Scotland. The first between the Bank and Chip (One) Limited and Chip (Three) Limited for an amount up to £31,700,000. The second facility between the Bank and Chip (Four) Limited and Chip (Five) Limited whereby Bank of Scotland has made available up to £50,000,000.

 

The terms and conditions for each facility were the same. Interest was payable at a rate equal to LIBOR, plus the mandatory costs of Bank of Scotland, plus a margin of 1.1% per annum if the level of debt did not exceed 50% of the value of the relevant properties; the margin increased by 0.075% per annum if the level of debt rose above 50% but not above 55%, and increased by 0.15% per annum if the level of debt rose above 55%. Each facility was repayable on the business day immediately prior to the tenth anniversary of the first draw down under the facility although, if an event of default (as defined in the facility agreement) was triggered, it would be repayable on first demand by Bank of Scotland. The facility agreements contained standard events of default and covenants for bank facilities of this nature. An event of default (as defined in the facility agreement) would be triggered if, inter alia, the amount of the loan facility exceeded 60% but was less than 75% of the value of the underlying security for a period of in excess of 180 days. Each facility was secured by a legal charge and debenture over the property assets of the respective companies i.e. Chip (One) Limited, Chip (Three) Limited, Chip (Four) Limited and Chip (Five) Limited.

 

Following the breach of the LTV covenant of both loan facilities on 31 December 2008 the Group successfully completed the refinancing of these loan facility agreements with Bank of Scotland on 19 April 2010. The new facility is between the Bank and Close High Income Properties Plc, Chip (One) Limited, Chip (Three) Limited, Chip (Four) Limited and Chip (Five) Limited for an amount up to £54.1 million.

 

Interest is payable at a rate equal to LIBOR, plus the mandatory costs of Bank of Scotland, plus a margin of 2.6% per annum. The facility is repayable on 31 October 2012 although, if an event of default (as defined in the facility agreement) were triggered, it would be repayable on first demand by Bank of Scotland. The facility agreements contain standard events of default and covenants for bank facilities of this nature. An event of default (as defined in the facility agreement) will be triggered if, inter alia, the amount of the loan facility exceeds 90% of the value of the underlying security. The facility is secured by a legal charge and debenture over the property assets of the respective companies i.e. Chip (One) Limited, Chip (Three) Limited, Chip (Four) Limited and Chip (Five) Limited. As at 31 December 2009 the LTV stands at 72.7%

 

Other financial covenants dictate that the Net Rental Income of the secured properties shall not be less than 1.25:1 for any test period, that combined rent for each calendar year shall not be less than £6.4 million and that the Company shall make quarterly loan repayments of £0.2 million.

 

Should any of these covenants be breached then the margin of the new funding will increase by a further 2.6% per annum and will remain at this rate until such a time the breach is remedied.

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