9th Apr 2008 07:00
ING UK Real Estate Income Trust Ltd09 April 2008 ING UK Real Estate Income Trust Limited PRELIMINARY ANNOUNCEMENT FOR THE YEAR ENDED 31 DECEMBER 2007 The financial information set out in this announcement does not constitute theCompany's statutory accounts for the year ended 31 December 2007. The financial information for the year ended 31 December 2007 is derived fromthe financial statements delivered to the UK Listing Authority and The ChannelIslands Stock Exchange. The Auditors reported on those accounts, their reportwas unqualified and did not contain a statement under section 65(3) of TheCompanies (Guernsey) Law, 1994. Facts and Figures 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. Maximumborrowings are limited to 65% of gross assets. The investment portfolio ismanaged by ING Real Estate Investment Management (UK) Limited. FINANCIAL HIGHLIGHTS > Income profit for the year, prior to payment of dividendsand excluding revaluation, of £18.5 million, compared to a prorated incomeprofit of £17.9 million for the year to 31 December 2006. > Dividends totalling £20.7 million paid in the year, equivalent to6.25 pence per ordinary share. > Gain of £4.1 million arising from sale of assets. > Total expense ratio of 1.11% (calculated as total expenses as aproportion of the average property assets). > Reduction in total cost of debt to 5.16% (31 December 2006: 5.18%). Since theyear end and following disposals, the loan balance of £307.0 million has beenreduced to £282.2 million and total debt cost reduced to 5.09%. > 1,098,700 shares repurchased for cancellation during the year, enhancingincome. OPERATIONAL HIGHLIGHTS > Outperformance of the underlying property portfolio at incomelevel, generating an income return of 5.7% compared with the IPD Annual Index of4.6%. > Outperformance of underlying property portfolio generating a totalreturn of -0.8% compared to the IPD Annual Index of -3.4%. > Dividend cover of 89% was achieved reflecting active management inthe year. > Exchanged contracts on six disposals over the year, at an averagepremium of 8.8% over preceding valuation. > Outperformance principally driven through sales programme andexposure to office sector. Facts and Figures (continued) Year ended 31 15 month period to 31 Dec 2007 Dec 2006Net asset value £369.5 million £418.3 millionNet asset value per share 112 pence 126 penceDividends paid £20.7 million £17.8 millionNet income for the year/period £18.5 million £22.4 millionPre-tax (loss)/profit (including £(27.8) million £106.6 millionunrealised (losses)/gains)(Loss)/earnings per share (8.2) pence 34.4 pence(Loss)/gain on interest rate swaps £(3.1) million £8.7 million(Loss)/gain on revaluation of portfolio £(46.7) million £70.4 millionGearing* 45.4% 44.6%Share price 69.5 pence 118 penceNet asset valuetotal return (6.8)% 33.8%Shareholder totalreturn (35.8)% 25.4% * Calculated as debt as a proportion of gross assets less current liabilities Chairman's Statement I am pleased to present the Annual Report for ING UK Real Estate Income TrustLimited for the 12 months from 1 January 2007 to 31 December 2007, during whichtime conditions within the UK commercial property market changed dramatically. Despite rising interest rates, the first six months were to be characterised byincreasing asset values and continued investor demand. The later months havebeen in sharp contrast, with reduced investor activity and significantly tighteravailability of bank lending, which has led to a 'buyers' market' with reducingcapital values, despite a reduction in financing rates. In 2006, we highlighted that growth in the market driven by yield compressionwould not last and that income would become a primary driver of performance.Although the correction in the underlying asset class has been significantlysharper than commentators had predicted, this change in sentiment has primarilybeen driven by capital market conditions, rather than the underlyingoccupational market which provided positive rental growth throughout the year. Against this backdrop, I am pleased to report that your Company, as an incomefocused vehicle, has met its objectives and continued to pay a dividendequivalent to 6.25 pence per share. The ungeared performance of the portfoliooutperformed the IPD Annual Index on both an Income and Total Return basis. The Investment Manager continues to extract value from the portfolio andacquired only £2.6 million of assets in 2007. It sold or exchanged contracts onapproximately £39 million of sales, not only ahead of the original cost onacquisition, but also over 8% on average ahead of their preceding valuation. Set against the repricing of the commercial property market, there have beenconsiderable successes within the property portfolio and through activemanagement at the end of the year the dividend cover of the Group was 89%, withthe remaining £2.2 million distributed to investors from retained earnings. Your Board has been active in addressing issues within the underlying marketand, as such, during the year and also following the year end, the Group reducedthe overall level and cost of its borrowings. In addition, over the year there has been an increasingly wide divergencebetween the asset valuation and the share price, as the volatility and forwardlooking nature of the share price became disconnected with the more stable assetclass. This led your Company to seek to repurchase over one million shares forcancellation during the final quarter of 2007, which enhanced both income andNet Asset Value per share. The Board has been pleased with the way the Investment Manager has managed theportfolio during these difficult market conditions, but remains acutely aware ofthe need to maintain all activity cognisant with the prevailing conditions andensure that no opportunity is missed to optimise investor returns. One particular aspect that both the Board and Investment Manager are aware of isthe importance of maintaining a competitive total expense ratio, which for theyear to 31 December 2007 was 1.11%. At the same time the Board is acutely aware of the volatility of currentconditions and will ensure that the investment strategy is continually monitoredand adapted to meet any unexpected and significant changes in market sentiment. The portfolio remains well balanced, offers an attractive income yield of justover 6 per cent with reversionary potential, a 95% occupancy rate and a secureincome stream with an average lease length in excess of 8.5 years. Whilst economic concerns still exist, the effect of declining interest rates anda rising income return from commercial property is bringing investors andliquidity back to the sector. Whilst capital values of commercial real estatecontinue to be volatile, the income and stability of this income stream is oneof the defensive attributes of the sector and we believe the Group is wellstructured in current market conditions to continue to meet its objective ofdelivering a strong income return. Given the structure of the portfolio and the Investment Manager's performance todate, the Board is confident that the Investment Manager will continue to takeaction and address the challenging market conditions to best position theCompany to achieve its objectives during 2008. Nicholas Thompson Chairman of the Board 8 April 2008 Economic and Property Market Review Economic Overview 2007 was an unsettling year for the UK economy. Whilst GDP growth continued toadvance, rising at a robust pace of 2.8% per annum up to the end of the year,there was also a marked deterioration in financial conditions that began in thesummer. The UK was not immune from the US sub-prime mortgage crisis andinstitutions also suffered significant sub-prime-related losses. The result of the losses was a notable reduction in the willingness of banks tolend to each other and, consequently, the spread between the 3-month LIBOR andthe base rate widened significantly, reducing the amount of liquidity availablein the financial system. Moreover, despite the strength of the underlyingeconomy, the credit crunch has impacted on investor sentiment across all assetclasses. The risk premium to invest will almost certainly have risen across theasset classes. An exception was gilts, where yields fell as investors sought adegree of security in uncertain times. The credit tightening will eventuallyease, probably later on in 2008, and although base rates are now reducing, it isdifficult to envisage debt in the future being as freely available as it hasbeen over the last four to five years. Adding to the concerns brought about by the seizing up of the financial system,UK economic growth is also expected to slow in 2008. Current economic growth hasbeen partly underpinned by the resilience of household consumption. However,previous interest rate rises are beginning to take effect with householdexpenditure and retail sales growth now starting to ease. RPI inflation was 4.1% per annum in February 2008, up from 4.0% in December2007. Upside risks include food and oil prices and their effects on bothproducers and manufactured goods prices. The outlook for a weak 2008 promptedthe Bank of England to cut rates by 25 basis points in December to 5.50% andagain in early February 2008 to a current 5.25%. This was influenced by theongoing credit crunch and fears of it spilling over to the real economy. Property Performance According to the IPD Annual Index, the average ungeared UK property total returnwas -3.4% over the year to December 2007. This overall figure masks significantvariation in monthly performance. On a month-on-month basis, total returns weremild but positive for the first half of the year. However, thereafter totalreturns started to decline as the market began to experience reduced investordemand and weakening capital values, and the credit crunch began to impact oninvestor sentiment. The worst monthly performance was recorded in December 2007 and total returnsactually improved over the following month. It is, however, too soon to tellwhether this slight deceleration in the decline marks a more general improvementin the market. In terms of the main three-sector hierarchy, the Office sector saw the bestrelative return of -0.7% per annum, followed by -3.3% per annum for Industrialsand -7.1% per annum for Retail. The underperformance of the retail sector was chiefly driven by the significantdeclines in total returns in the retail warehouse sub-sector, reflectingproportionally greater outward yield movement from their lower yield level,whilst the more defensive shopping centre segment fared relatively better. The sub-sectors that fared relatively better overall, however, were mainlyfocussed on London and the South East, such as West End and Mid-town offices,primarily driven through strong rental growth, South East Industrial and Rest ofSouth East offices. Capital growth detracted from returns to a significant extent in 2007, with theincome return acting as a buffer against the impact of the outward yieldmovement. The decrease in liquidity was demonstrated by the reduction in UK propertyinvestment turnover levels in the closing months of 2007, down from an averageof around £15 billion quarter-on-quarter over the last few years to around £7billion in the last quarter of 2007. This means that the normal volume of dealevidence has not been available for year end valuations and therefore we expectthat the outward yield movement that was seen in the market in late 2007 willcontinue to filter through into the IPD index this year as a result of valuationlag. However, given the relative "speed" of the yield movement to date, it isunlikely that this will be a drawn out process as was the case in the early1990s, but the pace of yield increase is instead expected to slow. It is alsounlikely that the full extent of yield movement that has been registered in thetransactions market has yet to be reflected in the IPD index, due to thevaluation process, which tends to "smooth" the highest and lowest performancepoints out of the index. Looking further into the performance drivers, unsurprisingly given the buoyantconditions in the wider economy over the last few years, IPD rental growthcontinued at a robust 4.1% per annum. This was largely powered by central Londonoffice stock seeing rental value growth of around 10 to 15% over the last 12months. However, because of previous capital growth, income returns stillmarginally fell from 4.9% per annum to 4.6% per annum over the same 12 monthperiod. The strong rental value growth that was recorded in the central London officemarket was also seen elsewhere in the country, with Rest of South East offices(excluding central London) also seeing buoyant growth of 4.1% per annum. Anotherstrong performer was South East standard retail, which achieved rental valuegrowth of 2.8% in 2007. The industrial sector, however, continued to seerelatively low rises in rental levels but, more positively, maintained thehighest income return of 6.9% per annum. As a result of this deterioration in investor sentiment and outward movement inyields, the property market underperformed both equities and bonds on an annualbasis to December, with the other main asset classes recording total returns of4.6% and 2.9% respectively. For the UK, on a one, three year and five year basisequities outperformed both bonds and property. Property shows a much strongerperformance over ten years, outperforming both asset classes, with an annualisedreturn of 11.5%. Portfolio Review Strategy The investment strategy is aimed at providing an attractive level of income,together with the potential for capital growth, from directly or indirectlyinvesting in a diversified portfolio of property located in the UK, Isle of Manor Channel Islands. It is intended that the Group will hold a diversified portfolio of properties.The Group's strategy includes investment in the five principal sectors; namelyoffice, retail, retail warehouse, industrial and leisure. The Group may alsoinvest in other property funds. The Investment Manager has a strategy of targeting assets with good fundamentalcharacteristics, maintaining a diverse spread of occupational tenants and aboveaverage income yields for the property sector, with opportunities to enhancevalue through active management. This is achieved by taking an overweight position in sub sectors which provide ahigher level of income return relative to the IPD Annual Index, whilst at thesame time providing opportunities for capital growth. The Group has anoverweight position in the office and industrial sectors and a lower weightingtowards the retail sector. In particular the Group has a below average exposureto lower yielding sub sectors such as retail warehousing and central Londonoffices. Particular emphasis is placed on providing a stable and secure cash flow, addedto which active management initiatives are pursued that can enhance income orcapital value. Where assets do not meet the strategy of providing strong income returncharacteristics or offer the prospects for capital enhancement, and where activemanagement initiatives have been completed, then, where appropriate, monies willbe recycled to opportunities that provide greater performance potential. With a number of disposals completed throughout 2007 and early in 2008, theInvestment Manager has sought to enhance the income bias and at the same timereduce the number of non-core assets within the portfolio. Proceeds wereprimarily used to reduce the overall level and cost of debt and it is expectedthat this will continue into 2008, with a view to repaying all non-securitisedborrowings by the end of this year. Portfolio Performance For the year ending 31 December 2007, at an ungeared level, the underlyingportfolio outperformed the IPD Annual Index on both an Income and Total Returnbasis. The Group's property portfolio produced a total loss of -0.8% which comparesfavourably with the IPD Annual Index of -3.4%. The portfolio has nowoutperformed this Index since inception. The Income Return from the portfolio was 5.7% for 2007, significantly ahead ofthe IPD Annual Index at 4.6%, for the second consecutive year. In 2007, as in 2006, the portfolio outperformed on an income return basis due tothe portfolio structure providing a relatively high initial yield, furthercombined with active management initiatives that enhanced income throughout theyear. Net Asset Value The marked and sudden movement in capital values in the second half of 2007impacted overall performance, and, together with the impact of gearing, reducedthe overall Net Asset Value of the Group. For the year to December 2007, the NAV Total Return was -6.8%. NAV Total Returnis calculated as the percentage increase or decrease in net asset valuegenerated over the year assuming the dividend is reinvested. Since launch in October 2005, the NAV Total Return has been 10.3% on anannualised basis. Review of 2007 The repricing of commercial real estate during 2007 came much sooner and wasmore severe than we had predicted. Whilst the occupier market remained robustthroughout the year, this was in marked contrast to the investment market inwhich values corrected sharply in the latter half of the year. Set against this correction, there was significant activity on the underlyingportfolio and real progress was made in enhancing the quality of the portfolioand income generated. In the latter half of 2007 active management was as muchfocussed on maintaining value as opposed to creating it. The sales programme which continued throughout the year, with selectivedisposals across all sectors, resulted in proceeds that were used to degear theportfolio, whilst at the same time reducing the overall exposure to the retailsector in particular. Whilst it was the Investment Manager's intention to reduce borrowing furtherover the course of the year, the speed of the correction in the underlyingmarket and significantly lower transaction volumes in the fourth quarterresulted in some disposal transactions becoming abortive in the latter part ofthe year as purchasers withdrew from transactions, unable to obtain finance orapproval to proceed. With a portfolio as diverse as this, there are likely to be many assetmanagement led initiatives that provide performance on a cumulative basis ratherthan one off transactions. We have however highlighted below examples across allsectors that contributed to performance. What is particularly pleasing is thecompletion of a number of business plans, many of which were first prepared atthe launch. The Investment Manager's focus continues to be on active management to retainexisting tenants, minimise void periods and capitalise on situations where thelandlord and tenant can work together to create value. Particular emphasis hasbeen on providing additional income and thereby enhancing the dividend coverwhich this year was close to 90%. At the year end the portfolio consisted of 58 assets, diversified across bothsector and geographically, providing an income stream secured against over 300separate tenancies. The running yield on the portfolio was 6.01% andreversionary yield 6.63%, before purchaser's costs. A brief sector by sector summary follows; Offices The Group has an overweight position towards the office sector, which performedwell during 2007. In particular, central London assets, such as Boundary House, London, EC3 whichwas acquired in 2006 at a low rent of £18 per sq ft., saw significantperformance as leases were restructured and income grew, with over 20% rentalgrowth achieved during 2007. At Angel Gate Office Village, London, N1 the scheme reached over 95% occupancyfor the first time since acquisition and rental levels achieved showed over 25%rental growth during 2007. At City Link House, Croydon we were able to regear a lease over four floors toThe Royal Bank of Scotland plc on a 15 year term enhancing both rental incomeand capital value. Retail Performance in the retail sector was more muted, coming principally from thedisposals made in 2007. The sale of Belfast in particular is detailed below. A strong rent review settlement at one of the retail warehouse assets, AngoulemeWay Retail Park, Bury, has enhanced the rental income from the park, and alsoprovided good quality evidence for future settlements, with estimated rentalgrowth of over 16% in 2007. In addition, the Group's two principal supermarket investments performed well onthe back of rental and capital growth. Industrial The industrial sector continues to be important for its relatively high incomereturn and one small strategic acquisition was made in this sector as detailedbelow. At Easter Court, Warrington, the estate became fully income producing followingthree lettings during the course of 2007. The income has increased 47% since theend of 2006. The disposal of the industrial unit at Garsington Road, Oxford, detailed below,highlights the recycling of capital, in particular of smaller assets, wherethere is limited capital upside and the income return does not meet the Group'scriteria. Acquisitions and Disposals In the year to 31 December 2007 the Group acquired one asset and exchangedcontracts or disposed of six assets for a consideration of over £39 million, onaverage 8.8% above their preceding valuation. The acquisition was of a vacant industrial unit, adjacent to the Group's largestholding, a south east industrial estate, in Harlow, Essex. This was a strategicacquisition for £2.6 million, which consolidated the holding. Having refurbishedand re-let the unit to FedEx UK Limited following acquisition, this provided newrental value evidence for the rest of the estate. The disposals were part of a planned programme of phased disposals which startedin 2006, principally to reduce the number of smaller assets within the portfolioand also to sell assets which did not contribute on an income return basis andwhere the business plans had been implemented. The principal sales were as follows: Trafford Park, Manchester - The Group completed the sale of two detached retailwarehouse units for £5.8 million on 13 April 2007, following completion of rentreviews undertaken the preceding year. The sale was £255,000 ahead of thepreceding quarter's valuation. Scottish Provident Building, Belfast - The Group completed the sale of thisGrade II Listed building, located in central Belfast for £21.0 million on 20December 2007. Detailed analysis had been undertaken in respect of arefurbishment of the predominately vacant upper parts and a decision was made tosell the asset rather than employ significant capital to facilitate arefurbishment programme. The sale reflected a net initial yield of 3.75% and was£2.2 million ahead of the preceding valuation. 40 Garsington Road, Oxford - The Group exchanged contracts on the sale of avacant industrial unit in Oxford, following the tenant activating their breakclause in November 2007. The outgoing tenant paid the Group a penalty of£132,000 , equivalent to six months' rental, to terminate the lease. The sale,which completed just after the year end, was at £4.85 million, £510,000 ahead ofthe previous valuation. Whilst in current market conditions it is more difficult to achieve disposals,where appropriate these will continue where value can be achieved through thedisposal process and when it is in line with the strategy of enhancing incomeand total return prospects. Occupancy The occupancy rate on the portfolio remains strong and at December stood at 95%,ahead of the IPD Annual Index of 92.8%. The Investment Manager has taken advantage of the low vacancy rate and hasundertaken surrenders of occupational leases where value can be generatedthrough this process. As at 31 December 2007, approximately 50% of the void is attributable to twoassets, which are detailed below:- 3 The Boulevard, Watford - This refurbished office building totals 43,259 sq ftand provides Grade A headquarters open plan accommodation. The Watford area hasbeen over-supplied for a number of years although the availability of stock inthis market has reduced. The Manager continues to market the property onflexible terms and unfortunately a transaction to lease the entire buildingbecame abortive in December this year. We are actively remarketing it and areexploring reconfiguring access arrangements and flexible leasing options. Unit G2, River Way Industrial Estate, Harlow - This industrial unit, comprising33,500 sq ft was vacated in 2007 and was subsequently refurbished. An agreementfor lease has just been signed, which will secure a new ten year lease with abreak option after five years, setting further positive evidence for the estateand increasing the rental income by over £209,000 per annum. Debt The Group's borrowings were reduced during 2007 as part of a strategy to reducethe overall level of debt. Whilst debt repayment costs were fixed, changes tothe marked to market value of the swap had a negative impact on the BalanceSheet at the year end. The debt is held in two separate tranches, the majorityof which is securitised. Proceeds from sales have been used to reduce borrowingsin the more expensive tranche. At 31 December 2007 the weighted average cost ofdebt was 5.16%, excluding loan arrangement costs. The Group has borrowed a total of £225 million of AAA rated loan notes on thedebt market, with interest payable on the initial £200 million at 4.795% and thefurther £25 million at 5.3804%, both fixed by way of interest rate swaps. Theseloan notes are repayable on 31 January 2013. The Group also has a loan with JP Morgan with a balance of £82 million at 31December 2007. Interest is payable on this loan at 6.0%, also fixed by way of aswap. This loan is repayable on 4 December 2009. During the year loan repayments of £6.5 million were made. Following the yearend and after completion of the disposals undertaken in the fourth quarter, theGroup reduced its non-securitised borrowings by a further £24.8 million. Currentborrowings now stand at £282.2 million and the weighted average cost of debt hasreduced to 5.09%. Outlook With economic growth entering a slower period over the next 12 to 18 months, theprincipal implication for commercial property is softer occupational demand.Supply-side issues are also a factor to consider, but we believe that in mostcases the importance of new supply is exaggerated. Some pockets of new supplywill have local impacts, particularly in retail, where new shopping centres andretail parks can alter the dynamic between retail locations within thecatchment, but these locations have a minimal impact on rents at a nationallevel. Even in City offices, where an above average amount of new supply is setfor delivery in 2008 and 2009, the impact on rents should be minor, providingfinancial sector redundancies do not escalate dramatically. Consequently, whilewe do expect rental growth on the average UK property portfolio to decelerate,we would not expect a decline in rental levels in the absence of a prolongedeconomic recession. On the capital market front, credit markets are unlikely to immediately ease.That means property market liquidity will remain lower than normal over theremainder of the year. Despite a 10 to 15% fall in capital values in 2007, weexpect the IPD index to show further falls in capital values, concentrated inthe first half of 2008. A key reason for this is that we believe that UKproperty is already approaching long-term 'fair value' (an initial yield ofaround 5.25 to 5.5%), but values are likely to undershoot through the bottom ofthe cycle, as they overshot at the top. The difference between the current viewson yields in the transactions market and those yields being quoted by IPD willalso come more into play this year, with the index expected to continue to"catch up" with the underlying market. At a sector level, industrials are expected to outperform over a one, three andfive year time horizon, with both the South East and Rest of UK sub-marketsforecast to see relatively healthy returns. The office sector is expected to seethe lowest total returns over all three periods. However, it must be noted thatthis relative underperformance will largely be the result of the central Londonsub-markets. Indeed, offices elsewhere in the UK are expected to see a somewhatstronger performance and are in fact forecast to move in line with theall-property average over the three periods. Income returns are expected to form the greatest proportion of total returns andare forecast to average 5.9% per annum over the five years to 2012, slightlystronger than the 5.7% per annum that has been recorded over the period 2002 to2007. 2008 sees the introduction of two elements of legislation that will affect thereal estate sector, namely The Rating (Empty Properties) Act 2007 and the EnergyPerformance of Buildings Regulations 2007. The former, which came into effect on1 April, increases the rates liability of vacant accommodation and in particularthe industrial sector which until now has benefited from full business ratesrelief for vacant properties. At present, the portfolio benefits from a relatively low vacancy rate, so theimpact of the legislation will be less than the market in general. We haveemployed consultants to review the rates liabilities on all vacant or soon to bevacant assets to ensure that appeals can be lodged and costs mitigated whereappropriate. In respect of the introduction of Energy Performance Certificates, these wereintroduced (on a phased basis) from 6 April and are required on all sales andlettings of commercial real estate, dependent upon the size of the building. Wehave employed consultants to prepare these to ensure that no letting or salecampaign is prejudiced by the introduction of this legislation. Furthermore, in respect of properties that are in direct control of thelandlord, either being multi-let or vacant, we are in the process ofestablishing a policy to ensure that the environmental impact of these assets isimproved in the short and medium term, through the introduction and monitoringof energy saving measures. The income bias on the portfolio, along with officeexposure and lower weighting in the retail sector, led to outperformance in2007. With slower economic and rental growth envisaged for 2008, the portfolio'sdefensive quality of a high income return and low exposure to primarily growthdependant sectors, will we believe enable it to continue to outperform. We will continue our successful sales programme with a view to further reducingborrowings where we are able to make disposals at opportunistically attractivelevels, selling assets where we have completed business plans and where they donot add to the income bias of the portfolio. With the diversity of assets and tenancies within the portfolio we are confidentthat the asset management team will continue to deliver outperformance andcreate additional opportunities that will enhance value and income from theunderlying portfolio. Michael Morris ING Real Estate Investment Management (UK) Limited 8 April 2008 Financial Statements Consolidated IncomeStatementFor the year ended 31December 2007 Year ended 31 15 Sept Dec 2007 2005 to 31 Dec 2006 Note Income Capital Total Total £000 £000 £000 £000 IncomeRental income 40,902 - 40,902 39,329Service charges rechargedto 3,999 - 3,999 6,074tenantsOther operating income 2,795 - 2,795 4,661Total operating income 47,696 - 47,696 50,064 Gains and losses oninvestmentsRealised gains arising ondisposal of investmentproperties - 4,085 4,085 4,572Unrealised (losses)/gainson revaluation of investment - (46,775) (46,775) 70,421propertiesTotal gains and losses oninvestments - (42,690) (42,690) 74,993 ExpensesProperty operating (2,935) - (2,935) (2,572)expensesService charge costs (3,999) - (3,999) (6,074)Management expenses (6,496) - (6,496) (5,977)Other operating expenses (1,669) - (1,669) (1,607)Total operating expenses (15,099) - (15,099) (16,230) (Loss)/profit beforefinance 32,597 (42,690) (10,093) 108,827costs and tax Finance costsInterest receivable 1,914 - 1,914 1,617Interest payable (16,470) - (16,470) (12,549)Unrealised (losses)/gainsonrevaluation of interest - (3,079) (3,079) 8,727rateswapsTotal finance costs (14,556) (3,079) (17,635) (2,205) (Loss)/profit before tax 18,041 (45,769) (27,728) 106,622Tax 460 - 460 (460) (Loss)/profit for theyear/period 18,501 (45,769) (27,268) 106,162 (Loss)/earnings per shareBasic and diluted 3 (8.2)p 34.4p The total column of this statement represents the Group's Consolidated IncomeStatement, prepared in accordance with International Financial ReportingStandards. The supplementary income return and capital return columns are bothprepared under guidance published by the Association of Investment Companies.All items in the above statement derive from continuing operations. All income is attributable to the equity holders of the parent company. Thereare no minority interests. Consolidated Statement of Changes in EquityFor the year ended 31 December 2007 Share Share Premium Distributable Retained Total Capital Account Reserve Earnings £000 £000 £000 £000 £000 Balance as at 15 - - - - -September 2005Net profit forthe period - - - 106,162 106,162Dividends paid - - - (17,835) (17,835)Issue ofordinaryshares - 337,198 - - 337,918Issue costs - (7,199) - - (7,199)Transfer todistributablereserve - (298,610) 298,610 - -Balance as at31 December2006 - 31,389 298,610 88,327 418,326 Net loss forthe year - - - (27,268) (27,268)Dividends paid - - - (20,707) (20,707)Repurchase ofordinaryshares - - (834) - (834) Balance as at31 December2007 - 31,389 297,776 40,352 369,517 Consolidated Balance SheetAs at 31 December 2007 2007 2006 Note £000 £000 Non-current assetsInvestment properties 5 633,206 702,167Total non-current assets 633,206 702,167 Current assetsAccounts receivable 6,018 7,437Cash and cash equivalents 51,150 37,873Total current assets 57,168 45,310 Total assets 690,374 747,477 Current liabilitiesAccounts payable and accruals (17,496) (24,428)Total current liabilities (17,496) (24,428) Non-current liabilitiesLoans and borrowings 6 (303,361) (304,723)Total non-current liabilities (303,361) (304,723) Total liabilities (320,857) (329,151) Net assets 369,517 418,326 EquityOrdinary share capital 8 - -Share premium account 9 31,389 31,389Distributable reserve 9 297,776 298,610Retained earnings 40,352 88,327 Total equity 369,517 418,326 Net asset value per share 1.12 1.26 These Consolidated Financial Statements were approved by the Board of Directorson 8 April 2008 and signed on its behalf by: Robert Sinclair Tjeerd Borstlap Director Director Consolidated Cash FlowStatementFor the year ended 31December 2007 Year ended 31 Dec Period from 15 Sept 2005 to 31 2007 Dec 2006 £000 £000 (Loss)/profitbefore tax (27,728) 106,622 Adjusted forInterestreceivable (1,914) (1,617)Interestpayable 16,470 12,549Realised andunrealisedgains andlosses oninvestments 45,712 (83,720)Amortisationof financecosts 544 331Cashflows fromoperatingprofit beforeworkingcapitalchanges 33,084 34,165 Decrease/(increase) intrade andotherreceivables 1,419 (4,930)(Decrease/increase in tradeand otherpayables (7,188) 23,968 Net cash flowsfrom operatingactivities 27,315 53,203 Cash flows from investingactivitiesPurchase ofinvestmentproperties (5,913) (652,930)Disposal ofinvestmentproperties 34,343 25,756Interestreceived 1,847 1,617Net cash flowsfrom investingactivities 30,277 (625,557) Cash flows from financingactivitiesEquity raised - 337,198Repurchase ofordinaryshares (834) -Proceeds fromlong termborrowings - 738,000Repayment oflong termborrowings (6,469) (424,550)Issue costs ofborrowing &equity raising - (10,037)Interest paidon loans (16,305) (12,549)Dividends paid (20,707) (17,835)Net cash flowsfrom financingactivities (44,315) 610,227 Net increasein cash andcashequivalents 13,277 37,873 Cash and cashequivalents atbeginning ofyear/period 37,873 - Cash and cashequivalents atend ofyear/period 51,150 37,873 Notes to the Consolidated Financial Statements for the year ended 31 December 2007 1. Significant accounting polices The preliminary statement is prepared on the basis of the accounting policiesdisclosed in the prior year financial statements. Whilst the financial information included in this preliminary statement has beencomputed in accordance with International Financial Reporting Standards (IFRS),this announcement does not itself contain sufficient information to comply withIFRS. The Group's full financial statements that comply with IFRS were approvedby the Directors on 8 April 2008. 2. Dividends Year ended 31 Dec 2007 Period ended 31 Dec 2006 £000 £000Declared and paid 20,707 17,835 The interim dividend of 1.5625 pence per ordinary share in respect of the periodended 31 December 2007 has not been recognised as a liability in accordance withIFRS as it was declared after the year end. A dividend of £5,163,000 was paid on29 February 2008. 3. Earnings per share Basic earnings per share is calculated by dividing the net (loss)/profit for theyear attributable to ordinary shareholders of the Company by the weightedaverage number of ordinary shares in issue during the year. The following reflects the income and share data used in the basic and dilutedearnings per share calculations: Year ended 31 Dec 2007 Period ended 31 Dec 2006 Net (loss)/profitattributable to ordinaryshareholders of theCompany from continuingoperations (£000) (27,268) 106,162 Weighted average number ofordinary shares for basicand diluted earnings pershare 331,350,393 308,366,051 4. Investments The Company had the following principal subsidiaries and sub-subsidiaries at 31December 2007 and as at 31 December 2006. Name Place of Ownership proportion incorporationING UK Real Estate (Property)Limited Guernsey 100%ING (UK) REIT (SPV) Limited Guernsey 100%ING (UK) Listed Real Estate Guernsey 100%ING UK Real Estate (Property)No.2 Limited Guernsey 100%ING (UK) REIT (SPV No.2)Limited Guernsey 100%Merbrook Business PropertyUnit Trust Jersey 100%Merbrook Prime Retail PropertyUnit Trust Jersey 100%Merbrook Bristol Property UnitTrust Jersey 100%Merbrook Swindon Property UnitTrust Jersey 100%ING (UK) Listed Real Estate Issuer England & Wales -PLC 5. Investment properties 2007 2006 £000 £000Opening valuation 702,167 -Additions 5,913 652,930Disposals (34,343) (25,756) 673,737 627,174Gains and losses on investments held at fair value throughprofit and loss:Gains on disposals 4,085 4,572(Deficit)/surplus on revaluation (46,775) 70,421Closing valuation 631,047 702,167Valuations of assets held under finance leases 2,159 -Total investment properties 633,206 702,167 Historic cost 611,384 631,746 The investment properties were valued by King Sturge LLP, Chartered Surveyors,as at 25 December 2007, on the basis of Market Value in accordance with theAppraisal and Valuation Manual of the Royal Institution of Chartered Surveyors. The Group's borrowings are secured by a first ranking fixed charge over theinvestment properties held. Rental Income and property expenses arise from the properties shown above. 6. Loans and borrowings Maturity 2007 2006 £000 £000Floating rate notes 31 January 2013 225,000 225,000Bank loan 4 December 2009 81,981 88,450Interest rate swaps (5,648) (8,727)Obligations under finance leases 2,028 - 303,361 304,723 On 20 December 2005 the Group issued £200 million of AAA rated seven year loannotes to the debt market. The interest payable on these notes is fixed at 4.795%by means of an interest rate swap. On 6 July 2006 a further £25 million of loannotes were issued on the same terms, with the interest payable fixed at 5.3804%by means of a further swap. The loan notes are secured over the investmentproperties held by the GPUT, and are repayable on 31 January 2013. The loannotes were issued by ING (UK) Listed Real Estate Issuer PLC, a Special PurposeEntity that is consolidated under the principles of SIC 12, see Note 10. On 4 December 2006 the Group entered into a 3 year term loan with J P Morgan for£93 million. The full amount was drawn down on that date, with £4,550,000 repaidon 11 December 2006, following the disposal of an investment property.Subsequent disposals have lead to further repayments of the loan. Interest onthe loan is fixed at 5.20% by a further interest rate swap, plus a marginpayment of between 60 and 80 basis points depending on the loan to value ratioat the time. This is currently 80 basis points. The loan is repayable in full on4 December 2009, and is secured over the units held in the JPUTs and theinvestment properties held by those JPUTs, with the exception of MerbrookSwindon Property Unit Trust. The interest rate swaps mature on the same dates as the associated borrowings. The weighted average interest rate paid on the Group's borrowings for the yearwas 5.1645% (31 December 2006: 5.1817%). The fair value of the loans may be lower than the book value given that, at thepresent time, lenders are less willing to provide financing for the type ofassets held by the Group at the interest annually paid by the Group. However, itis not practical or possible to measure the fair value of the loan due to thecurrent market conditions. The loan agreement for the floating rate notes states that for the securitisedpool of assets the Loan to Value ratio should not exceed 50% and the InterestCover Ratio should be a minimum of 1.50. The additional JP Morgan loan agreementdetermines that for the assets falling under this agreement the Loan to Valueratio should not exceed 78% and the minimum Interest Cover Ratio should be aminimum of 1.10. The Group has not breached any of the loan covenants either inthe current year or in the previous accounting periods. 7. Contingencies and capital commitments The Group has entered into contracts at Longcross Court, Cardiff and HeronIndustrial Estate, Reading with commitments outstanding at 31 December 2007 ofapproximately £1.0m, (31 December 2006 : £nil). There are no other contractualobligations to purchase, construct or develop investment property or forrepairs, maintenance or enhancements as at 31 December 2007. 8. Ordinary Share Capital 2007 2006Authorised: £000 £000 Unlimited number of ordinary shares of no par value - - Issued and fully paid: 330,401,300 ordinary shares of no par value - -(31 December 2006: 331,500,000) The Directors have authority to buy back up to 14.99% of the Company's ordinaryshares in issue subject to the annual renewal of the authority fromshareholders. Any buy back of ordinary shares will be made subject to Guernseylaw, and the making and timing of any buy backs will be at the absolutediscretion of the Board. During November 2007 the Company repurchased 1,098,700 ordinary shares forcancellation at an average price of 75.76 pence per share, leaving ordinaryshares in issue of 330,401,300. Under Guernsey law, a capital redemption reserveis created for the redemption of these ordinary shares. As the nominal value ofthese shares is £nil the amount to be transferred to this reserve is £nil. 9. Share Premium and distributable reserve Share Distributable Premium Reserve £000 £000Opening balance at 15 Sept 2005 - -Premium arising on issue of equity shares 305,000 -Expenses of issue of equity shares (6,390) -Transfer (298,610) 298,610Further issue of equity shares 32,198 -Expenses of issue of equity shares (809) -Balance at 31 Dec 2006 31,389 298,610 Repurchase of ordinary shares - (834) Balance at 31 Dec 2007 31,389 297,776 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. Royal Court approval was obtained on 17 October 2005.Distributable reserves may be used for the purpose of paying dividends or buyingback shares. For further information: The Company Secretary Northern Trust International Fund Administration Services (Guernsey) Limited Trafalgar Court Les Banques St Peter Port Guernsey GY1 3QL Tel: 01481 745439 Fax: 01481 745085 ING Real Estate Investment Management (UK) Limited Helen Stott, 020 7767 5648 [email protected] Financial Dynamics Dido Laurimore/Laurence Jones, 020 7831 3113 [email protected] This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Picton Prop