Mucklow (A & J) Group plc 4 September 2013 Rupert Mucklow, Chairman commented: I am pleased to report another solid performance by the Group for the year ended 30 June 2013. Pre-tax profit and net asset value per share have both increased, while our financial position has been further strengthened, by the renewal and extension of our principal banking facilities. Financial Summary for the year ended 30 June 2013 Statement of comprehensive income Year ended Year ended 30 June 2013 30 June 2012 Pre-tax profit 16.3m 0.1m Underlying pre-tax profit (1) 13.5m 13.4m Basic EPS 27.21p 0.28p EPRA EPS (2) 22.43p 22.59p Ordinary dividend per share 19.64p 19.07p Balance sheet 30 June 2013 30 June 2012 Net asset value 182.5m 177.6m Basic NAV per share 303p 295p EPRA NAV per share (3) 305p 297p Net debt 74.9m 69.0m Gearing 41% 39% Property portfolio 30 June 2013 30 June 2012 Vacancy rate 6.7% 6.5% Portfolio value (4) 262.7m 252.8m Valuation gain/(deficit) 2.7m (15.1)m Initial yield on investment properties 7.8% 8.1% Equivalent yield 8.5% 8.7% Recommended final dividend of 10.86p per share (2012: 10.55p), making the total in respect of the year ended 30 June 2013 19.64p per share (2012: 19.07p). The final dividend will be paid as a Property Income Distribution (PID). (1) See the property and finance review for the calculations. (2) Excludes the profit on disposal of investment, development and trading properties and the revaluation of investment and development properties and derivative financial instruments and tax adjustments. See note 8. (3) Excludes the fair value of derivative financial instruments and includes the surplus on trading properties. See note 8. (4) See note 8. For further information please contact: Rupert Mucklow, Chairman Tel: 0121 550 1841 David Wooldridge, Finance Director Fiona Tooley Tel: 0121 309 0099 TooleyStreet Communications Mobile: 07785 703523 Page 1 of 28
Chairman s Statement Rupert J Mucklow I am pleased to report another solid performance by the Group for the year ended 30 June 2013. Pre-tax profit and net asset value per share have both increased, while our financial position has been further strengthened, by the renewal and extension of our principal banking facilities. Results Statutory pre-tax profit for the 12 months ended 30 June 2013 was 16.3m, compared with 0.1m for the corresponding period last year. The difference is mainly due to a 2.8m increase in the value of the investment portfolio (2012: negative 15.0m). There was no trading profit during year (2012: 1.5m). EPRA earnings per share was 22.43p (2012: 22.59p). The underlying pre-tax profit, which excludes revaluation movements and profit on the sale of investment and trading properties, increased marginally from 13.4m to 13.5m. Gross rental income received rose from 20.2m to 20.4m. EPRA net asset value per share increased by 2.7% during the year from 297p to 305p per share. Shareholders funds were 182.5m (2012: 177.6m), while borrowings net of cash amounted to 74.9m, representing 41% of shareholders funds (2012: 69.0m and 39%). The Board is recommending the payment of a final dividend of 10.86p per Ordinary share, an increase of 3% over last year (2012: 10.55p), making a total for the year of 19.64p (2012: 19.07p). Following approval by shareholders, the final dividend will be paid on 2 January 2014, to shareholders on the register at the close of business on 29 November 2013. The final dividend will be paid as a PID. Property Review For the last five years, while the property market has remained fragile, our priority has been to maintain a high occupancy level, in order to maximise revenues from our existing investment properties and reduce costs. At the same time, we have also focused on utilising our strong balance sheet to capitalise on adverse market conditions, to acquire additional income producing properties when suitable opportunities have arisen. Over the last 12 months, we have continued actively to manage our property portfolio, negotiating a number of lease extensions and securing long term funding to support investment acquisitions. Business confidence appears to be improving in the industrial property sector, which is reflected in a positive valuation uplift for the year. However, provincial offices and retail property are still suffering from weak investor and occupier demand. Industrial property accounts for approximately two thirds of the value of our investment portfolio. Our average industrial rent and capital value per square foot in the Midlands at 30 June 2013 was 4.94 and 53 respectively (2012: 4.95 and 51), significantly below replacement cost. Our vacancy rate at 30 June 2013 remained low at 6.7% (2012: 6.5%). This figure included 40,000 sq ft of industrial space (1.1% of total available space) which was returned to us on 25 June 2013, following the expiry of 4 leases. We have continued to see steady occupier demand for our vacant industrial property. Letting incentives have hardened, but the market is still not strong enough to start aggressively enhancing rental levels, particularly without evidence from any new developments. Page 2 of 28
There is still a real shortage of good quality industrial space across the Midlands. However, demand is currently being satisfied by the limited supply. There is some interest in pre-let development, which may set higher rental levels, but we need to see rents rise by at least 1 psf before we will start any speculative development. The regional investment market for better quality industrial property noticeably picked up towards the end of our financial year. An increase in the number of Institutional Investors looking to buy in the Midlands, coupled with a slight improvement in market conditions, has started to compress yields and increase industrial property values. Property yields for offices and retail property with short income are still being penalised. We acquired two industrial investments towards the end of the financial year at a total cost of 5.71m (excluding stamp duty and purchase costs), with a combined rental income of 0.53m pa and average net yield of 8.8%. They were:- A prime 51,151 sq ft warehouse, built in 2000 and located close to Junction 13, A42(M) at Ashby-de-la- Zouch. The property has recently been let on a new 10 year lease to a large Italian lighting manufacturer at an initial rent of 0.23m pa ( 4.50 psf) and capital value of 50psf. A prominent Trade Park in Oldbury, West Midlands, built in 1990 s and comprising 9 units totalling 61,207 sq ft and currently producing a rent of 0.30m ( 5.23 psf), with a capital value of 51psf. There is one vacant unit (4,452 sq ft). DTZ Debenham Tie Leung Limited revalued our property portfolio at 30 June 2013. The investment properties and development land were valued at 262.7m, which showed a revaluation surplus of 2.8m for the period (1.0%). The initial yield on the investment properties was 7.8% (2012: 8.1%) and the equivalent yield was 8.5% (2012: 8.7%). Our industrial properties increased in value by 3.5%, while offices and retail properties reduced by 4.2% and 2.0% respectively. DTZ Debenham Tie Leung Limited also valued our trading properties at 30 June 2013. The total value was 1.9m, which showed an unrecognised surplus of 1.4m. There were no disposals of trading property during the year. Finance We completed a new 20m, 10 year term loan with Lloyds TSB Bank Plc in the first half year at a fixed rate of 5.23% and renewed 64m of banking facilities with HSBC Bank Plc for a further 5 years from March 2013. Total net borrowings at our year end had risen to 74.9m (2012: 69.0m). Debt to equity gearing was 41% and loan to value 28%. Undrawn banking facilities amounted to 33.0m and average cost of debt at 30 June 2013 was 4.33%. Outlook There are signs that the Midlands industrial property market is slowly improving, but values still remain 30% below 2007 peak levels. We shall continue our strategy of steadily growing income by accumulating and managing our modern portfolio of quality investment properties, which should benefit significantly from capital appreciation in the medium to long term when occupier demand and rental growth resumes. Rupert J Mucklow Chairman 3 September 2013 Page 3 of 28
Property and Finance Review Justin Parker, Managing Director David Wooldridge, Finance Director The Group has maintained a healthy operational performance over the course of the 2012/2013 financial year. Through a combination of active management and selective acquisitions, we have kept our vacancy rate low at 6.7% and, in turn, increased our overall net rental income by 3.3% ( 0.6m). Our efforts remain concentrated on generating as much rental income from our existing assets as possible, particularly, while rental levels remain flat and to position the business so that it will benefit in the medium to long term when the occupier and investor markets improve. With our strong balance sheet, conservative gearing (41%) and focused portfolio we are able selectively to acquire additional investment properties which offer attractive long-term returns to support future dividend growth. Strategy and Business Model The Group s main objective is the long-term enhancement of shareholder value through dividend and capital appreciation, whilst adopting a conservative financial structure. As a Real Estate Investment Trust, we are committed to distributing 90% of the profits of our tax exempt business. We therefore expect dividends to be an important part of the total shareholder return. Our long-term objective remains focused on accumulating a portfolio of high quality, modern, income producing properties, with potential for long-term rental and capital growth. Our primary geographic focus is the Midlands region. The three areas of our strategy are: Selectively acquiring and disposing of investment properties; Developing new properties for long-term investment; and Actively managing our assets to enhance value. We continue to be a counter-cyclical investor in modern, well located, quality investment properties, where we expect to achieve attractive returns. Given the long-term and cyclical nature of the property market, we believe that the precise timing of acquisitions and disposals is crucial in boosting returns from our existing property portfolio. The core of our business is the investment property portfolio, which represents 96% of the value of the investment and development properties held. The investment portfolio consists of 54 properties/estates, with 334 units, totalling 3.5m sq ft. We are also a selective developer of well-located, high quality property, developing properties when the occupier market is strong. In addition, the proactive approach to the management of our assets allows us additional opportunity to enhance overall value. Our low cost base, including only twelve employees, as well as three non-executive directors, enables us to pay a high proportion of our profits as dividends. In addition, the small size of the team enables us to react quickly to changing market conditions, and the liquidity of our financing provides us with the ability to transact quickly on investment acquisitions. Page 4 of 28
Review Towards the end of our financial year, there were signs of greater investor confidence and increased depth and liquidity in the Midlands industrial market. It appears that an increasing number of both domestic and international investors are now beginning to invest outside London and the South East, which is starting to be reflected in capital values. The Midlands industrial occupier market is also slowly improving, partially on the back of strong demand from the automotive and distribution sectors. Rental incentives are continuing to harden for better quality properties as tenant demand picks up and available space reduces. This is likely to lead to upward pressure on rental levels at some point in the future and stimulate more pre-let and speculative development. We acquired two quality industrial investments in the Midlands region during the year. Each property is well located in terms of their prominence to the road network and both offer good rental growth prospects. The total cost of these two properties was 5.71m (excluding purchase costs), with a combined rental income of 0.53m per annum producing an average net income return of 8.8%. 1. Redwood Trade Park, Oldbury Road, Oldbury Acquired in June 2013. This 61,207 sq ft, nine unit industrial /trade park was built in the 1990 s and is let to various tenants including: BSS, Rexel Senate, Euro Car Parts and Dulux at a current rent of 297,252 per annum. There is one vacant unit which when let should increase the passing rent to around 320,000 per annum. The property is located in a prominent position fronting the A457 Oldbury Road in an established industrial location close to Junctions 1 & 2 of the M5 motorway approximately 4 miles west of Birmingham city centre. The property was purchased for 3.15 million reflecting a net initial yield of 9.0% and a reversionary yield of 9.7% on the letting of the one vacant unit. 2. Flagstaff 42, Ashby-De-La-Zouch Acquired in June 2013. This is a modern 51,151 sq ft industrial unit. The property is prominently located on the established Flagstaff 42 Business Park in Ashby-de-la-Zouch which is 0.5 miles west of Junction 13 of the A42(M). It is let to Manfrotto Lighting Ltd on a 10 year term from December 2012 at a rent of 230,265 per annum. The property was acquired for 2.56 million reflecting an income return of 8.5%. Midlands industrial property values are still 30% below their pre-recession peak levels, despite the fact that rental levels have remained stable. We continue to believe it is a good time to be purchasing modern investment properties, providing the right opportunities can be found and they can be acquired at a significant discount to replacement cost. The latest acquisitions are let at an average rent of 4.89 psf and capital value of 51 psf, which is in line with our current industrial values and offer excellent long term growth potential. There is a shortage of good quality industrial accommodation in the Midlands, however it is not financially viable for us speculatively to develop new space off current rental levels. We continue to look for opportunities for risk free pre-lets on our 30 acres of development land, but there is currently very little development activity in the Midlands, as it remains difficult to secure commitments from potential tenants. Asset management remains the Group s key focus. Through a proactive programme of lettings, lease renewals, lease extensions and rent reviews along with the additional revenue stream created from investment acquisitions our annual rent roll has risen from 20.6m to 21.2m. Whilst our occupancy levels at the financial year end were 93.3%, down marginally from last year s 93.5%, this was primarily due to 40,000 sq ft of industrial accommodation being returned to us in June 2013 following a number of simultaneous lease expiries. Page 5 of 28
Our tenant retention profile during the year was good, with 83% of leases renewed on expiry and only 5% of break clauses operated. We have experienced virtually no tenant failures throughout the year. We have also successfully negotiated a number of early lease extensions involving over 1.1m pa in rent, which will provide us with added security of income going forward. DTZ Debenham Tie Leung Limited carried out a valuation of our property portfolio as at 30 June 2013. Our investment properties and development land were valued at 262.7m (2012: 252.8m), which showed a revaluation surplus of 2.8m for the period (+1%). Our industrial property increased in value by 3.5%, while offices and retail properties reduced by 4.2% and 2.0% respectively. The initial yield on our investment properties was 7.8% (2012: 8.1%) and the equivalent yield was 8.5% (2012: 8.7%). The increase in the capital value for our industrial property was due to improvements in the regional occupational market, together with a reduction in available space and better prospects for rental growth for investors. Industrial property accounts for approximately two thirds of the value of our investment portfolio and provides us with a generous equivalent yield of 8.8%. Our Midlands industrial property, including the recent additions to the portfolio, show a low average base rent of 4.94psf (2012: 4.95psf) and a capital value of 53psf (2012: 51psf). The Group's trading properties mainly comprise residential land and were valued by DTZ Debenham Tie Leung Limited as at 30 June 2013 at 1.9m (2012: 1.9m) which shows an unrecognised surplus of 1.4m over book value. There were no trading property disposals during the year. Finance Review The Group has used the strength of our balance sheet to increase our financial liquidity, with total debt facilities rising to 109.9m and year-end undrawn amounts from 19.5m to 33.0m, enabling us to continue to pursue further, earnings enhancing, investment opportunities, whilst remaining a conservatively financed REIT. Two investment property acquisitions (at a total cost of 6.0m) have been completed since the refinancings, leading to a marginal increase in our Loan to Value during the year, from 27% to 28%. Net balance sheet gearing remains low at 41% (2012: 39%). Our net rental income has increased by 3.3% and EPRA net asset value per share has also increased by 3%, after paying dividends representing 7% of our opening net assets. Reflecting this performance, the Board proposes a 3% increase in our final dividend, in line with the increase at the half-year stage. Income The Group s statutory pre-tax profit has increased by 16.2m on the prior year, from 0.1m to 16.3m, due mainly to a 2.8m revaluation increase in the investment values for our regional property portfolio, compared to a 15.0m decrease in the prior year. Gross rental income has increased by 0.2m (1%) to 20.4m. Surrender premiums received from tenants reduced from 0.3m to 0.1m, whilst the impact of acquisitions in the current and previous financial year increased rents by 0.4m, compared to 2012. Page 6 of 28
Two investment acquisitions with a combined annual rent of 0.5m were completed in the year, both taking place in the final month of our financial year, leading to a limited impact on reported revenue in the period under review. Including those acquisitions, year-end annual passing rent roll has increased from 20.6m at 30 June 2012 to 21.2m at 30 June 2013. Property outgoings have reduced compared to the prior year, from 4.7% of gross rental income to 2.7%, mainly due to decreased net refurbishment costs on the re-letting of units. Occupancy levels at the financial year end were 93.3%, down marginally from last year s 93.5%. Net rental income rose by 3.3% to 19.8m. Administration expenses increased by 4.9%, from 2.9m to 3.0m, principally due to the repositioning of our term debt facilities in the year, which is detailed later in this report. Total salary costs, including share based payment charges to the statement of comprehensive income, were unchanged at 1.9m. Bad debt costs recognised in pre-tax profit represent 0.09% of gross rental income for the year. Only 15,516 sq ft (0.4% of the property portfolio) has been returned to us due to insolvency in the twelve months under review. An additional 0.3m of net finance costs were incurred in the current financial year, as a result of the higher percentage of fixed rate debt held by the Group and an increase in margin on our principal banking facilities, following the two refinancings, as well as a rise in the level of overall drawn debt. Fair value movements on the Group s interest rate caps increased profit before tax by 0.02m (2012: reduced profit by 0.15m). No break costs have been incurred in respect of the Group s interest rate caps. As a result of the above, the Group s underlying profit increased by 0.1m (0.5%) in the year. No trading profit was recognised in the current financial year (2012: 1.5m). The Group also realised a profit of 0.1m from a non-refundable deposit due to the failure of the proposed purchaser to complete the acquisition of the Golden Cross (Aston) unit just prior to our financial year end. The value of the Group s investment and development portfolio increased from 252.8m to 262.7m during the year, due to additions of 6.0m, lease incentives of 1.2m and a revaluation gain of 2.8m (1.1%). Taxation The Group continues to operate as a Real Estate Investment Trust, so profits and gains from the property investment business are normally exempt from corporation tax. The tax credit in respect of the current financial year of 0.04m arises from an overprovision in respect of the previous financial year. Earnings per share Basic earnings per share, which includes the valuation movement, increased from 0.28p to 27.21p. EPRA earnings per share, which excludes non-cash valuation movements, as well as the profit on sale of trading, investment and development properties, reduced by 0.16p per share (0.7%) to 22.43p, mainly due to tax adjustments in the previous financial year. Dividend Our efficient cost base and low gearing enables us to return a high proportion of our gross income to Shareholders, with dividends paid in the year amounting to 57% of our gross rental income (2012: 56%). The interim dividend of 8.78p per Ordinary share was paid as a Property Income Distribution ( PID ), attracting a 20% withholding tax for Shareholders who are not eligible for gross payment. Page 7 of 28
Reflecting the improvement in underlying profitability, the Directors have proposed a 3% increase in the final dividend to 10.86p, bringing the total in respect of the year to 19.64p, an overall increase of 3%. The final dividend, if approved by Shareholders, will also be paid as a PID. The dividend will be paid on 2 January 2014 to shareholders on the register at the close of business on 29 November 2013. The allocation of future dividends between PID and non-pid may vary. The Board s continued intention is to grow the rent roll to enable a sustainable, covered, increase in dividends over the long-term, with a view to distributing around 90% of our recurring profit. The interim and final dividends total 11.8m, amounting to 88% of our underlying pre-tax profit (2012: 86%). Underlying financial performance Investment/ Trading Other Total development properties items 2013 000 000 000 000 Rental income 20,398 20,398 - - Property outgoings (559) (559) - - Net rental income 19,839 19,839 - - Sale of trading properties - - - - Property outgoings on trading properties (2) - (2) - Net expenditure on trading properties (2) - (2) - Administration expenses (2,997) (2,997) - - Operating profit before net gains on investment 16,840 16,842 (2) - Net gains on revaluation 2,770 - - 2,770 Profit on disposal of investment and development properties 92 - - 92 Operating profit/(loss) 19,702 16,842 (2) 2,862 Gross finance income 87 87 - - Fair value movement on derivative financial instruments 22 - - 22 Total finance income 109 87-22 Total finance costs (3,465) (3,465) - - Profit before tax 16,346 13,464 (2) 2,884 2012 000 000 000 000 Rental income 20,160 20,160 - - Property outgoings (953) (953) - - Net rental income 19,207 19,207 - - Sale of trading properties 1,700-1,700 - Property outgoings on trading properties (170) - (170) - Net income from trading properties 1,530-1,530 - Administration expenses (2,856) (2,856) - - Operating profit before net gains on investment 17,881 16,351 1,530 - Net losses on revaluation (14,978) - - (14,978) Profit on disposal of investment and development properties 307 - - 307 Operating profit 3,210 16,351 1,530 (14,671) Finance income 62 62 - - Gross finance costs (3,016) (3,016) - - Fair value movement on derivative financial instruments (147) - - (147) Total finance costs (3,163) (3,016) - (147) Profit before tax 109 13,397 1,530 (14,818) Page 8 of 28
Presented above is an analysis of the underlying rental performance before tax, as shown in the investment/development column, which excludes the impact of EPRA adjustments and capitalised interest. The directors consider that this further analysis of our profit before tax gives shareholders a useful comparison of our underlying performance for the periods shown in the Group financial statements. Net assets Net assets have increased from 177.6m to 182.5m, leading to an uplift of 8p in net asset value per share to 303p. The investment and development portfolio valuation increase amounts to 5p per share, with the balance being virtually all profits retained after dividends. Dividend payments in the year reduced net assets by 19p. EPRA net asset value per share, which adjusts for the valuation of trading properties and derivatives, has also increased by 8p per share, from 297p to 305p. Net debt has risen by 5.9m, from 69.0m to 74.9m (39% to 41% of net assets), reflecting the 6.0m of investment acquisitions in the financial year. We remain well within our self-imposed gearing limit of 50% of net assets. This level of debt equates to 28% of the DTZ valuation of our investment and development portfolio (2012: 27%), a low level compared to other REITs and property companies. All of the Group s properties are wholly owned. Page 9 of 28
Financing, cash flow and going concern The Group continues to generate a strong operating cash flow, with 12.8m in the current financial year. A summary of the cash flows for the year is set out below. 000 000 Net cash generated from operations 15,963 18,298 From investment and development properties 15,963 16,712 From trading properties - 1,586 Net interest paid (3,116) (2,787) Taxation (15) (46) Operating cash flow 12,832 15,465 Property acquisitions (6,048) (7,133) Property disposals 92 1,707 Net expenditure on property, plant and equipment (132) (9) Movement in borrowings 5,244 1,000 Share issue 16 23 Payments for derivative financial instruments (313) - Equity dividends (11,645) (11,290) Net movement in cash 46 (237) The Group started the financial year with 89.9m of debt facilities, of which 19.5m (22%) was undrawn. Of these facilities, the 5.0m overdraft was due to expire within twelve months and the 60.0m HSBC term loan and revolving credit facility were due to expire in September 2014. Having spent 26.8m on investment properties (net of disposal proceeds) in the previous two financial years, using our medium term, floating rate, revolving credit facilities, we decided to raise a further 20.0m of longer term fixed rate debt facilities, increasing both the amount of our facilities and the term of those facilities. In October 2012 we raised 20.0m from Lloyds Bank for 10 years at a fixed rate of 5.23%. The funds raised were used to repay existing HSBC revolving credit drawdowns, thereby freeing up capacity within those facilities. In March 2013 we refinanced our principal bank facilities with HSBC, increasing the term to March 2018. The total level of the facilities - 65.0m remains unchanged. The breakdown of the facilities has altered slightly, with the 40.0m revolving credit facility increasing by 4.0m to 44.0m, and the 5.0m overdraft reducing by the same amount to 1.0m. We have converted 4m of annually renewable overdraft facility into the five year term facility. The 20.0m term loan amount remains unchanged. The two financings completed in the year represent 77% of our current total debt facilities. The Group s available facilities as at 30 June 2013 therefore consisted of: Borrowing Expiry year Available Drawn Undrawn m m m HSBC overdraft 2014 1.0-1.0 HSBC Revolving Credit Facility 2018 44.0 12.0 32.0 HSBC term loan 2018 20.0 20.0 - Lloyds 15 year term loan 2023 20.0 20.0 - Lloyds 10 year term loan 2022 20.0 20.0-11.5% Debenture Stock 2014 4.2 4.2 - Preference shares - 0.7 0.7-109.9 76.9 33.0 Page 10 of 28
As a result of increasing the Group s facilities and fixed rate debt, the weighted average cost of the drawn borrowings as at 30 June 2013 was 4.8% (or 4.3% on total facilities), an increase from the 4.1% reported as at 30 June 2012, although the weighted average remaining term (excluding preference shares) also increased, from 4.7 years to 7.1 years. Less than 5% of the total debt facilities (the 1.0m overdraft and 4.2m of debenture stock) are due to be refinanced within twelve months of the date of approval of these financial statements. The 11.5% debenture stock, with an annual interest cost of 0.5m, is due to be repaid on 1 July 2014. The HSBC term facilities of 64m (58% of the total) expire in more than four years, and the two Lloyds facilities ( 40m, 36%) expire in more than 9 years. The preference shares have no redemption date. Of the total debt facilities of 109.9m, 44.9m (41%) is at fixed rates (2012: 24.9m and 28%). During the year, the Group has entered into 35.0m of interest rate caps (representing 32% of total debt facilities), at a cost of 0.3m, in respect of the refinanced term loan and revolving credit facilities for the duration of the new facilities, in order to limit the impact to the Group of increases in LIBOR interest rates. As a result of the caps, we continued to benefit from low LIBOR rates on 42% of our drawn debt at our year-end. Total debt facilities have increased by 22% during the year, from 89.9m to 109.9m. Analysis of borrowings at 30 June 2013 000 000 11.5% First Mortgage Debenture Stock 2014 4,203 4,203 Preference Share Capital 675 675 Cash and short-term deposits (1,262) (1,216) Lloyds Term Loan 2023 19,958 19,954 Lloyds Term Loan 2022 19,633 - HSBC Term Loan 2014 HSBC term loan 2018 Borrowings from revolving credit facility - 19,660 12,000 19,864-25,500 Net Debt and Preference Share Capital 74,867 68,980 Net Assets 182,479 177,570 Gearing (net of cash) 41% 39% As at the date of this preliminary announcement the Group had drawn 13.5m from the 2018 Revolving Credit Facility and 0.0m from the overdraft, leaving undrawn amounts of 30.5m from the Revolving Credit Facility and 1.0m from the Group s overdraft. The Group s three term loans remain fully drawn. At the same date, the Group had 75.3m of properties that were unencumbered, providing significant capacity to raise additional finance, if required, or to provide additional security for existing facilities, should property values fall. We are complying with our banking covenants and the directors do not expect this position to alter in the forthcoming twelve months. Additional information about the going concern assumption is provided in the accounting policies note. The directors have considered our forecast cash flows, the Group s low gearing, significant portfolio of unencumbered properties and the maturity profile of our borrowings, and have a reasonable expectation that the Group has adequate resources to continue for the foreseeable future. Accordingly, the directors continue to adopt the going concern basis in preparing the annual report and accounts. Page 11 of 28
Outlook The Midlands industrial property market is showing encouraging signs of activity both in the occupational and investment arenas, which will hopefully start accelerating growth in rental and capital values. Meanwhile, we aim to continue to take advantage of the Group s strong financial position, to enhance value for shareholders through steady and prudent acquisitions, actively managing income, whilst keeping voids to a minimum. We have entered the 2013/14 Financial Year with cautious optimism. Justin Parker David Wooldridge Managing Director Finance Director 3 September 2013 3 September 2013 Page 12 of 28
Group Statement of Comprehensive Income for the year ended 30 June 2013 Notes 000 000 Revenue 2 21,286 22,701 Gross rental income relating to investment properties 2 20,398 20,160 Property outgoings 3 (559) (953) Net rental income relating to investment properties 19,839 19,207 Proceeds on sale of trading properties 2-1,700 Carrying value of trading properties sold - (165) Property outgoings relating to trading properties (2) (5) Net (expenditure on)/income from trading properties (2) 1,530 Administration expenses (2,997) (2,856) Operating profit before net gains/(losses) on investment and development properties 16,840 17,881 Profit on disposal of investment and development properties 92 307 Revaluation of investment and development properties 9 2,770 (14,978) Operating profit 19,702 3,210 Net finance costs 5 (3,356) (3,101) Profit before tax 4 16,346 109 Tax credit 6 41 60 Profit for the financial year 16,387 169 Other comprehensive income: Revaluation of owner-occupied property (25) (123) Total comprehensive income for the year 16,362 46 All operations are continuing. Basic and diluted earnings per share 8 27.21p 0.28p Page 13 of 28
Statements of Changes in Equity for the year ended 30 June 2013 Ordinary Capital Revaluation Share-based Retained Total share redemption reserve payments earnings equity capital reserve reserve 000 000 000 000 000 000 Balance at 1 July 2011 15,021 11,162 262 261 161,912 188,618 Retained profit - - - - 169 169 Other comprehensive income - - (123) - - (123) Total comprehensive income - - (123) - 169 46 Share-based payment - - - 173-173 Ordinary share issue 23 - - - - 23 Exercise of share options - - - (154) 154 - Release on forfeiture of share options - - - (16) 16 - Dividends paid - - - - (11,290) (11,290) Balance at 30 June 2012 15,044 11,162 139 264 150,961 177,570 Retained profit - - - - 16,387 16,387 Other comprehensive income - - (25) - - (25) Total comprehensive income - - (25) - 16,387 16,362 Share-based payment - - - 176-176 Ordinary share issue 16 - - - - 16 Exercise of share options - - - (134) 134 - Dividends paid - - - - (11,645) (11,645) Balance at 30 June 2013 15,060 11,162 114 306 155,837 182,479 Page 14 of 28
Group Balance Sheet at 30 June 2013 Notes 000 000 Non-current assets Investment and development properties 9 261,787 251,789 Property, plant and equipment 1,247 1,198 Derivative financial instruments 352 17 Trade and other receivables 780 321 264,166 253,325 Current assets Trading properties 458 450 Trade and other receivables 1,747 1,554 Cash and cash equivalents 1,262 1,216 3,467 3,220 Total assets 267,633 256,545 Current liabilities Trade and other payables (8,279) (7,989) Tax liabilities (746) (790) (9,025) (8,779) Non-current liabilities Borrowings (76,129) (70,196) Total liabilities (85,154) (78,975) Net assets 182,479 177,570 Equity Called up ordinary share capital 15,060 15,044 Revaluation reserve 114 139 Share-based payment reserve 306 264 Redemption reserve 11,162 11,162 Retained earnings 155,837 150,961 Total equity 182,479 177,570 Net asset value per share - Basic and diluted 8 303p 295p - EPRA 8 305p 297p Rupert J Mucklow David Wooldridge Page 15 of 28
Group Cash Flow Statement for the year ended 30 June 2013 Notes 000 000 Cash flows from operating activities Operating profit 19,702 3,210 Adjustments for non-cash items - Unrealised net revaluation (gains)/losses on investment and development properties (2,770) 14,978 - Profit on disposal of investment properties (92) (307) - Depreciation 96 92 - Share based payments 175 173 - Profit on sale of property, plant and equipment (39) - - Amortisation of lease incentives (1,180) (834) Other movements arising from operations - (Increase)/decrease in trading properties (8) 109 - (Increase)/decrease in receivables (152) 1,625 - Increase/(decrease) in payables 231 (748) Net cash generated from operations 15,963 18,298 Interest received 87 62 Interest paid (3,132) (2,825) Preference dividends paid (71) (24) Corporation tax paid (15) (46) Net cash inflow from operating activities 12,832 15,465 Cash flows from investing activities Acquisition of and additions to investment and development properties (6,048) (7,133) Proceeds on disposal of investment and development properties 92 1,707 Net expenditure on property, plant and equipment (132) (9) Net cash outflow from investing activities (6,088) (5,435) Cash flows from financing activities Net increase in borrowings 5,244 1,000 Equity share issue 16 23 Payment for derivative financial instruments (313) - Equity dividends paid (11,645) (11,290) Net cash outflow from financing activities (6,698) (10,267) Net increase/(decrease) in cash and cash equivalents 46 (237) Cash and cash equivalents at 1 July 1,216 1,453 Cash and cash equivalents at 30 June 1,262 1,216 Page 16 of 28
NOTES TO THE ACCOUNTS 1 Accounting policies Basis of preparation of financial information The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) adopted for use in the European Union and therefore comply with Article 4 of the EU IAS regulation. Whilst the financial information included in this preliminary announcement has been computed in accordance with IFRSs, this announcement itself does not contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs on 11 October 2013. The preliminary announcement was approved by the board of directors on 3 September 2013. The financial information set out in this announcement does not constitute the Company s statutory accounts for the years ended 30 June 2013 or 2012 as defined under Section 434 of the Companies Act 2006. The financial information for the year ended 30 June 2012 is derived from the statutory accounts for that year which has been delivered to the Registrar of Companies and those for 2013 will be delivered following the Company s annual general meeting. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain statements under section 498(2) or (3) of the Companies Act 2006. The financial statements are prepared under the historical cost convention, except for the revaluation of investment and development properties and owner-occupied properties and deferred tax thereon and certain financial assets, with consistent accounting policies to the prior year. The Group financial statements consolidate the financial statements of the Company and all its subsidiaries. Control is assumed where the Parent Company has the power to govern the financial and operational policies of the subsidiary. Unrealised gains and losses on intra-group transactions and intra-group balances are eliminated from the consolidated results. Going concern As at 30 June 2013 the Group had 33.0m of undrawn banking facilities and had drawn down 12.0m from its HSBC 44m 2018 Revolving Credit Facility. The Group s 1.0m overdraft, which is due for renewal within 12 months of the date of this document, was undrawn. Given these facilities, the Group s low gearing level of 41% and 75.3m of unencumbered properties, significant capacity exists to raise additional finance or to provide additional security for existing facilities, should property values fall. Accordingly, the directors continue to adopt the going concern basis in preparing the annual report and accounts. Critical accounting judgements and key sources of estimation uncertainty The preparation of financial statements requires the use of estimates and assumptions that affect reported amounts of assets and liabilities during the reporting period. These estimates and assumptions are based on management s best knowledge of the amount, event or actions. Actual results may differ from those amounts. Management has made judgements over the valuation of properties that has a significant effect on the amounts recognised in the financial statements. Management has used the valuation performed by its independent valuers as the fair value of its investment, development, owner-occupied and trading properties. The valuation is based upon assumptions including future rental income and an appropriate discount rate. The valuers also use market evidence of transaction prices for similar properties. Page 17 of 28
Standards in issue but not yet effective At the date of authorisation of these financial statements, the following Standards, Amendments and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU): IAS 1 (amendment) IAS 12 (amendment) IAS 19 (revised) IAS 27 (revised) IAS 28 (revised) IAS 32 (amendment) IFRS 1 (amendment) IFRS 7 (amendment) IFRS 9 IFRS 10 IFRS 11 IFRS 12 IFRS 13 Presentation of Items of Other Comprehensive Income Deferred Tax: Recovery of Underlying Assets Employee Benefits Separate Financial Statements Investments in Associates and Joint Ventures Offsetting Financial Assets and Financial Liabilities Government Loans Disclosures Offsetting Financial Assets and Financial Liabilities Financial Instruments Consolidated Financial Statements Joint Arrangements Disclosure of Interest in Other Entities Fair Value Measurement In addition, Improvements to IFRSs (issued May 2012) is the 2011 tranche of the Improvements to IFRS project and these have a number of minor amendments to existing IAS and IFRS, which require implementation for the Group from 1 July 2013. The adoption of these Standards, Amendments and Interpretations will either result in changes to presentation and disclosure, or are not expected to have a material impact on the financial statements. Revenue recognition Rental income Gross rental income represents rents receivable for the year. Rent increases arising from rent reviews due during the year are taken into account only to the extent that such reviews have been agreed with tenants at the accounting date. Rental income from operating leases is recognised on a straight-line basis over the term of the lease. Lease incentives are amortised on a straight-line basis over the lease term. Property operating expenses are expensed as incurred. Service charges and other recoverables are credited against the related expense. Revenue and profits on sale of investment, development and trading properties Revenue and profits on sale of investment, development and trading properties are taken into account on the completion of contracts. The amount of profit recognised is the difference between sale proceeds and the carrying amount. Page 18 of 28
Dividends and interest income Dividend income from investments in subsidiaries is recognised when shareholders rights to receive payment have been established. Interest income is recognised on an accruals basis when it falls due. Cost of properties An amount equivalent to the total development outgoings, including interest, attributable to properties held for development is added to the cost of such properties. A property is regarded as being in the course of development until practical completion. Interest associated with direct expenditure on investment properties which are undergoing development or major refurbishment and development properties is capitalised. Direct expenditure includes the purchase cost of a site or property for development properties, but does not include the original book cost of investment property under development or refurbishment. Interest is capitalised gross from the start of the development work until the date of practical completion, but is suspended if there are prolonged periods when development activity is interrupted. The rate used is the rate on specific associated borrowings or, for that part of the development costs financed out of general funds, the average rate. Valuation of properties Investment properties are valued at the balance sheet date at fair value. Where investment properties are being redeveloped the property continues to be treated as an investment property. Surpluses and deficits attributable to the Group arising from revaluation are recognised in the statement of comprehensive income. Valuation surpluses reflected in retained earnings are not distributable until realised on sale. Properties under development, which were not previously classified as investment properties, are valued at fair value until practical completion, when they are transferred to investment properties. Valuation surpluses and deficits attributable to properties under development are recognised in the statement of comprehensive income. Owner-occupied properties are valued at the balance sheet date at fair value. Valuation changes in owneroccupied property are taken to revaluation reserve through other comprehensive income. Where the valuation is below historic cost, the deficit is recognised in the statement of comprehensive income. Trading properties held for resale are stated at the lower of cost and net realisable value. Property, plant and equipment Land and buildings held for use in the production or supply of goods or services, or for administrative purposes, are stated in the balance sheet at their revalued amounts, being the fair value at the date of revaluation, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the balance sheet date. Any revaluation increase arising on the revaluation of such land and buildings is credited to the properties revaluation reserve through other comprehensive income, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense, in which case the increase is credited to the statement of comprehensive income to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of such land and buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the properties revaluation reserve relating to a previous revaluation of that asset. Page 19 of 28
Depreciation on revalued buildings is charged to income. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the properties revaluation reserve is transferred directly to retained earnings. Plant and equipment is stated at cost less accumulated depreciation, less any recognised impairment. Depreciation Depreciation is provided on buildings, motor vehicles and fixtures and fittings on a straight-line basis over the estimated useful lives of between two and twenty-five years. Investment properties are not depreciated. Government grants Capital grants received relating to the cost of building or refurbishing investment properties are deducted from the cost of the relevant property. Revenue grants are deducted from the related expenditure. Share-based payments The cost of granting equity-settled share options and other share-based remuneration is recognised in the statement of comprehensive income at their fair value at grant date. They are expensed straight-line over the vesting period, based on estimates of the shares or options that eventually vest. Options are valued using the Monte Carlo simulation model. Deferred taxation Deferred taxation is provided in full on temporary differences that result in an obligation to pay more tax, or a right to pay less tax, at a future date, at rates expected to apply when they crystallise based on current tax rates and law. Temporary differences arise from the inclusion of items in taxation computations in periods different from when they are included in the financial statements. Deferred tax is provided on temporary differences arising from the revaluation of fixed assets. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Taxation The tax expense represents the sum of the tax currently payable and deferred tax. The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income and expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date. Tax is recognised in the statement of comprehensive income except for items that are reflected directly in equity, where the tax is also recognised in equity. Pension costs The cost to the Group of contributions made to defined contribution plans is expensed when the contributions fall due. Acquisitions On the acquisition of a business, including an interest in an associated undertaking, fair values are attributed to the Group s share of separable net assets. Where the fair value of the cost of acquisition exceeds the fair value attributable to such assets, the difference is treated as purchased goodwill and capitalised in the balance sheet in the year of acquisition. Under the Group s previous policy, 0.13m of goodwill has been written off directly to reserves as a matter of accounting policy. This would be credited to the statement of comprehensive income on disposal of the business to which it related. Page 20 of 28
Group undertakings Investments are included in the balance sheet at cost less any provision for impairment. Financial instruments Financial assets and financial liabilities are recognised on the Group s balance sheet when the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire; or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for any amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. The Group derecognises financial liabilities when, and only when, the Group s obligations are discharged, cancelled, or they expire. Trade receivables Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in the statement of comprehensive income when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset s carrying amount and the present value of future cash flows discounted at the effective rate computed at initial recognition. Available-for-sale assets Mortgage receivables held by the Group are classified as being available-for-sale and are stated at fair value. Fair value is determined in the manner described in note 13 to the annual report. Gains and losses arising from changes in fair value are recognised directly in equity in the investments revaluation reserve with the exception of impairment losses, which are recognised directly in the statement of comprehensive income. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss recognised in the investments revaluation reserve is included in profit or loss for the period. Financial assets at FVTPL Financial assets are classified as at fair value through profit or loss where it is a derivative that is not designated and effective as a hedging instrument. The interest rate caps are classified as FVTPL. Cash and cash equivalents Cash and cash equivalents comprise cash in hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value. Financial liabilities and equity Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Bank borrowings Interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges, including premiums payable on settlements or redemption and direct issue costs, are accounted for on an accrual basis in the statement of comprehensive income using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise. Page 21 of 28