Results for the Year Ended 31 December 2016 (au...
To: RNS
Date: 3 April 2017
From: F&C Commercial Property Trust Limited
L.E.I. 213800A2B1H4ULF3K397
Results in Respect of the Year Ended 31 December 2016 (audited)
Highlights
· Net asset value total return of 4.8 per cent
· Share price total return of 6.4 per cent
· Portfolio total return of 5.3 per cent, compared with a total return of 3.6 per cent from the MSCI IPD quarterly benchmark index
· Maintained dividend of 6.0p per Ordinary Share, providing a yield of 4.4 per cent based on the year-end share price
· Dividend cover increased to 87.0 per cent from 80.6 per cent, with net income increasing by £3.1 million in the year
Chairman’s Statement
Introduction
The Company’s portfolio and UK Commercial Property performed well during 2016, notwithstanding the unstable conditions and uncertainties arising following the result of the EU Referendum vote. The Company’s closed-ended structure was of benefit during the period after the vote. Despite an immediate fall in the share price, the Company was not forced to react when some open-ended funds became forced sellers with many having to suspend redemptions as investors tried to sell down their property positions.
Performance for the Year
The net asset value (‘NAV’) total return for the year was 4.8 per cent and the share price total return was 6.4 per cent. The total return from the portfolio was 5.3 per cent, which compares favourably with a total return of 3.6 per cent from the MSCI Investment Property Databank (‘IPD’) Quarterly Benchmark Index. The longer term performance of the portfolio remains strong with IPD rating it second quartile over three years and top quartile over five and ten years.
The share price at the year-end was 136.4p, representing a premium of 0.7 per cent to the NAV per share of 135.5p, recovering significantly from a 24 per cent discount experienced in the immediate aftermath of the Brexit vote.
The following table provides an analysis of the movement in the NAV per share for the year:
Pence
NAV per share as at 31 December 2015 135.2
Unrealised increase in valuation of direct property portfolio 1.2
Decrease in valuation of interest rate swap (0.1)
Other net revenue 5.2
Dividends paid (6.0)
---------
NAV per share as at 31 December 2016 135.5
---------
The Company experienced modest capital growth in the portfolio of 0.8 per cent, ahead of the MSCI IPD index which recorded a negative capital return of 1.1 per cent. As with 2015, the strongest returns were experienced in the logistics and industrial sector.
In absolute terms, the most significant contributors to returns were:
• London, St Christopher’s Place Estate – reflecting yield compression and rental growth on all elements of the Estate.
• Birmingham, Unit10a Hams Hall Distribution Park – reflecting the renewal and extension of lease agreements with the tenants.
• Colchester, Ozalid Works, Cowdray Avenue – The grant of outline planning for a residential development accompanied by a completed s106 agreement with the Local Authority more than doubled the value of the property.
Negative contributions came from:
• The changes to Stamp Duty announced in March 2016 which reduced the value of the portfolio by 0.8 per cent as the rate increase was factored in to property valuations.
• Reading, Thames Valley One, Thames Valley Park – reflecting new void space following the exit of the tenant.
There was one sale during the year of the Company’s Freehold interest in 25 Great Pulteney Street, London W1 in December 2016 for £54.3 million. This reflected a net initial yield of 3.95 per cent and crystallised substantial value for the Company, reducing its exposure to Central London.
Borrowings and Loan Refinancing
The Group amended its financing arrangements with Barclays Bank PLC in respect of the existing £50 million term loan facility repayable in June 2017. This included extending the repayment date to June 2021. The Board also agreed an additional revolving credit facility of £50 million over the same period for ongoing working capital purposes and to provide the Group with the flexibility to acquire further property when the opportunity arises.
Following this refinancing, the Group’s available borrowings comprise a £260 million term loan with Legal & General Pensions Limited, maturing on 31 December 2024, and both a £50 million term loan facility and an undrawn £50 million revolving credit facility with Barclays. The Group’s net gearing was 17.2 per cent at the end of the year.
The Group terminated, at a cost of £1.3 million, the interest rate hedging arrangements linked to the previous Barclays facility. This had been accounted for as a liability, net of accrued interest, of £1.5 million as at 31 December 2015. The Group has entered into a new
£50 million interest rate swap to cover the extended Barclays term facility. This has fixed interest payable at 2.5 per cent per annum, a substantial reduction on the previous 4.9 per cent per annum. The weighted average interest rate in the Group’s total current borrowings is 3.3 per cent, which is 0.3 per cent lower than before the refinancing.
Dividends and Dividend Cover
Twelve monthly interim dividends, each of 0.5p per share, were paid during the year, maintaining the annual dividend of 6.0p per share and providing a dividend yield of 4.4 per cent based on the year-end share price. Barring unforeseen circumstances, the Board intends that dividends in 2017 will continue to be paid monthly at the same rate.
The Company’s level of dividend cover for the year (excluding capital gains on properties and loss on redemption of the interest rate swap) was 87.0 per cent, ahead of the 80.6 per cent cover achieved last year. The improved cover is primarily attributable to an enhanced level of rental income which increased by £2.0 million in the current year and a reduced performance fee of £1.9 million.
Management Fees
We have had discussions with the Investment Manager over the management fee and agreed a revised arrangement with effect from 1 January 2017. The performance fee has been removed and in the future, the Investment Manager will be entitled to a base management fee of 0.55 per cent per annum of the Group’s gross assets (reduced to 0.525 per cent on assets between £1.5 billion and £2 billion and 0.5 per cent on assets in excess of £2 billion).
The arrangement will be reviewed again formally in three years’ time. All other terms and conditions will remain the same including the administration fee and termination notice period of six months. We believe this to be a competitive fee arrangement, being the lowest ad valorem fee rate of the Company’s peer group.
Board Composition
The Company employed the services of an independent external search consultant to assist with the recruitment of new Board Member, Paul Marcuse, who was appointed on the 12 January 2017. Paul has approximately 35 years’ experience in the real estate and finance sectors. He was Head of Global Real Estate at UBS Global Asset Management between 2007 and 2012. Prior to this, he was Chief Executive of AXA Real Estate Investment Managers.
Peter Niven, who has served the Company since inception as a Non- Executive Director and was the Company’s first Chairman from 2005 to 2009 will retire at the 2017 AGM. On behalf of the Board, I would like to thank Peter for all the time and effort he has put in over the years. Peter has made a valuable contribution towards the success of the Company and is the last of the first appointed Directors to retire from the Board.
Following the 2017 AGM, and subject to Shareholders’ approval, the Board will consist of six non-executive directors with an average appointment of 4 years’ service. No further changes to the Board are anticipated in the near term.
Annual General Meeting
The Annual General Meeting will be held at 12.30pm on Wednesday 31 May 2017 at Trafalgar Court, Les Banques, St. Peter Port, Guernsey.
Outlook
Following a turbulent year for the UK, there is greater clarity emerging from Brexit but considerable areas of uncertainty remain and it is probable that this will influence investor sentiment. Investors are expected to de-risk their property holdings and favour prime, well-let assets. Property is still attractively priced against the risk free rate of interest and the search for yield should support the property investment market, with the industrial sector a major beneficiary.
The occupational market may face headwinds from business rates, the imposition of a National Living Wage and higher import costs in the coming year. However, the Company is looking for opportunity in longer-term structural changes such as digitisation, urbanisation, infrastructure and communications to grow capital value and dividend cover in a portfolio of prime assets.
The Company’s portfolio is well diversified, consists of high quality assets and is well positioned to continue to deliver attractive income, combined with capital appreciation in line with the investment objective. The Investment Manager will continue to look to invest in interesting and accretive assets, as well as realising the value add potential of the portfolio.
Chris Russell
Chairman
Managers’ Review
Highlights over the Year
· Strong total return from property portfolio of 5.3 per cent compared with 3.6 per cent from the MSCI IPD benchmark.
· Portfolio capital growth of 0.8 per cent compared with capital falls of 1.1 per cent from the MSCI IPD benchmark.
· Gross rental income increased by £2.0 million per annum.
Property Market Review for 2016
The benchmark total return for the year, as measured by the MSCI Investment Property Databank ('IPD') Quarterly Universe was 3.6 per cent. Performance was adversely affected by a change in stamp duty early in the year and by a marked weakening in investor sentiment reflecting, in large part, the perceived impact of Brexit on the UK economy and property market. The final quarter witnessed some rebalancing with a benchmark total return of 2.2 per cent.
The period following the EU referendum result saw a change in the UK’s political leadership, a reduction in official interest rates and an expanded quantitative easing programme. Despite initial survey evidence from the Purchasing Managers Index to the contrary, the GDP growth rate remained positive throughout the year. However, sterling fell sharply in the wake of the vote and inflation expectations have risen. Attention has been focused on the exit terms and timing of the withdrawal from the EU, with Article 50 having been triggered on 29 March 2017.
Investment activity in 2016 fell back to its lowest level since 2012. Investors were becoming concerned about pricing ahead of the referendum vote and holding back until the outcome of the result. Once this was known, investment activity fell further. Some deals proceeded, some were aborted and others renegotiated. The fall in sterling may have mitigated the impact on transaction levels to a degree and the fourth quarter saw investment activity revive, boosted by strong net investment from overseas buyers. UK institutions were net sellers of property for most of the year. Reaction to the referendum result also saw open-ended property funds struggle with redemptions. This necessitated moves in pricing, fair value adjustments, suspension of redemptions and some forced sales. However, this period was relatively short lived and all funds had reopened by year-end.
The income return was largely unaffected by the volatility elsewhere in the market and was 4.7 per cent in the year to December. Capital growth resumed in the fourth quarter at 1.0 per cent, but with capital values down by 1.1 per cent for the year, attention has switched more towards income to deliver performance. The year witnessed a marked shift, with investors focusing on long leases and secure income streams, with the focus moving from enhancing to defending and protecting the income stream.
The industrial/distribution sector and the “other†sector, comprising non-traditional property assets such as student accommodation, drew ahead of the field with both delivering an annual total return of 7.4 per cent. This compares with 2.7 per cent for offices and 1.6 per cent for retail. Within retail, Central London continued to deliver a strong performance but retail warehousing and regional retail under- performed, while shopping centres delivered a negative total return. In 2015, the office market was the strongest performing sector but in 2016 all the main components under-performed the all-property average, with City offices particularly badly affected.
The yield compression that has driven performance in recent years, drew to a close in 2016. The initial yield edged out to 4.9 per cent from 4.8 per cent at the all-property level. Outward yield movement was most pronounced in retail warehousing, shopping centres and South East offices sectors. The alternative property sector recorded an inward yield shift.
Rental growth for standing investments at the all-property level slipped to 2.1 per cent in 2016. The deceleration was widespread but Central London offices were particularly affected. Regional retail assets and supermarkets continued to record rental decline. Gross rent passing rose by only 0.8 per cent in the year, underscoring the difficulty of capturing rental growth. The occupational market has been affected by the Brexit vote, incentives have increased and development activity re-appraised.
The year was characterised by high levels of uncertainty and a move towards a more defensive strategy by investors, although the final quarter of the year showed some steadying in sentiment. There is significant equity in the market but property owners are holding on to their best assets. This has been a watershed year, where the yield compression and capital growth of earlier years has been replaced by a return to income as the driver of performance and a focus on income security and protection.
Valuation and Portfolio Growth
The Company continues to invest in a diversified UK commercial real estate portfolio of 36 properties. CBRE are external valuers to the Company and they independently valued the portfolio at £1,322,455 million as at 31 December 2016.
The total return from the portfolio over the year was 5.3 per cent (30th percentile) compared with the benchmark return of 3.6 per cent. The portfolio has delivered a strong track record of longer term performance: Second quartile over three years and top quartile over five and ten years.
Total Return Analysis
| Market Segment – Direct Property | Portfolio Total Return (%) | Benchmark Total Return (%) |
| St Retails – South East* | 9.0 | 5.8 |
| St Retails – Rest of UK | (5.6) | 1.5 |
| Shopping Centres | - | (0.2) |
| Retail Warehouses | 0.2 | 0.2 |
| Offices – City | 1.7 | 1.7 |
| Offices – West End | (0.2) | 3.5 |
| Offices – South East | (1.9) | 2.8 |
| Offices – Rest of UK | 2.9 | 1.8 |
| Industrials – South East | 24.6 | 8.3 |
| Industrials – Rest of UK | 15.5 | 5.8 |
| Other Commercial | 14.8 | 7.4 |
| All Segments | 5.3 | 3.6 |
* Includes West End Retail
Source: MSCI IPD
Retail Market
The Company’s exposure to the “in town†retail sector consists of St Christopher’s Place Estate, London W1, The Broadway, Wimbledon and a shop in Conduit Street, London W1. The value of these holdings is £383 million. The total return on the retail portfolio was 5.2 per cent compared with the MSCI IPD benchmark total return of 1.6 per cent.
St Christopher’s Place
St Christopher’s Place Estate remains a core holding for the Company and the largest asset with a value approaching £300 million. The holding comprises 44 individual properties across a range of uses including traditional retail, restaurants, offices and a growing number of residential units. The Estate performed strongly over the period with an 8.5 per cent increase in its capital value. The rise in capital value was driven by rental growth across the retail, restaurant and office sectors.
The redevelopment of 71-77 Wigmore Street is almost complete. The restaurant is under offer on a new lease to a renowned London restaurant group and although the shop unit, on the corner of St Christopher’s Place, has received a number of offers we will be formally marketing the opportunity on completion of the development to ensure optimal market exposure. Elsewhere planning consent has been approved for the redevelopment of
1-2 Barrett Street and several other development opportunities of varying scale have been identified and will be the subject of planning applications for redevelopment or reconfiguration over the next 12 months.
There has been very strong occupier interest in the Estate over the last 12 months, particularly in the food and beverage sector and this is producing interesting opportunities to refresh the occupier line up. As an example, on James Street, Café Rouge surrendered their lease for a premium of £650,000 and the unit has been re-let to Bone Daddies, a Japanese Ramen operator who paid an ingoing premium of £400,000 and the rent reflected an uplift of
£80,900 per annum (77 per cent over the previous rent passing). We foresee similar opportunities arising to bring in new operators over the short and medium term.
The opening of the Elizabeth Line (Crossrail 1) in 2018 and the predicted increase of pedestrian traffic to the Oxford Street area, has acted as a catalyst for discussion with other key West End stakeholders to secure further improvements to the public realm and the general visitor experience. In particular we are promoting the opportunities for reduced through traffic on James Street and we intend that this will form part of the overall strategy for environmental improvements in this part of the West End in the future.
Other Retail
At 16 Conduit Street, Christian Dior surrendered their lease in July 2016 and a new 15-year lease was simultaneously granted to luxury retailer MCM, at a record rental level for their London flagship store. Meanwhile at the Company’s retail and leisure holding in Wimbledon, Uniqlo renewed their lease for a term of 10 years at a higher rent, supporting a round of rent reviews and lease renewals that will become due over the next 12 months. A number of announcements have been made concerning Crossrail 2, which it is proposed will run through Wimbledon and active consultation is being undertaken. The longer term impact is likely to be very positive for the Company’s ownership.
Key asset management activities in the out of town retail sector included the completion of the letting to Boots the Chemist at Newbury Retail Park, following their agreement to surrender the lease of unit 10. Boots took a new 10-year lease from July 2016 at a rent of £325,000 per annum (£32.50 psf). The valuers pro-forma estimated rental value for this unit was £281,000 per annum (£28.10 psf). Linked to this transaction, the agreement for a lease with T K Maxx for unit 10 became unconditional when both planning consent and vacant possession were achieved. Works started on site in September 2016 to extend the floor area and to modernise the shop front of the unit. The premises were handed over to T K Maxx to fit out in February 2017. This is a new 15 year lease with a tenants break option in the tenth year, at £351,000 per annum (£29.25 psf) in excess of the pro-forma estimated rental value of £27.50 psf.
Terms have also been agreed with Homesense to take a new lease of unit 7, currently occupied by Poundstretcher who will surrender the remaining 5 years of the existing lease. Work will be undertaken to extend the current unit by 2,000 sq ft. Upon completion of these works Homesense will take a new lease of 15 years (tenant break option in year 10) at a commencing rent of £310,000 per annum (£31.00 psf). The existing rent is £212,477 per annum (£26.50 psf).
This new leasing and rent review evidence resulted in the holdings estimated rental value increasing by 4.8 per cent.
Sears Retail Park, Solihull is fully income producing following the expiry of the rent-free period granted to T K Maxx on Unit 5. New totem directory signage for the retail park was erected as part of the ongoing three-year park refurbishment and business plan. The next phase of these works will include the modernisation of the shop fronts and signage zones for those units still to be refurbished.
At Dane Street, Rochdale, Asda has presented to their board for approval for a new reversionary lease. This will extend the existing 5 year term to 20 years, in return for a rent free period.
Office Market
The Company’s exposure to the office sector amounts in total to £469 million (35.5 per cent of the portfolio) across 16 properties and provides approximately 39 per cent of gross rental income.
The total return on the office portfolio was 0.5 per cent compared with the MSCI IPD benchmark total return of 2.7 per cent. This relative underperformance can be attributed to the short term income of our West End holdings and void space on our South East out of town properties, particularly TVP One at Thames Valley Park, Reading and Building B at Watchmoor Park, Camberley. Significant transactions are being negotiated at Cassini House, 2-4 King Street, London SW1 and recently completed refurbishment at 7 Birchin Lane, London EC3. We also sold 25 Great Pulteney Street at £54.3 million reflecting a net initial yield of 3.95 per cent.
Elsewhere in the regions 82 King Street, Manchester has continued its letting success post refurbishment works with leases completed to Lloyds Bank Plc, Arbuthnot Latham and Inflexion Private Equity at £32.50 psf, which is a record for this building. Total rent from new lettings is £319,000. The vacant area in the building has now reduced to 7,381 sq. ft. (9 per cent) compared to 24,352 sq ft (29 per cent) of the building in 2014.
HSBC have now confirmed that they will be vacating Nevis and Ness Houses at Edinburgh Park but, subject to refurbishment, we are in discussion with two other potential occupiers.
Aberdeen remains the Company’s largest exposure to Rest of UK Offices. This market remains quiet, which is a general reflection of the sub regional macro economy, but the buildings are high quality and located on Aberdeen’s prime office park with strong landlord friendly leases to undoubted covenants.
Industrial & Logistics
2016 saw the “Big Box†logistics sector, where the majority of the eleven properties in this sector are held, deliver another year of strong performance. The total return on the industrial and logistics portfolio was 17.5 per cent compared with the MSCI IPD benchmark total return of 7.4 per cent. The combined value rose from £193 million to £214.5 million, an 11 per cent increase. This was due to further yield compression, owing to the continued demand for core logistics from a wider variety of investors, coupled with the successful conclusion of a number of key asset management initiatives.
At Hams Hall in Birmingham, we both renewed and extended lease agreements with our tenants Arvato and Nestle. These two transactions in isolation provided an increase in value over the period in excess of £8.2 million.
Agreement was also reached to capitalise on the sectors current high level of rental growth with a rent review on the DHL occupied logistics facility in Liverpool. This will be documented at an increase of £275,000 per annum, an uplift of circa 20 per cent over the previous rent. This rewards our historic belief in the potential of the North West as a region.
Post year end the lease renewal with Mothercare at Plot E4 DIRFT Daventry concluded.
Significant progress has been made in exiting the former Ozalid Works in Colchester. The grant of outline planning for a residential development accompanied by a completed s106 agreement with the Local Authority more than doubled the value of the property. Following the appointed agents marketing campaign we are in advanced contract negotiations with one of the UKs major house builders for the sale of this holding.
Opportunities to invest in prime assets in both the logistics and industrial market remain limited and expensive, but we continue to scour the market for value and genuine reversion.
The Alternative Property Sector
The student accommodation block, let in its entirety to the University of Winchester on a long lease, remains the Company’s only exposure to this sector. The property produced a total return of 1.1 per cent last year. This lease is subject to annual RPI increases and the annual rent is now £1.748 million per annum.
Acquisitions & Sales
As previously announced the Company completed the sale of its freehold interest in 25 Great Pulteney Street, London W1 for £54.3m, reflecting a net initial yield of 3.95 per cent. The property comprised a seven-storey building providing high quality, contemporary, Grade A office accommodation and was fully let to four tenants. The sale price exceeded the last external valuation of £51.2 million.
25 Great Pulteney Street was a property that the Company fully redeveloped, completing 2011. It was subsequently leased at high rents reflecting the quality of the building. The most recent re-letting achieved a rent of £96.50 psf. The property produced an annualised total return of 16.5 per cent since completion of the works. The disposal crystallised substantial value for the Company, reduced its exposure to Central London and allows capital to be employed into other opportunities.
Responsible Property Investment
The principles of Responsible Property Investment (RPI), through which environmental, social and governance (ESG) factors are integrated into investment processes and asset ownership activities, have continued to gain significant traction and momentum in the UK property market. In particular, the emergence of new regulations which target the energy performance of existing buildings, together with the ratification and coming into force of the Paris Agreement on Climate Change during 2016, have been key stimulants of investor engagement on the topic. Increasingly, investment decision-making is influenced by these factors, in terms of capital allocation strategies and commercial property transactions.
The Company, through the policies and procedures of its Property Manager has taken strides to strengthen its approach to RPI during 2016 including:
• Formalising an ESG Committee with representation from across its investment management teams, with the purpose of leading on, monitoring and overseeing the Property Managers’ approach to RPI.
• Establishing a new RPI Strategy for its corporate and investment activities, which is reflective of strengthening market expectations with respect to ESG factors, and which has the mutual goals of ensuring portfolio resilience; driving environmental improvements; and engaging with our stakeholders.
• Putting in place comprehensive RPI requirements for asset and property managers to ensure continued attendance to ESG factors across the property investment lifecycle.
• Introducing Responsible Property Management Guidelines to support property managers in identifying and capturing opportunities for improving the ESG performance and attributes of assets, covering factors such as energy efficiency, water conservation, health and well-being, waste management and procurement.
• Implementing a system for the classification of all assets under management according to their energy performance risk and energy consumption characteristics, which the Company is using as a basis for prioritising actions and determining the frequency of its comprehensive ESG monitoring activities at the property level.
• Installing a market-leading RPI Appraisal system, which is now applied to all acquisitions made by the Company. We are also in the process of applying the Appraisal system to all assets under management, a process which will be completed by Q4 2017.
• Preparing Guidelines for Sustainable Development & Refurbishment, which is to be applied to all significant capital projects undertaken on the portfolio.
• Delivering training to its fund, investment, asset and property management teams to ensure that they are cognisant of the evolving RPI agenda, aware of the expectations which the Company places upon them in relation to ESG factors, and knowledgeable about what needs to be done to implement the new RPI Strategy.
• In carrying out the above, the Property Managers appointed a specialist RPI consulting and training firm, Hillbreak, which will continue to support and advise by taking an independent role on the Property Managers’ ESG Committee.
The Company and its Property Managers will remain vigilant of the evolving nature of the RPI agenda and will continue to develop its approach to ESG factors so that it remains on track to realising its RPI goals.
Outlook
Despite some recovery in property performance towards year-end and upward revisions to GDP growth forecasts, market sentiment remains cautious. There is a focus on political issues, with Brexit negotiations to the fore, but the impact of the US election and developments in Europe are also potential areas of concern. Within property, the introduction of new business rates will affect tenants’ occupational costs, while margins could be hit by higher prices for imported goods. With interest rates expected to remain low by historic standards and property benefiting from a relatively high and stable income return, the asset class is likely to retain its appeal to income seeking investors. We expect a period of positive single digit total return performance, driven by income in an uncertain environment. We continue to favour quality industrial and distribution, Central London retail and alternative assets on a selective basis. The outlook for Central London offices is still unclear. In the short and medium term, the path of Brexit negotiations is expected to be a major determinant of performance but over the longer-term, the impact of any move towards the normalisation of interest rates also needs to be borne in mind.
Richard Kirby
Fund Manager
BMO REP Asset Management plc
F&C Commercial Property Trust Limited
Consolidated Statement of Comprehensive Income (audited)
| Year ended 31 December 2016 |
Year ended 31 December 2015 |
||
| £’000 | £’000 | ||
| Revenue | |||
| Rental income | 64,628 | 62,613 | |
| --------- | --------- | ||
| Total revenue | 64,628 | 62,613 | |
| Gains on investment properties | |||
| Unrealised gains on revaluation of investment properties | 9,507 | 110,314 | |
| Gains on sale of investment properties realised | 215 | 2,530 | |
| ---------- | ---------- | ||
| Total income | 74,350 | 175,457 | |
| ---------- | ---------- | ||
| Expenditure | |||
| Investment management fee | (6,406) | (8,100) | |
| Other expenses | (5,056) | (4,204) | |
| ---------- | ---------- | ||
| Total expenditure | (11,462) | (12,304) | |
| ----------- | ----------- | ||
| Operating profit before finance costs and taxation | 62,888 | 163,153 | |
| ----------- | ----------- | ||
| Net finance costs | |||
| Interest receivable | 69 | 194 | |
| Finance costs | (11,269) | (11,708) | |
| Loss on redemption of interest rate swap | (1,283) | - | |
| ----------- | ----------- | ||
| (12,483) | (11,514) | ||
| ----------- | ----------- | ||
| Profit before taxation | 50,405 | 151,639 | |
| Taxation | (251) | (142) | |
| ---------- | ---------- | ||
| Profit for the year | 50,154 | 151,497 | |
| ---------- | ---------- | ||
| Other comprehensive income | |||
| Items that are or may be reclassified subsequently to profit or loss | |||
| Net change in fair value of swap reclassified to profit and loss | 1,546 |
||
| Movement in fair value of effective interest rate swaps | (717) | 909 | |
| ---------- | ---------- | ||
| Total comprehensive income for the year, net of tax | 50,983 | 152,406 | |
| ---------- | ---------- | ||
| Basic and diluted earnings per share | 6.3p | 19.0p |
All of the profit and total comprehensive income for the year is attributable to the owners of the Group.
All items in the above statement derive from continuing obligations.
F&C Commercial Property Trust Limited
Consolidated Balance Sheet (audited)
| As at 31 December 2016 £’000 |
As at 31 December 2015 £’000 |
|
| Non-current assets | ||
| Investment properties | 1,306,002 | 1,340,061 |
| Trade and other receivables | 17,827 | 14,431 |
| ------------ | ------------ | |
| 1,323,829 | 1,354,492 | |
| ------------ | ------------ | |
| Current assets | ||
| Trade and other receivables | 3,093 | 5,144 |
| Cash and cash equivalents | 85,021 | 55,755 |
| ------------ | ------------ | |
| 88,114 | 60,899 | |
| ------------ | ------------ | |
| Total assets | 1,411,943 | 1,415,391 |
| ------------ | ------------ | |
| Current liabilities | ||
| Trade and other payables | (18,871) | (24,844) |
| ------------ | ------------ | |
| Non-current liabilities | ||
| Trade and other payables | (1,565) | (1,158) |
| Interest-bearing loans | (307,345) | (307,419) |
| Interest rate swaps | (717) | (1,546) |
| ------------ | ------------ | |
| (309,627) | (310,123) | |
| ------------ | ------------ | |
| Total liabilities | (328,498) | (334,967) |
| ------------ | ------------ | |
| Net assets | 1,083,445 | 1,080,424 |
| ------------ | ------------ | |
| Represented by: | ||
| Share capital | 7,994 | 7,994 |
| Share premium | 127,612 | 127,612 |
| Reverse acquisition reserve | 831 | 831 |
| Special reserve | 461,150 | 474,529 |
| Capital reserve – investments sold | 7,068 | (21,408) |
| Capital reserve – investments held | 355,586 | 374,340 |
| Hedging reserve | (717) | (1,546) |
| Revenue reserve | 123,921 | 118,072 |
| ------------ | ------------ | |
| Equity shareholders’ funds | 1,083,445 | 1,080,424 |
| ------------ | ------------ | |
| Net asset value per share | 135.5p | 135.2p |
F&C Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2016 (audited)
Share Capital £’000 |
Share Premium £’000 |
Reverse Acquisition Reserve £’000 |
Special Reserve £’000 |
Capital Reserve - Investments Sold £’000 |
Capital Reserve – Investments Held £’000 |
Hedging Reserve £’000 |
Revenue Reserve £’000 |
Total £’000 |
|
| At 1 January 2016 | 7,994 | 127,612 | 831 | 474,529 | (21,408) | 374,340 | (1,546) | 118,072 | 1,080,424 |
| Total comprehensive income for the year | |||||||||
| Profit for the year | - | - | - | - | - | - | - | 50,154 | 50,154 |
| Movement in fair value of interest rate swaps | 829 |
829 |
|||||||
| Transfer in respect of unrealised gains on investment properties | 9,507 |
(9,507) |
|||||||
| Gains on sale of investment properties realised | 215 |
(215) |
|||||||
| Transfer of prior years’ revaluation to realised reserve | 28,261 |
(28,261) |
|||||||
| Transfer from special reserve | (13,379) |
13,379 |
|||||||
| Total comprehensive income for the year | - |
- |
- |
(13,379) |
28,476 |
(18,754) |
829 |
53,811 |
50,983 |
| Transactions with owners of the Company recognised directly in equity | |||||||||
| Dividends paid | - | - | - | - | - | - | - | (47,962) | (47,962) |
At 31 December 2016 |
7,994 |
127,612 |
831 |
461,150 |
7,068 |
355,586 |
(717) |
123,921 |
1,083,445 |
Consolidated Statement of Changes in Equity
for the year ended 31 December 2015 (audited)
Share Capital £’000 |
Share Premium £’000 |
Reverse Acquisition Reserve £’000 |
Special Reserve £’000 |
Capital Reserve - Investments Sold £’000 |
Capital Reserve – Investments Held £’000 |
Hedging Reserve £’000 |
Revenue Reserve £’000 |
Total £’000 |
|
| At 1 January 2015 | 7,994 | 127,612 | 831 | 511,933 | (18,856) | 258,944 | (2,455) | 89,977 | 975,980 |
| Total comprehensive income for the year | |||||||||
| Profit for the year | - | - | - | - | - | - | - | 151,497 | 151,497 |
| Movement in fair value of interest rate swaps | 909 |
909 |
|||||||
| Transfer in respect of unrealised gains on investment properties | 110,314 |
(110,314) |
|||||||
| Gains on sale of investment properties realised | 2,530 |
(2,530) |
|||||||
| Transfer of prior years’ revaluation to realised reserve | (5,082) |
5,082 |
|||||||
| Transfer from special reserve | (37,404) |
37,404 |
|||||||
| Total comprehensive income for the year | - |
- |
- |
(37,404) |
(2,552) |
115,396 |
909 |
76,057 |
152,406 |
| Transactions with owners of the Company recognised directly in equity | |||||||||
| Dividends paid | - | - | - | - | - | - | - | (47,962) | (47,962) |
At 31 December 2015 |
7,994 |
127,612 |
831 |
474,529 |
(21,408) |
374,340 |
(1,546) |
118,072 |
1,080,424 |
F&C Commercial Property Trust Limited
Consolidated Statement of Cash Flows (audited)
| Year ended 31 December 2016 | Year ended 31 December 2015 | |
| £’000 | £’000 | |
| Cash flows from operating activities | ||
| Profit for the year before taxation | 50,405 | 151,639 |
| Adjustments for: | ||
| Finance costs | 11,269 | 11,708 |
| Interest receivable | (69) | (194) |
| Unrealised gains on revaluation of investment properties | (9,507) | (110,314) |
| Gains on sale of investment properties realised | (215) | (2,530) |
| Loss on redemption of interest rate swap | 1,283 | - |
| (Increase) / decrease in operating trade and other receivables | (888) |
2,006 |
| (Decrease)/increase in operating trade and other payables | (5,566) | 3,877 |
| ----------- | ----------- | |
| 46,712 | 56,192 | |
| ----------- | ----------- | |
| Interest received | 69 | 194 |
| Interest and bank fees paid | (10,778) | (11,395) |
| Tax paid | (251) | (147) |
| ----------- | ----------- | |
| (10,960) | (11,348) | |
| ----------- | ----------- | |
| Net cash inflow from operating activities | 35,752 | 44,844 |
| ----------- | ----------- | |
| Cash flows from investing activities | ||
| Purchase/development of investment properties | (4,099) | (44,914) |
| Sale of investment properties | 54,291 | 18,007 |
| Capital expenditure | (6,411) | (4,717) |
| ----------- | ----------- | |
| Net cash inflow / (outflow) from investing activities | 43,781 | (31,624) |
| ----------- | ----------- | |
| Cash flows from financing activities | ||
| Dividends paid | (47,962) | (47,962) |
| Draw down of Bank Loan, net of costs | 49,489 | - |
| Repayment of Bank Loan | (50,000) | - |
| Revolving credit facility arrangement costs | (511) | - |
| Swap breakage costs | (1,283) | - |
| ----------- | ----------- | |
| Net cash outflow from financing activities | (50,267) | (47,962) |
| ----------- | ----------- | |
| Net increase / (decrease) in cash and cash equivalents | 29,266 | (34,742) |
| Opening cash and cash equivalents | 55,755 | 90,497 |
| ----------- | ----------- | |
| Closing cash and cash equivalents | 85,021 | 55,755 |
| ----------- | ----------- |
F&C Commercial Property Trust Limited
Principal Risks and Risk Management
The Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council, and has established an ongoing process designed to meet the particular needs of the Company in managing the risks and uncertainties to which it is exposed. The principal risks and uncertainties faced by the Company are described below and in note 2 which provides detailed explanations of the risks associated with the Company’s financial instruments.
· Market – the Company’s assets comprise direct investments in UK commercial property and it is therefore exposed to movements and changes in that market.
· Investment and strategic – poor investment decisions and incorrect strategy, including sector and geographic allocations, use of gearing, inadequate asset management activity and tenant defaults could lead to poor returns for shareholders.
· Regulatory – breach of regulatory rules could lead to suspension of the Company’s London Stock Exchange listing, financial penalties or a qualified audit report.
· Environmental – inadequate attendance to environmental factors by the Managers, including those of a regulatory and market nature and particularly those relating to energy performance, health and safety, flood risk and environmental liabilities, leading to the reputational damage of the Company, reduced liquidity in the portfolio, and/or negative asset value impacts.
· Management and control – changes that cause the management and control of the Company to be exercised in the United Kingdom could lead to the Company becoming liable to United Kingdom taxation on income and capital gains.
· Operational – failure of the Managers’ accounting systems or disruption to its business, or that of other third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders’ confidence.
· Financial – inadequate controls by the Managers or other third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to a qualified audit report, misreporting or breaches of regulations. Breaching Guernsey solvency test requirements or loan covenants could lead to a loss of shareholders’ confidence and financial loss for shareholders.
The Board seeks to mitigate and manage these risks through continual review, policy-setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company’s property portfolio. The Managers seek to mitigate these risks through active asset management initiatives and carrying out due diligence work on potential tenants before entering into any new lease agreements. All of the properties in the portfolio are insured.
Principal risks encountered during the year
· Tax Structure and Compliance - A Key area of concern relates to the recent change to UK corporation tax legislation regarding restrictions on interest deductibility in tax computations. The UK government have issued a consultation paper on whether non-resident companies should be brought into the UK corporation tax scheme at a point in the future. If such a decision were to be made, the interest rate deductibility rules would have a significant effect on the level of taxation payable by the Company. The Company are in consultation with their tax advisors on this and are monitoring the situation. These changes may result in the Company converting to a UK Real Estate Investment Trust at a future date.
· Valuation Accuracy - There was concern over the accuracy of property valuations following the Brexit vote. A caveat on the accuracy of the valuations was included in the June 2016 external valuation but has since been removed, although uncertainty still exists.
· Discount/Premium to Net Asset Value - The share price went through a period of instability and fell significantly to a discount of 24 per cent following the Brexit vote. The share price recovered reasonably quickly and has subsequently settled at a small premium.
F&C Commercial Property Trust Limited
Going Concern
In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. They have reviewed detailed cash flow, income and expense projections in order to assess the Company’s ability to pay its operational expenses, bank interest and dividends. The Directors have examined significant areas of possible financial risk including cash and cash requirements and the debt covenants, in particular those relating to loan to value and interest cover. They have not identified any material uncertainties which cast significant doubt on the ability to continue as a going concern for a period of not less than 12 months from the date of the approval of the financial statements. The Board believes it is appropriate to adopt the going concern basis in preparing the financial statements.
Statement of Directors' Responsibilities in Respect of the Annual Financial Report
In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge:
· The consolidated financial statements contained within the Annual Report for the year ended 31 December 2016, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards as adopted by the EU, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole and comply with The Companies (Guernsey) Law, 2008 (as amended) ; and
· The Chairman’s Statement and Managers’ Review include a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and
· The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; and
· The Annual Report includes details of related party transactions that have taken place during the financial year.
On behalf of the Board
Chris Russell
Director
F&C Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year ended 31 December 2016
1. The Board has declared a twelfth, and last, interim dividend for the year of 0.50p per share to be paid on 28 April 2017 to shareholders on the register on 7 April 2017.
It is the Directors’ intention that the Company will continue to pay dividends monthly.
2. Financial Instruments
The Company’s investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for capital and income growth from investing in a diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial property investments. In addition, the Group’s financial instruments during the year comprised interest-bearing bank loans, cash and receivables and payables that arise directly from its operations. The Group does not have exposure to any derivative instruments other than the interest rate swap entered into to hedge the interest paid on the Barclays interest-bearing bank loan.
The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.
The Board reviews and agrees policies for managing the Group’s risk exposure. These policies are summarised below and have remained unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group’s investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group’s overall risk exposure.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.
In the event of default by an occupational tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Managers monitor such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.
All of the Group’s cash is placed with financial institutions with a long term credit rating of A or better. Bankruptcy or insolvency of such financial institutions may cause the Group’s ability to access cash placed on deposit to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank.
Liquidity risk
Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments. The Group’s investments comprise UK commercial property. Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.
The Group’s liquidity risk is managed on an ongoing basis by the Managers and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to meet its obligations for a period of at least twelve months.
Interest rate risk
Some of the Group’s financial instruments are interest bearing. They are a mix of both fixed and variable rate instruments with differing maturities. As a consequence, the Group is exposed to interest rate risk due to fluctuations in the prevailing market rate.
The Group’s exposure to interest rate risk relates primarily to its long-term debt obligations. Interest rate risk on long-term debt obligations is managed by fixing the interest rate on such borrowings, either directly or through interest rate swaps for the same notional value and duration. Long-term debt obligations and the interest rate risk they confer to the Group is considered by the Board on a quarterly basis. Long term debt obligations consist of a £260 million L&G loan on which the rate has been fixed at 3.32 per cent until the maturity date of 31 December 2024. The Group also has a £50 million interest-bearing bank loan with Barclays on which the rate has been fixed through an interest rate swap at 2.522 per cent per annum until the maturity date of 21 June 2021. The Group has agreed an additional revolving credit facility of £50 million with Barclays over the same period, which has not been drawn down as at 31 December 2016. The revolving credit facility pays an undrawn commitment fee of 0.60 per cent per annum.
When the Group retains cash balances, they are ordinarily held on interest-bearing deposit accounts. The benchmark which determines the interest income received on interest bearing cash balances is the bank base rate of Bank of England which was 0.25 per cent as at 31 December 2016 (2015: 0.5 per cent). The Company’s policy is to hold cash in variable rate or short-term fixed rate bank accounts and not usually in fixed rate securities with a term greater than three months.
Market price risk
The Group’s strategy for the management of market price risk is driven by the investment policy. The management of market price risk is part of the investment management process and is typical of commercial property investment. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.
3. There were 799,366,108 Ordinary Shares in issue at 31 December 2016 (2015: 799,366,108).
At 31 December 2016, the Company did not hold any Ordinary Shares in treasury (2015: nil).
4. The basic and diluted earnings per Ordinary Share are based on the profit for the year of £50,154,000 (2015: £151,497,000) and on 799,366,108 (2015: 799,366,108) Ordinary Shares, being the weighted average number of shares in issue during the year.
5. The Company owns 100 per cent of the issued ordinary share capital of FCPT Holdings Limited, a company registered in Guernsey. The principal activity of FCPT Holdings Limited is to act as a holding company and it owns 100 per cent of the ordinary share capital of F&C Commercial Property Holdings Limited, a company registered in Guernsey whose principal business is that of an investment and property company, and 100 per cent of the ordinary share capital of Winchester Burma Limited, a company registered in Guernsey whose principal business is that of an investment and property company.
The Company owns 100 per cent of the issued ordinary share capital of SCP Estate Holdings Limited, a company registered in Guernsey. The principal activity of SCP Estate Holdings Limited is to act as a holding company and it owns 100 per cent of the ordinary share capital of SCP Estate Limited, a company registered in Guernsey whose principal business is that of an investment and property company, and 100 per cent of the ordinary share capital of Prime Four Limited, a company registered in Guernsey whose principal business is that of an investment and property company.
The Company owns 100 per cent of the issued ordinary share capital of Leonardo Crawley Limited, a company registered in Guernsey whose principal business is that of an investment and property company.
On 11 October 2016, the Company placed Crawley Holdings Limited, a company registered in England and Wales, into a members’ voluntary wind up appointing Derek Hyslop and Colin Dempster of Ernst & Young LLP as liquidators.
6. The Group had capital commitments totalling £4,271,000 as at 31 December 2016 (2015: £8,852,000). These commitments related mainly to contracted development works at the Group’s properties at St. Christopher’s Place Estate, London W1.
7. The Company and FCIB have entered into a revised investment management agreement, to reflect amended fee arrangements, with an effective date from 1 January 2017. FCIB will be entitled to a base management fee of 0.55 per cent per annum of the Group’s gross assets (reduced to 0.525 per cent per annum on assets between £1.5 billion and £2 billion and 0.5 per cent per annum in excess of £2 billion) and reduced to 0.25 per cent per annum on cash net of gearing in excess of 5 per cent of net assets, payable quarterly in arrears. FCIB will not be entitled to a performance fee. All other terms and conditions will remain the same including the administration fee and termination notice.
8. These are not full statutory accounts. The full audited accounts for the year to 31 December 2016 will be sent to shareholders and will be available for inspection at Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3QL, the registered office of the Company, and from the Company’s website: fccpt.co.uk
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration (Guernsey) Limited
Trafalgar Court
Les Banques
St. Peter Port
Guernsey GY1 3QL
Tel: 01481 745436
Fax: 01481 745186
Richard Kirby
BMO REP Asset Management plc
Tel: 0207 016 3577
Graeme Caton
Winterflood Securities Limited
Tel: 0203 100 0268
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