Final Results

RNS Number : 3016A

F&C Commercial Property Trust Ld

29 March 2012

 



To:                   RNS

Date:               29 March 2012

From:              F&C Commercial Property Trust Limited

Results in Respect of the Year Ended 31 December 2011 (audited)

Highlights

·     Net asset value total return of 10.9 per cent for the year

·     Portfolio total return of 11.4 per cent for the year, compared with a total return of 7.9 per cent from the IPD benchmark

·     Top quartile performance of the portfolio over 1, 3 and 5 years within the IPD benchmark

·     Dividend level maintained at 6.0p per Ordinary Share, providing a yield of 5.9 per cent at the year end

·     Acquisitions of £45.0 million during the year with a further £10.3 million invested in development and asset management initiatives

·     A number of successful lease events completed, securing annual rental income and proactively dealing with the portfolio's lease expiry profile

·     Continuing low levels of voids and bad debts

·     Over £15 million raised since the year end through an issue of Ordinary Shares  

Chairman's Statement

I am pleased to be reporting a further year of outperformance by the Company against its benchmark index and, in challenging market conditions, growth in the net asset value ('NAV') per share.

The Company's NAV per share as at 31 December 2011 was 100.5p. This represented an increase of 4.4 per cent for the year. The NAV total return for the year was 10.9 per cent, comparing favourably with a market portfolio return of 7.9 per cent as measured by the benchmark Investment Property Databank ('IPD') All Quarterly and Monthly Valued Funds. The ungeared total return from the property portfolio during the year was 11.4 per cent, reflecting strong absolute and relative performance against the IPD benchmark return. The portfolio continues to have a strong performance record, being measured top quartile over one, three and five years by IPD.

The share price total return was 2.0 per cent and the share price at the year end was 101.6p, representing a premium of 1.1 per cent to the NAV per share. Reflecting the attractive dividend level and quality of the portfolio, the share price traded at a regular premium throughout the year, with an average premium of 4.9 per cent to the published NAV per share. 

The Company's strong performance for the year is attributable in the main to its retail and office properties in Central London, in particular, Wimbledon Broadway, London SW19 and the Company's largest property, St. Christopher's Place Estate, London W1. The completion during the year of the developments at Revolution Park, Chorley and 25 Great Pulteney Street, London W1 also contributed positively to performance. Indeed, Great Pulteney Street recorded the highest total return within the portfolio.

The UK commercial property market continued to deliver positive total returns throughout 2011, although returns for the year were below those recorded in 2010. Performance moderated as the period progressed and by the end of the year total returns were being driven purely by income. The outperformance of Central London offices and shops continued in 2011 and these parts of the market delivered double digit total returns and positive rental and capital growth. In contrast, the commercial property market outside the South East was significantly weaker with rental and capital growth turning negative in several parts of the market. With investors risk averse, the year saw prime, low yielding property generally outperform stock of a more secondary nature. The sharpest deterioration was in the retail sector, with shopping centres particularly affected. Relative to other asset classes, property benefited from a high and stable income return in 2011, of approximately 6 per cent.

The Company's main investment activity during the year included acquisitions of £20.0 million for a modern retail warehouse in East Kilbride, and £13.3 million for a distribution warehouse in Liverpool. These acquisitions were funded by available cash resources. In addition, the Company contracted to the funding of approximately £26.5 million for a student accommodation block in Winchester which, upon its expected completion date in 2013, will be let to the University of Winchester for a term of 25 years. These investments were made at attractive yields which should increase the Company's revenues and improve its dividend cover.

Full details of the investment and property management activities during the year are included in the Managers' Review.

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 2010                                                       96.3

Unrealised increase in valuation of direct property portfolio                           5.6

Movement in interest rate swap                                                                      (0.6)

Net revenue                                                                                                     5.2

Dividends paid                                                                                                (6.0)

                                                                                                                        ---------

NAV per share as at 31 December 2011                                                       100.5

                                                                                                                        ---------

Dividends

Twelve monthly interim dividends, each of 0.5p per share, were paid during the year maintaining the annual dividend of 6.0p per share. Barring unforeseen circumstances, the Board intends that dividends in 2012 will continue to be paid monthly at the same rate.

Borrowings and Cash Balances

The Company's borrowings comprise £230 million of Secured Bonds, which have been assigned an 'Aaa' rating by Moody's Investor Services and mature in 2015, and a £50 million secured bank loan which is repayable in 2017.

As at 31 December 2011, the Company's level of gearing net of cash was 25.4 per cent which compares with 20.6 per cent at the beginning of the year. The movement in net gearing is due mainly to the investment of cash during the year.  

Issue of New Ordinary Shares

During the year, the Company announced that it would be prepared to issue new Ordinary Shares at a premium to NAV, on a non pre-emptive basis under existing annual authorities if it was in shareholders' and the Company's interests to do so. On 26 January 2012, the Company issued 14,750,000 Ordinary Shares, which rank pari passu with the other Ordinary Shares in issue. The shares were issued at a price of 103.41p per share, raising an amount of £15.3 million before issue costs, and were admitted to listing on the UKLA's Official List and to trading on the London Stock Exchange on 1 February 2012.

These new shares increased the Company's issued share capital by 2.2 per cent and provided additional funds which are available for identified investment opportunities.

Boardroom Diversity

The Board notes the proposed change to the UK Corporate Governance Code in relation to the number of women on the boards of listed companies in the UK. This and other factors, such as diversity of skills, experience, availability of time, commitment and independence, are all taken into account in the constitution of the Board and succession planning. The majority of the Board members need to be resident offshore, which also has an impact on the constitution of the Board. A number of changes have been made to the Board since the Company's reconstruction in June 2009 and, while the process for future appointments will necessarily be an evolving one, the Board will strive to embrace governance guidelines as well as fulfil the requirement of having a balance of competences, experience and independence in its membership in order to safeguard shareholders' interests.

Annual General Meeting

The Annual General Meeting will be held at 12.30pm on Tuesday 29 May 2012 at Trafalgar Court, Les Banques, St. Peter Port, Guernsey. All shareholders are welcome to attend.

Outlook

The prospects for UK commercial property are being adversely affected by macro-economic factors as the UK economy struggles to advance, credit markets remain constrained and the problems of the Eurozone persist. In this uncertain environment, investors are expected to remain cautious and focused on core stock, and occupiers are expected to be reluctant to expand. In addition, property returns are likely to continue to be driven by income with little prospect of capital growth.

Against this challenging background, the Managers will continue to take positive steps to protect the Company's income stream in terms of covenant strength and lease length. They will seek successful asset management initiatives and acquisitions of further prime properties with attractive income characteristics to deliver performance in the year ahead.

Chris Russell

Chairman

Managers' Review

Market Review

The market total return for the year ended 31 December 2011, as measured by the Investment Property Databank ('IPD') All Quarterly and Monthly Valued Funds, was 7.9 per cent. This marks a return to the traditional model with performance driven largely by income, with modest capital value uplift.

The year saw market returns slip quarter on quarter as the year progressed and, by the final three months of 2011, the yield compression that had driven the recovery in its early stages had virtually stalled. Benchmark capital value growth was close to zero and rental growth was similar.

The problems in the Eurozone and concerns about the pace of economic recovery, both overseas and in the United Kingdom, intensified over the course of 2011 and affected sentiment towards investment, including property. A climate of uncertainty and fears about the downside risk has led to an increased focus on prime property in established locations in core markets. Investors are selective, favouring property with long, secure and sustainable income streams.

In a subdued and cost sensitive occupier market, with a trend towards shorter leases and the payment of rates on vacant property, maintaining the income stream has been challenging. This has borne more heavily on the secondary market which has seen income decline, especially at lease expiry. The prime market, notably in areas of tight supply, has proved more resilient and, in some circumstances, it has been possible to secure some rental uplifts and income growth.

This disparity in performance was also apparent at the regional level, with concern about the impact of public sector cutbacks and an increased recognition that the austerity measures will involve long-term structural change, disproportionately affecting sentiment in areas outside London and the South East. This became more pronounced as the year progressed.

Investment activity in 2011 was slightly lower than in 2010 and institutions became net sellers by the year end. In contrast, interest from overseas investors was significant, especially in Central London and for large lot sizes. The exposure of the banks to commercial property remains substantial, but the year saw a greater release of stock onto the market at their instigation as they divested themselves of problem loans. The availability of prime stock remained limited, however, with competition among buyers for these assets.

Portfolio

As at 31 December 2011 the Company's property portfolio was valued at £932.5 million. This represents an absolute increase in value, including net purchases, of £94.2 million, and an ungeared capital increase, net of purchases, sales and capital expenditure (including acquisition costs) of 4.6 per cent.

The portfolio recorded a total return of 11.4 per cent over the year, compared with the IPD All Quarterly and Monthly Valued Funds (comprising directly held properties only) total return of 7.9 per cent referred to above. This performance delivers a strong outperformance of the benchmark. Over the period, the portfolio was ranked on the 6^th percentile and 16th out of the 240 funds included within the benchmark. The three-year annualised return ranks the portfolio on the 7^th percentile (against 220 funds), while the five-year annualised return ranks the portfolio on the 11^th percentile (against 206 funds). As such, the portfolio continues to deliver top quartile performance over 1, 3 and 5 years.

During the year it was decided to tender the external valuation contract as the incumbent valuer, DTZ, had provided this service since the Company's launch in 2005. On completion of a robust selection process, CBRE was appointed as the new service provider. The handover between valuers was managed effectively with CBRE undertaking a shadow valuation in September 2011 and formally valuing the portfolio for the first time at the end of the year. The tendering of the contract has resulted in a saving in fees but more importantly has resulted in a rotation of external valuers, which the Board considers good corporate governance.

Strategy and Positioning of Portfolio

The portfolio continues to be managed to reflect our conviction asset allocation to Central London and particularly the West End. During the year, various opportunities were considered, appraised and bid on to increase the Company's exposure to the City of London, but in our view pricing was too aggressive and we were unable to secure any of these opportunities. We were disciplined in our investment process and did not chase pricing. As the year evolved, it became increasingly evident that activity in the City leasing market was slowing, reinforcing the judgements we made earlier in the year. Given our current outlook, we are now happy with the underweight position to the City of London and our proxy weighting to the wider Central London market as a whole. Following our strategic review of the portfolio, there are one or two of the Company's Central London properties which we believe no longer fit in the portfolio and, as such, we are likely to take advantage of the current level of pricing to sell these assets.

During 2011, the Company held cash to invest into the direct market.  The Company benefits from having tangible opportunities to add value to a substantial proportion of its existing portfolio. While this segment of the portfolio is managed on a total return basis, there is also a place in the portfolio for defensive properties producing a good and stable income return. A focus of the acquisition policy during the year was to appraise and acquire properties that provide good quality income, possibly with fixed uplifts or some inflationary hedging, to balance the portfolio.

Moving forward, stock selection remains critical in tandem with the quality of income and cashflow. When appraising potential investments we have a high regard for not only the location but also the quality of income and unexpired lease term vis a vis the expiry profile of the portfolio.

Geographically, the portfolio continues to maintain its positioning to Central London, Rest of London and the South East. Generally, it remains underweight to the UK regions and continues to have no representation in Northern Ireland, Wales, the North East or South West.

Retail

The retail sector IPD benchmark total return was 6.9 per cent in 2011, representing a marked deceleration from the total return of 15.7 per cent recorded in the previous year. The sector under-performed the All Property average following two years of out-performance. The market in 2011 was affected by the squeeze on household income, a higher VAT rate and restricted credit availability together with the continued move towards online shopping. There were wide differences in performance within the market: Central London shops, helped by tight supply, tourism and workplace shopping, delivered strong out-performance. Shops outside the South East were significantly weaker with a total return of 5.2 per cent and shopping centres also under-performed at 5.0 per cent. Retail warehousing total returns were slightly above the All Property average. Prime retail property generally out-performed secondary properties over the year. Performance weakened towards the year end in several parts of the market and, by the final quarter, "all retail" capital growth at the benchmark level had turned negative, principally due to problems in the Rest of UK shops and shopping centre components. These remain sectors to which the Company has a low exposure, or no exposure.

The Company's retail properties produced a total return of 11.5 per cent for the year, significantly outperforming the IPD benchmark total return of 6.9 per cent. Following on from the trend seen in 2010, the Company's strongest performance came from its exposure to South East retail properties, which recorded a return of 14.4 per cent. This out-performance reflects in the main the contribution from Wimbledon Broadway, London SW19 and the Company's largest asset, the mixed use St. Christopher's Place Estate, London W1, which is categorised by IPD into this segment.

At St. Christopher's Place Estate, asset management initiatives focused on building on the successes of 2010 and completing a series of key strategic lettings to retail tenants that collectively enhance income, lease expiry profile and the overall customer experience. Lettings were completed to Kurt Geiger, Prints, Elliot Rhodes and Sensory Lab.  

A series of office and residential refurbishments were undertaken and completed during the year. The common parts of 3 Barrett Street were remodelled and three vacant suites within the building refurbished and re-let. A refurbishment of the 4^th floor at 6 James Street completed and terms were agreed to let the space to an existing occupier within the same building. The residential estate was expanded with the purchase of a long lease of the upper floors of 28-30 James Street which provides four, two-bedroom apartments. Three of these flats have now been refurbished. Meanwhile, seven apartments were completed at Woodstock House and successfully let into a buoyant Central London residential market.  

The rebranding of the Estate was completed and rolled out with its new identity being seen at every level of communication, whether with business occupiers, consumers or visitors, in physical signage or on the internet. Looking to the future, plans were finalised with Westminster City Council for significant improvements to the public realm throughout the Estate, with works commencing in February 2012 and due to complete prior to the Olympic Games in July. Completion of these works will enhance the ambiance and attractiveness of the Estate.

Offices

Offices delivered an IPD benchmark total return of 9.6 per cent in 2011, driven by strong growth in Central London, where total returns in the West End and the City were 14.0 per cent and 13.3 per cent respectively. The West End was relatively resilient over the course of the year but, as highlighted in the commentary above, macro-economic and financial concerns affected performance in the City office market towards the year end. In contrast, performance in the South East was markedly weaker at 5.5 per cent, and total returns for provincial offices were barely positive at 1.4 per cent. Sentiment towards the regional office markets remained subdued, reflecting concerns about the impact of public sector cutbacks, and capital growth was negative for the year in this part of the market.

The Company's office properties recorded a total return of 12.9 per cent for the year, compared to the IPD benchmark total return of 9.6 per cent. The out-performance of this sector was driven by the Company's overweight postioning to London, West End and the  South East office segment. However, just as importantly, the Company's regional office portfolio also outperformed its benchmark with a total return of 5.6 per cent compared with the benchmark total return of 1.4 per cent. It should be noted that the regional office segment produced the weakest market total returns in 2011.

In September, the Company completed both on time and budget its flagship development at 25 Great Pulteney Street, London W1. This property, located in London's Soho area, comprises approximately 33,000 sq ft Grade A space and we believe was launched into the market at an opportune time. The quoting rent on the upper floors is £75.00 psf, significantly ahead of the proforma Estimated Rental Value ('ERV') of £52.00-£55.00 psf adopted in the appraisals at the time of making the decision, in the recession, to start on site.

The property was successfully launched in September and prior to the year end lettings of both the fifth and third floors were contracted at rents equating to £90.60 psf and £82.50 psf. Since the year end, a letting of the fourth floor has contracted at an average rent of £85.00 psf and the property has been awarded a BREEAM (British Research Establishment Environmental Assessment Method) rating of "Excellent" which reinforces its sustainable and "green" credentials. Great Pulteney Street has been constructed and finished to a high standard and the quality of the offering is evidenced by the fact all three lettings contracted have been to corporates from the Financial and Business Sector and not Soho's traditional media/advertising occupier base. As a result of these three high profile lettings, at the time of writing, the building is 38 per cent let by floor area and 49 per cent let by rental value. This is testament to the quality of the building. There remains a good level of interest in the remaining floors. On the back of this success, 25 Great Pulteney Street was the Company's best performing property during the year.

Within the South East office segment of the portfolio we had success with asset managing an early lease expiry at Building C, Watchmoor Park, Camberley. The building, comprising approximately 60,000 sq ft, was let to Novartis, one of the world's largest healthcare companies, at a commencing rent of £850,000 per annum for a term of 10 years subject to rent-free periods and break clauses.

The building was substantially refurbished to a specification, agreed with the tenant, involving a capital commitment of approximately £4 million.

Prior to this letting, the Company had taken an early surrender of a lease of the building which had been due to expire in February 2012. A premium of £2.9 million was received from the tenant to cover full rent, rates and service charges payable until the end of the lease and, in addition, a dilapidations settlement was agreed. This was the Company's largest lease event due in 2012 and the early surrender enabled us to take a more proactive stance in relation to the lease, to enhance the overall lease expiry profile and to achieve the largest office letting in the M3 corridor for three years.

Industrial & Logistics

The industrial market delivered an IPD benchmark total return of 7.5 per cent in 2011, with the South East generally out-performing the rest of the UK and prime out-performing secondary. The industrial market is favoured for its high income return, which totalled 6.8 per cent in 2011, and investment into the sector increased towards the year end as several large portfolios were marketed.

The Company's industrial and logistics properties underperformed the IPD benchmark, recording a total return of 6.7 per cent. However, when this is broken down, the under-performance was attributable to industrials located in the South East which recorded a total return of 5.9 per cent (benchmark 8.3 per cent) while industrials located in the rest of UK recorded a total return of 7.1 per cent (benchmark 6.2 per cent).

The Industrial South East portfolio was marked down in value due to a number of short term lease expiries and the fact that there is no resolution to planning matters and master planning at the Ozalid Works, Colchester. However, a sale of part of the site remains under offer to a major food store retailer and we are hopeful of securing satisfactory planning consent during the course of 2012. It remains our view that the sale of part of this site will be the catalyst for a regeneration of the area. This is supported by the major house builders now beginning to seek to acquire land banks for future development. With regard to the short term lease expiries it is envisaged that, nearer the time of the event, tenants will renew their occupation of the premises.

Purchases & Disposals

The acquisition strategy during the year was to invest the Company's available cash into good quality property with a long and sustainable income stream. In September, the Company announced its first acquisition of the year, contracting to the funding of 5 blocks of student accommodation in Winchester. This development will comprise 499 bedrooms and, on completion, the University of Winchester will enter into a direct lease for a term of 25 years subject to fixed annual RPI increases with a collar and cap of 1.0 per cent and 3.5 per cent. The development period extends to approximately two years. This commitment involves total capital expenditure of £26.5 million and has been funded off an attractive yield of 6.15 per cent. Since committing to this acquisition, the developer and contractor, Geoffrey Osborne Limited, has commenced construction. Four of the five accommodation blocks are currently under construction and on programme. It is envisaged that two of the blocks will be handed over to the university prior to the start of the 2012/13 academic year, and a pro rata rent will become payable on these blocks, with the remaining three blocks to be handed over prior to the next academic year. This is the Company's first exposure to an alternative sector and the acquisition is supported by the fundamentals of a long lease with partial inflationary hedging, strong ongoing educational demand and a strong city supported by underlying residential values.

In December, the Company completed the acquisition of a retail warehouse unit at Mavor Avenue, East Kilbride. The property is let to B&Q for a term of 18 years on a full repairing and insuring lease at a current rent of £1,468,724 pa (£13.85 psf). The property was purchased for £20.0 million reflecting a net initial yield of 6.94 per cent. Once again, this property provides a long and secure income on a covenant to which the Company was not previously exposed, and a relatively high yield.

The third purchase during the year was of Unit 1, G Park, Portal Way, Liverpool, a 360,309 sq ft distribution warehouse constructed in 2009 and located at Junction 5 of the M57 motorway. The property is let to Exel Europe Limited for a term of 10 years which commenced in March 2011, at a rent of £1,441,236 per annum (£4.00 psf). The tenant committed significant capital expenditure to fit out the property to an enhanced specification and, in return, received a rent free period expiring in July 2014. The purchase price of £13.3 million will provide a yield of 10.25 per cent when income producing. The purchase price breaks back to a capital value of £36 psf, which is low in comparison with the current total costs of land assembly, infrastructure, build costs, costs of finance and profit. This acquisition provides the Company with a highly specified building, a secure tenant off a low rental base, an attractive income on expiry of the rent free period and a "store of value" for the future. When this acquisition is added to the Company's existing exposure to Exel Europe Limited, in aggregate this tenant is now the Company's largest tenant exposure, representing 5.4 per cent of the Company's total annual rental income.

Earlier in the year, the Company acquired the long leasehold interest of four residential units at 28-30 James Street, London W1 (part of St. Christopher's Place Estate) at a price of £2.3 million. These flats were subject to a lease, in excess of 65 years, at a peppercorn rent and are located in one of the Company's freehold properties on the Estate. Three of these flats were vacant and the fourth was subject to a short term let. This acquisition accords with the Company's strategy to acquire ownership on the Estate falling outwith the Company's direct control and properties adjoining the Estate which add to critical mass and value.

The Company sold only one property during year: 40-42 Albion Street, Leeds. This high street shop unit was sold at a price of £1.125 million which represented a small reduction on the last external valuation of £1.19 million. The reason for the sale was that the property was too small for the portfolio and, at the rent passing, considered ex-growth.

Property Management

As already highlighted, maintaining income levels in this environment has been challenging, but the strategy of sustaining and protecting the rental income from the portfolio remains the principal asset management focus. During the year, the Company documented 23 rent reviews at an uplift of £597,000 per annum (12 per cent) over the previous rent passing.

Void levels over the year increased from 2.6 per cent to 6.0 per cent (excluding properties held for development). This increase was largely due to the completion of 25 Great Pulteney Street.  However, Great Pulteney Street is letting well with 49 per cent of the available floor area by rental value being let within six months of completion. Elsewhere, progress is being made on letting vacant accommodation and we promote a targeted and pragmatic approach to dealing with this space.

We continue to actively manage the Company's rental arrears and bad debts. Bad debts for the year were 0.6 per cent of gross annualised rents, which remains extremely low for a portfolio of this size.

Since the year end, there has been much publicity and speculation over retailers and indeed there have been a number of high profile retailer defaults. The Company is not heavily exposed to the "mainstream" retail sector. However, notwithstanding this strategic asset allocation policy, the Company does have some exposure to retailers recently entering administration, including Peacocks (Newbury Retail Park) and Blacks (Wimbledon Broadway, London SW19), with an aggregate rental liability of £345,000 per annum, or 0.6 per cent of total annual rental income. We will continue to negotiate with administrators to regularise the occupancy of these units, but in both locations there is demand from other retailers to take the space.

Outlook

With little evidence of capital or rental growth occurring in the property market and with some segments seeing negative numbers, performance in 2012 is expected to continue to be driven by income returns. The economic and financial market outlook is highly uncertain and this is leading both investors and occupiers to delay taking decisions and to avoid risk. The coming year is expected to see increasing pressure on secondary stock, especially if banks release more supply into the market. Our short-term strategy is to focus on protecting the income stream both through the selection and retention of prime resilient stock and by asset management initiatives aimed at minimising voids, lengthening leases and increasing flexibility and letting potential. Over the medium-term, we expect performance to strengthen but the slow pace of economic recovery will constrain prospects for marked uplifts in rental and capital growth, except in some core, prime areas.

Richard Kirby

Investment Manager

F&C REIT Property Asset Management plc

F&C Commercial Property Trust Limited

Consolidated Statement of Comprehensive Income (audited)

		Year ended 31 December 2011	Year ended 31 December 2010
		£'000	£'000
Revenue
Rental income		60,495	53,561
Income from indirect property funds		-	161
		---------	---------
Total revenue		60,495	53,722
Gains on investment properties
Unrealised gains on revaluation of investment properties		38,518	75,601
(Losses)/gains on sale of investment properties realised		(86)	19
Gains on sale of indirect property funds realised		-	2,905
		----------	----------
Total income		98,927	132,247
		----------	----------
Expenditure
Investment management fee		(5,727)	(8,137)
Other expenses		(5,153)	(5,018)
		----------	----------
Total expenditure		(10,880)	(13,155)
		-----------	-----------
Operating profit before finance costs		88,047	119,092
		-----------	-----------
Net finance costs
Interest receivable		510	481
Finance costs		(14,705)	(13,450)
		-----------	-----------
		(14,195)	(12,969)
		-----------	-----------
Profit before taxation		73,852	106,123
Taxation		(187)	791
		----------	----------
Profit for the year		73,665	106,914
		----------	----------
Other comprehensive income
Movement in fair value of interest rate swap		(3,671)	(389)
		----------	----------
Total comprehensive income for the year		69,994	106,525
		----------	----------
Basic and diluted earnings per share		10.8p	15.7p

All of the profit and total comprehensive income for the year is attributable to the owners of the Company.

All of the items in the above statement derive from continuing obligations.

F&C Commercial Property Trust Limited

Consolidated Balance Sheet (audited)

	As at 31 December 2011 £'000	As at 31 December 2010 £'000
Non-current assets
Investment properties	924,583	832,003
	------------	------------
	924,583	832,003
	------------	------------
Current assets
Trade and other receivables	8,736	8,377
Cash deposits held for tenants	2,461	2,136
Cash and cash equivalents	49,822	109,442
	------------	------------
	61,019	119,955
	------------	------------
Total assets	985,602	951,958
	------------	------------
Current liabilities
Trade and other payables	(18,301)	(17,735)
	------------	------------
Non-current liabilities
Interest-bearing bonds	(229,546)	(229,424)
Interest-bearing bank loan	(49,452)	(49,329)
Interest rate swap	(4,060)	(389)
	------------	------------
	(283,058)	(279,142)
	------------	------------
Total liabilities	(301,359)	(296,877)
	------------	------------
Net assets	684,243	655,081
	------------	------------
Represented by:
Share capital	6,805	6,805
Reverse acquisition reserve	831	831
Special reserve	562,366	576,729
Capital reserve - investments sold	(48,817)	(48,271)
Capital reserve - investments held	72,830	33,852
Hedging reserve	(4,060)	(389)
Revenue reserve	94,288	85,524
	------------	------------
Equity shareholders' funds	684,243	655,081
	------------	------------
Net asset value per share	100.5p	96.3p

F&C Commercial Property Trust Limited

Consolidated Statement of Changes in Equity

for the year ended 31 December 2011 (audited)

	Share Capital £'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 2011	6,805	831	576,729	(48,271)	33,852	(389)	85,524	655,081
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	-	73,665	73,665
Movement in fair value of interest rate swap	-	-	-	-	-	(3,671)	-	(3,671)
Transfer in respect of unrealised gains on investment properties	-	-	-	-	38,518	-	(38,518)	-
Losses on sale of investment properties realised	-	-	-	(86)	-	-	86	-
Transfer of prior years' revaluation to realised reserve	-	-	-	(460)	460	-	-	-
Transfer from special reserve	-	-	(14,363)	-	-	-	14,363	-
Total comprehensive income for the year	-	-	(14,363)	(546)	38,978	(3,671)	49,596	69,994
Transactions with owners of the Company recognised directly in equity
Dividends paid	-	-	-	-	-	-	(40,832)	(40,832)
At 31 December 2011	6,805	831	562,366	(48,817)	72,830	(4,060)	94,288	684,243

Consolidated Statement of Changes in Equity

for the year ended 31 December 2010 (audited)

	Share Capital £'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 2010	6,805	831	664,063	(20,974)	(71,970)	-	10,633	589,388
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	-	106,914	106,914
Movement in fair value of interest rate swap	-	-	-	-	-	(389)	-	(389)
Transfer in respect of unrealised gains on investment properties	-	-	-	-	75,601	-	(75,601)	-
Gains on sale of investment properties realised	-	-	-	19	-	-	(19)	-
Gains on sale of indirect property funds realised	-	-	-	2,905	-	-	(2,905)	-
Transfer of prior years' revaluation to realised reserve	-	-	-	(30,221)	30,221	-	-	-
Transfer from special reserve	-	-	(87,334)	-	-	-	87,334	-
Total comprehensive income for the year	-	-	(87,334)	(27,297)	105,822	(389)	115,723	106,525
Transactions with owners of the Company recognised directly in equity
Dividends paid	-	-	-	-	-	-	(40,832)	(40,832)
At 31 December 2010	6,805	831	576,729	(48,271)	33,852	(389)	85,524	655,081

F&C Commercial Property Trust Limited

Consolidated Statement of Cash Flows (audited)

	Year ended 31  December 2011	Year ended 31  December 2010 restated*
	£'000	£'000
Cash flows from operating activities
Profit for the year before taxation	73,852	106,123
Adjustments for:
Finance costs	14,705	13,450
Interest receivable	(510)	(481)
Unrealised gains on revaluation of investment properties	(38,518)	(75,601)
Losses/(gains) on sale of investment properties realised	86	(19)
Gains on sale of indirect property funds realised	-	(2,905)
Increased in cash deposits held for tenants	(325)	(105)
Increase in operating trade and other receivables	(359)	(2,977)
Increase/(decrease) in operating trade and other       payables	379	(625)
	-----------	-----------
	49,310	36,860
	-----------	-----------
Interest received	510	481
Interest paid	(14,453)	(13,272)
Tax paid	(7)	-
	-----------	-----------
	(13,950)	(12,791)
	-----------	-----------
Net cash inflow from operating activities	35,360	24,069
	-----------	-----------
Cash flows from investing activities
Purchases of investment properties	(45,026)	(24,315)
Sale of investment properties	1,174	8,801
Sale of indirect property funds	-	8,978
Capital expenditure	(10,296)	(9,639)
	-----------	-----------
Net cash outflow from investing activities	(54,148)	(16,175)
	-----------	-----------
Cash flows from financing activities
Dividends paid	(40,832)	(40,832)
Bank loan drawn down (net of costs)	-	49,273
	-----------	-----------
Net cash (outflow)/inflow from financing activities	(40,832)	8,441
	-----------	-----------
Net (decrease)/increase in cash and cash equivalents	(59,620)	16,335
Opening cash and cash equivalents	109,442	93,107
	-----------	-----------
Closing cash and cash equivalents	49,822	109,442
	-----------	-----------

* In the prior year accounts 'cash and cash equivalents' included cash deposits held for tenants. These have now been disclosed as a separate line item.

F&C Commercial Property Trust Limited

Principal Risks and Risk Management

The Company's assets comprise direct investments in UK commercial property, although market uncertainty has resulted in cash being held. Its principal risks are therefore related to the commercial property market in general and its investment properties. 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. Detailed explanations of the risks associated with the Group's financial instruments are contained in note 2.

Other risks faced by the Company include the following:

·     Economic - external shocks, inflation or deflation, economic recessions and movements in interest rates could affect property valuations.

·     Investment and strategic - incorrect strategy, including sector and geographic allocations and use of gearing could lead to poor returns for shareholders.

·     Regulatory - breach of regulatory rules could lead to suspension of the Company's Stock Exchange listing, financial penalties or a qualified audit report.

·     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 the Managers' business, or that of 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 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, and applies the principles detailed in the internal control guidance issued by the Financial Reporting Council.

F&C Commercial Property Trust Limited

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 financial statements contained within the Annual Report for the year ended 31 December 2011, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and return of the Company;

·      The Chairman's Statement and Managers' Review include a fair review of the important events that have occurred during the financial year and their impact on the financial statements;

·      'Principal Risks and Risk Management' includes a description of the Company's principal risks and uncertainties; 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 2011

1.         The Board has declared an eleventh interim dividend for the year of 0.50p per share to be paid on 30 March 2012 to shareholders on the register on 16 March 2012. The ex-dividend date was 14 March 2012.

The Board has declared a twelfth, and last, interim dividend for the year of 0.50p per share to be paid on 27 April 2012 to shareholders on the register on 13 April 2012. The ex-dividend date will be 11 April 2012.

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 comprise interest bearing bonds, an interest-bearing bank loan, 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 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.

During the year and the prior year, due to the quantum of cash balances held, counterparty risk was spread by placing cash across a number of different financial institutions.

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.

The Group's investments may, from time to time, include investments in indirect property funds which are not traded in an organised public market and which generally may be illiquid. As a result, similar to the directly held properties, the Group may not be able to liquidate quickly some of its investments in those instruments in order to meet its liquidity requirements. As at 31 December 2011 the Group did not hold any investments in indirect property funds (2010: £nil).

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 an interest rate swap 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 £230 million Secured Bonds due 2017 on which the rate has been fixed at 5.23 per cent until the expected maturity date of 30 June 2015. If the bonds are not redeemed at this date they will carry interest at 0.6 per cent over LIBOR until the final maturity date of 30 June 2017. The Group also has a £50 million interest-bearing bank loan on which the rate has been fixed through an interest rate swap at 4.8765 per cent until the maturity date of 28 June 2017.

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 which was 0.5 per cent as at 31 December 2011 (2010: 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.

The Group may also hold investments in indirect property funds (including listed property companies) which in turn invest directly in commercial property. In addition to the price risk attaching to the underlying assets, such funds also carry the risk that the investment cannot be disposed of at its net asset value due to a lack of liquidity. The Company did not hold any investments in indirect property funds at 31 December 2011 or 31 December 2010.

3.         There were 680,537,003 Ordinary Shares in issue at 31 December 2011 (2010: 680,537,003).

At 31 December 2011, the Company did not hold any Ordinary Shares in treasury (2010: nil).

The Company did not issue or repurchase any Ordinary Shares during the year. On 26 January 2012, the Company issued 14,750,000 Ordinary Share, raising gross proceeds of £15,253,000.

4.         The basic and diluted earnings per Ordinary Share are based on the profit for the year of £73,665,000 (2010: £106,914,000) and on 680,537,003 (2010: 680,537,003) 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 which was, until the group reconstruction in 2009, the top company in the group structure. The principal activity of FCPT Holdings Limited is now 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.

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.

The Company owns 100 per cent of the issued 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 Accede Limited, a company incorporated in England and Wales. At 31 December 2011 this Company was dormant, having acted as an investment and property company during the year.

The Group also consolidates the results of F&C Commercial Property Finance Limited, a special purpose vehicle incorporated in Guernsey to issue the interest-bearing bonds. F&C Commercial Property Finance Limited has the same board of directors as the Company and the Company has the majority of the risks and rewards associated with the vehicle. F&C Commercial Property Finance Limited is therefore consolidated as a quasi-subsidiary under common control.

6.         These are not full statutory accounts. The full audited accounts for the year to 31 December 2011 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: www.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:      [phone]

Fax:     [phone]

Richard Kirby

F&C REIT Property Asset Management plc

Tel:      [phone]

Graeme Caton

Winterflood Securities Limited

Tel:      [phone]

 

END

 

 

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