Annual Financial Report

RNS Number : 7960Z

IRP Property Investments Ltd

28 September 2009

 



To:             RNS

Date:         28 September 2009

From:        IRP Property Investments Limited

• Portfolio total return of -16.7 per cent for the year

• Net asset value total return since launch of  1.4 per cent

• Share price decreased by 23.3 per cent to 57.5 pence at the year end

• Net asset value per share total return of -34.2 per cent for the year

• Dividend yield of 12.5 per cent based on year end share price

• Dividend of 7.2 pence per share for the year

Chairman's Statement

The Chairman, Quentin Spicer, stated:

'It has been another difficult twelve months for UK commercial property as valuations continued to fall and total returns for the year ended 30 June 2009, as measured by the Investment Property Databank ('IPD') Monthly Index, were -25.6 per cent. Much of the negative return, however, occurred in the first half of the year and there were clear indications that valuations were stabilising as we reached the financial year end of the Company.

Against this background, the Company had a net asset value total return of -34.2 per cent with the net asset value at the year-end at 72.9 pence per share. The Company's gearing was a contributory factor to the fall, as was the adverse movement in the swap valuation on the Company's bank loan, which alone accounted for a fall of 7.5 pence per share.

There has been a re-rating of shares across the property sector as the outlook has become more optimistic. This has been reflected in the share price of the Company which was at 57.5 pence per share as at the year-end, with the discount to net asset value at 21.1 per cent compared to 38.0 per cent as at the previous year-end. There has been a further increase in the share price since the year-end with the shares trading close to net asset value at the time of writing.

Property Market and Portfolio

The fragile state of the economy took its toll on UK commercial property during the second half of 2008 and into early 2009. However, as 2009 has progressed, there have been more positive tones on the economy as some order returned to the banking system and consumer confidence improved. This is not an expectation of widespread growth however; it is more a period of stabilisation and cautious recovery.

Credit still remains expensive and difficult to obtain which is restricting the volume of investment activity in the property market. There is, however, increasing investor interest in prime property with good covenants and long leases. There is still concern over occupier demand, rental growth and income streams as voids have increased across the sector, reported by IPD to be in excess of 11 per cent of rental income at the end of June 2009. 

The Company's portfolio had a total return for the year ended 30 June 2009 of -16.7 per cent, significantly ahead of the IPD average of -25.6 per cent. This outperformance reflects the relative strength of the portfolio, with an average lease length of 7.9 years and vacant property of 5.7 per cent, as a percentage of estimated rental income.

In March 2009, the Company sold one of its largest properties; an office property in St James's Street, London for £16.0 million, at an initial yield of 4.35 per cent. The property was acquired by the Company on 1 June 2004 for a cost of £10.0 million and its valuation as at 31 December 2008 was £14.45 million.

Despite the fact that the level of vacant property increased during the year, the Manager has been working hard to rectify this. Since the year end, the Company has managed to let Unit B, Hemel Gateway for a term of ten years at a rent of £201,000 per annum with an upwards only rent review after five years. This is an excellent result and the Board is confident that other initiatives to fill vacant property will be concluded successfully in the near future.

Dividends

Three interim dividends of 1.80 pence per share were paid during the year and a fourth interim dividend of 1.80 pence per share was paid on 25 September 2009. This gives a total dividend for the year ended 30 June 2009 of 7.20 pence per share, in line with the amount proposed in last year's annual report; reflecting a yield of 9.9 per cent on the year-end net asset value.

In the absence of a material change in circumstances, it is the intention of the Board to maintain the dividend at this rate for the year ending 30 June 2010.

Borrowings

The net gearing level as at 30 June 2009 was 34.4 per cent, which compares with 31.0 per cent as at 30 June 2008 and 40.0 per cent at launch on 1 June 2004. The sale of the property in St James's Street has helped keep net borrowings at a level with which the Board is comfortable in a market of falling valuations. However, with signs of conditions stabilising and with £16 million of cash now earning a small return in an environment of low interest rates, the Company is seeking opportunities to re-invest. 

Management Fee

The Board recently reviewed the management arrangements and, effective from 1 July 2009, have agreed terms with the Manager for a reduction in the base management fee to 0.70 per cent of the total assets, including cash held, with no fee payable on any cash held in excess of 5 per cent of the net assets of the Company. Previously the management fee payable to the Manager was 0.85 per cent per annum of the gross assets of the Group, less current liabilities.

The notice period in relation to the termination of the investment management agreement has been reduced from twelve to six months by either party.

Outlook

There are clear signs that property valuations are stabilising with the IPD Monthly Index showing positive capital growth for the month of August 2009. The expectations are, however, that income will be the main driver of total returns in the coming year and the enhancement of income will be critical in delivering performance.

There is a significant gap in the yield being offered on UK commercial property against the lower returns that can be achieved on Gilts, approaching 4 percentage points as at June 2009. The argument for investing in property has become more compelling, although with restricted availability of credit and higher margins being charged, it is expected that the effective gap will narrow.

The Board believes that the Company remains in a strong position with a relatively low level of voids and a robust rental income stream. The Company will continue to focus on protecting that income and re-letting the small amount of vacant space that exists within the portfolio. It will also seek to enhance revenues by investing some of its cash resources in property when suitable investment opportunities are identified.'

All enquiries to:

Ian McBryde

Scott Macrae

F&C Investment Business Limited

Tel: [phone]

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Limited

Trafalgar Court

Les Banques

St Peter Port

Guernsey GY1 3QL

Tel:    [phone]

  IRP Property Investments Limited

Consolidated Income Statement 

	Year ended 30 June 2009	Year ended 30 June 2008
	£'000	£'000
Revenue
Rental income	12,059	12,513
Losses on investment properties	(42,969)	(40,215)
Total income	(30,910)	(27,702)
Expenditure
Investment management fee	(1,337)	(1,769)
Other expenses	(1,142)	(964)
Total expenditure	(2,479)	(2,733)
Net operating loss before finance costs	(33,389)	(30,435)
Net finance costs
Interest revenue receivable	84	318
Finance costs	(3,483)	(3,508)
	(3,399)	(3,190)
Net loss from ordinary activities before taxation	(36,788)	(33,625)
Taxation on profit on ordinary activities	(92)	-
Net loss for the year	(36,880)	(33,625)
Loss per share	(33.4)p	(30.4)p

IRP Property Investments Limited

Consolidated Balance Sheet 

	30 June 2009  £'000	30 June 2008   £'000
Non-current assets
Investment properties	131,886	190,443
Interest rate swap	-	2,269
	131,886	192,712
Current assets
Trade and other receivables	2,238	3,336
Cash and cash equivalents	16,474	2,468
	18,712	5,804
Total assets	150,598	198,516
Non-current liabilities
Interest-bearing bank loan	(60,292)	(60,384)
Interest rate swap	(6,017)	-
	(66,309)	(60,384)
Current liabilities
Trade and other payables	(3,754)	(4,475)
Total liabilities	(70,063)	(64,859)
Net assets	80,535	133,657
Represented by:
Share capital	1,105	1,105
Special distributable reserve	96,404	98,271
Capital reserve	(10,957)	32,012
Other reserve	(6,017)	2,269
Equity shareholders' funds	80,535	133,657
Net asset value per share	72.9p	121.0p

  IRP Property Investments Limited

Consolidated Statement of Changes in Equity

For the year ended 30 June 2009 

	Share Capital £'000	Special Distributable Reserve £'000	Capital Reserve £'000	Other Reserve £'000	Revenue Reserve £'000	Total £'000
At 1 July 2008	1,105	98,271	32,012	2,269	-	133,657
Net loss for the year	-	-	-	-	(36,880)	(36,880)
Dividends paid	-	-	-	-	(7,956)	(7,956)
Transfer in respect of losses on investment properties	-	-	(42,969)	-	42,969	-
Transfer from special distributable reserve	-	(1,867)	-	-	1,867	-
Movement in fair value of interest rate swap	-	-	-	(8,286)	-	(8,286)
At 30 June 2009	1,105	96,404	(10,957)	(6,017)	-	80,535

For the year ended 30 June 2008

	Share Capital £'000	Special Distributable Reserve £'000	Capital Reserve £'000	Other Reserve £'000	Revenue Reserve £'000	Total £'000
At 1 July 2007	1,105	99,648	72,227	3,397	-	176,377
Net loss for the year	-	-	-	-	(33,625)	(33,625)
Dividends paid	-	-	-	-	(7,967)	(7,967)
Transfer in respect of losses on investment properties	-	-	(40,215)	-	40,215	-
Transfer from special distributable reserve	-	(1,377)	-	-	1,377	-
Movement in fair value of interest rate swap	-	-	-	(1,128)	-	(1,128)
At 30 June 2008	1,105	98,271	32,012	2,269	-	133,657

  IRP Property Investments Limited

Consolidated Cash Flow Statement

	Year ended 30 June 2009	Year ended 30 June 2008
	£'000	£'000
Cash flows from operating activities
Net operating loss for the year before finance costs	(33,389)	(30,435)
Adjustments for:
Losses on investment properties	42,969	40,215
Decrease/(increase) in operating trade and other receivables	1,097	(864)
Decrease in operating trade and other payables	(878)	(59)
	9,799	8,857
Interest received	84	273
Bank loan interest paid	(3,645)	(3,918)
Receipts under interest rate swap arrangement	206	912
Taxation	(70)	-
	(3,425)	(2,733)
Net cash inflow from operating activities	6,374	6,124
Cash flows from investing activities
Purchase of investment properties	-	(15,164)
Capital expenditure	(412)	(147)
Sales of investment properties	16,000	2,677
Net cash inflow/(outflow) from investing activities	15,588	(12,634)
Cash flows from financing activities
Dividends paid	(7,956)	(7,967)
Net cash outflow from financing activities	(7,956)	(7,967)
Net increase/(decrease) in cash and cash equivalents	14,006	(14,477)
Opening cash and cash equivalents	2,468	16,945
Closing cash and cash equivalents	16,474	2,468

  IRP Property Investments Limited

Principal Risks and Risk Uncertainties

The Company's assets consist of direct investments in UK commercial property. Its principal risks are therefore related to the commercial property market in general, but also the particular circumstances of the properties in which it is invested and their tenants. More detailed explanations of these risks and the way in which they are managed are contained in note 5. The Managers also 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. 

Other risks faced by the Company include the following:

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

• Strategic - incorrect strategy, including sector and property allocation and use of gearing, could all 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. 

• 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 misreporting or breaches of regulations.

• 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. 

The Board seek 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.  

The Board and the Managers recognise the importance of the discount of share price to net asset value in shareholder value. The Managers meet with current and potential new shareholders, and with stockbroking analysts who cover the investment trust sector, on a regular basis. In addition, communication of quarterly portfolio information is provided through the Company's website. 

  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, in respect of the annual report for the year ended 30 June 2009, of which this statement of results is an extract:

• the financial statements, prepared in accordance with the applicable set of accounting standards give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

• the Report of the Directors and Managers' Review include a fair review of the development and performance of the business and the position of the Company together with a description of the principal risks and uncertainties that it faces.

On behalf of the Board

Q Spicer

Director

28 September 2009

  IRP Property Investments Limited

Notes to the Consolidated Financial Statements

for the year ended 30 June 2009

1.        The audited results of the Group which were approved by the Board on 28 September 2009 have been prepared on the basis of International Financial Reporting Standards and the accounting policies set out in the statutory accounts of the Group for the year ended 30 June 2009.

 

2.        The fourth interim dividend of 1.80p was declared on 2 September 2009 and was paid on 25 September 2009 to shareholders on the register on 11 September 2009. The ex-dividend date was 9 September 2009.

 

3.        There were 110,500,000 Ordinary Shares in issue at 30 June 2009. The earnings per Ordinary Share are based on the net loss for the year of £36,880,000 and on 110,500,000 Ordinary Shares, being the weighted average number of shares in issue during the year.

 

4.        One property was sold during the year for an aggregate of £16 million. This sale realised gains of £6 million against its original purchase price. 

 

5.         Financial Instruments

The Group's investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital 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 cash, receivables, a bank loan, an interest rate swap and payables.

The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk and market risk (those relating to interest rate changes and pricing movements).

There was no foreign currency risk as at 30 June 2009 or 30 June 2008 as assets and liabilities are maintained in Sterling.

The nature and extent of the financial instruments outstanding at the balance sheet date and the risk management policies employed by the Group are discussed below.

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.

Included within rent receivable is the prepayment for rent-free periods recognised over the life of the lease. As at 30 June 2009 this amounted to £189,000 (2008: £101,000).

Included within other debtors and prepayments at 30 June 2009 is £959,000 (2008: £1,017,000) relating to the reverse lease surrender premium paid to the tenants of Echo Park, Banbury.

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 until it is re-let. 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.

The Group has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 30 June 2009 is £640,000 (2008: £1,090,000). Rental deposits from tenants at 30 June 2009 were £189,000 (2008: £425,000).

As at 30 June 2009, £273,000 of rent receivable was greater than one month overdue. It is the practice of the Group to provide for rental debtors greater than three months overdue. At 30 June 2009 the provision was £269,000 (2008: £72,000). Of this amount £10 was subsequently written off and £21,000 was recovered.

All of the cash is placed with financial institutions with a credit rating of AA or above. Bankruptcy or insolvency 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, the Manager would move the cash holdings to another financial institution.

At the year end, counterparty risk was spread by placing cash balances with more than one financial institution.

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 in which the Group invests is not traded in an organised public Markey 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 full value in order to meet its liquidity requirements. 

In certain circumstances, the terms of the Group's bank loan entitles the lender to require early repayment, and in such circumstances the Group's ability to maintain dividend levels and the net asset value attributable to the ordinary shares could be adversely affected. As at 30 June 2009 the cash balance was £16,474,000 (2008: £2,468,000).

Interest rate exposure

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.

Interest is receivable on cash at a variable rate. At the year-end, rates receivable ranged from 0.375 per cent on current account balances to 1.43 per cent for deposit account balances. Interest is payable on the bank loan at a variable rate of LIBOR plus a margin of 0.5 per cent for the first three years of the facility and 0.45 per cent thereafter. The effect of the interest rate swap is to fix interest payable at 5.65 per cent until 2010 and 5.6 per cent thereafter. The effective rate of interest on the loan is 0.92 per cent. Interest on financial instruments classified as floating rate is repriced at intervals of less than one year.

Exposure varies throughout the year as a consequence of changes in the composition of the net assets of the Group arising out of the investment and risk management policies.

In addition, tenant deposits are held in interest-bearing bank accounts. These accounts earn interest at base rate less 0.75 per cent and receive no interest at this time as the base rate is too low.  Interest accrued on these accounts is paid to the tenant.

The Group's exposure to interest rate risk relates primarily to the Group's long-term debt obligations. The Group's policy is to manage its interest rate risk using an interest rate swap, in which the Group has agreed to exchange the difference between fixed and variable interest amounts calculated by reference to an agreed upon notional principal amount. The swap is designed to fix the interest payable on the loan. The interest rate swap covers the exact amount of the loan and has the same duration. Interest fixing periods are identical and on this basis the swap contract complies with IAS 39's criteria for hedge accounting.

An increase of 3 per cent in interest rates as at the reporting date would have increased net assets by £11.5 million (2008: £11.4 million) and reduced the reported loss by £494,000 (2008: £74,000). A decrease of 3 per cent would have reduced net assets by £13.0 million (2008: £11.4 million) and increased the reported loss by £494,000 (2008: £74,000). These movements are calculated as at 30 June 2009 which may not be reflective of actual future conditions.

Market price risk

As at 30 June 2009, all of the Company's financial instruments were included in the balance sheet at fair value. The book value and the fair value were the same. 

A 10 per cent increase in the value of the investment properties held as at 30 June 2009 would have increased net assets attributable to shareholders and reduced the net loss for the year by £13.2 million (2008: £19.0 million); and an equal change in the opposite direction would have decreased the net assets and increased the net loss by an equivalent amount.

The calculations above are based on investment property valuations at the respective balance sheet dates and are not representative of the year as a whole, nor reflective of future market conditions. 

6.    The Group results consolidate those of IRP Holdings Limited, a wholly owned subsidiary which invests in properties.

7.    These are not full statutory accounts. The full audited accounts for the year ended 30 June 2009 will be sent to shareholders in September 2009, and will be available for inspection at Trafalgar Court, Les Banques, St Peter Port, Guernsey, the registered office of the Company.  The full annual report and accounts will be available on the Company's website: www.irppropertyinvestments.com

8.   The Annual General Meeting will be held on 9 December 2009.

 

END

 

 

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