Final Results

RNS Number : 2262K
ING UK Real Estate Income Trust Ltd
15 April 2010
 



ING UK Real Estate Income Trust Limited ('IRET')

15 April 2010

ING UK Real Estate Income Trust Limited

ING UK Real Estate Income Trust Limited ("the Company") is a closed-ended, Guernsey registered investment company, launched on the London and Channel Islands' Stock Exchanges on the 25 October 2005. With approximately 900 investors, the Company, together with several subsidiaries including a Guernsey unit trust and four Jersey unit trusts which beneficially hold title to the properties, comprise "the Group".

The Group aims to provide shareholders with an attractive level of income together with the potential for capital growth. It can invest both directly and indirectly in an investment portfolio comprising UK, Isle of Man and Channel Islands properties. The Group's focus is on five principal commercial property sectors: office, retail, retail warehouse, industrial and leisure.  Maximum borrowings are limited to 65% of gross assets.  The investment portfolio is managed by ING Real Estate Investment Management (UK) Limited.

 

 

 

 

 

 

 

 

 

FOR FURTHER INFORMATION

 

Dido Laurimore, 020 7269 7144, dido.laurimore@fd.com 

Laurence Jones, 020 7269 7261, laurence.jones@fd.com

 

 

In addition to this full year results statement, the Company has also announced today the details of a recommended offer for Rugby REIT plc.  Please see the separate announcement for full details.

 

There will be an analyst meeting this morning at 0830 at the offices of J.P. Morgan Cazenove, 20 Moorgate, London, EC2R 6DA. There will also be a live conference call facility. Please contact Financial Dynamics for full details. A copy of the presentation will be made available on the Company's website

 

 

 

Facts and Figures

 
 
Year ended 31 Dec 2009
Year ended 31 Dec 2008
Net asset value
£181.1 million
£210.3 million
Net asset value per share
55 pence
64 pence
Dividends paid
£9.9 million
£18.8 million
Net income for the year
£12.0 million
£17.9 million
Pre-tax (loss)/profit (including unrealised (losses)/gains)
£(19.3) million
£(140.4) million
(Loss)/earnings per share
(5.9) pence
(42.5) pence
Gain/(loss) on interest rate swaps
£0.6 million
£(19.7) million
Gain/(loss) on revaluation of portfolio
£(25.3) million
£(141.2) million
Gearing*
43.5%
47.2%
Share price
53.8 pence
22.5 pence
Net asset value total return
(8.8)%
(39.3)%
Shareholder total return
162%
(63.1)%
Total Expense Ratio
1.17%
1.42%
* Calculated as total debt less cash deposits as a proportion of gross property asset value.

 

 

 

 

NET ASSET VALUE AND SHARE PRICE FROM INCEPTION

 

 

 

Chairman's Statement

  

2009 was a challenging year for all UK real estate companies.  The rapid deterioration in the market at the start of the year was unprecedented, set against a backdrop of global financial crisis and the UK economy in recession.

 

Financial stimulus measures that were put in place in March, combined with a more rational outlook, have had the effect of stabilising the underlying market.  Increased direct investor interest in the sector towards the latter half of the year led to the strongest recorded capital growth on record in the final quarter.  A significant and rapid turnaround.

 

The effect of this extreme volatility over the year has not been without its challenges.  At the start of the year, the Company undertook a restructuring of its securitised debt position to withstand the uncertainties created by the financial and real estate markets. Following a programme of asset disposals, £35 million of debt was repaid during the course of the year.  The Company has continued to further de-risk the capital structure and most recently, in January 2010, it repurchased £15 million of debt at a discount to its par value, thereby further improving dividend cover and underlying Net Asset Value. 

 

Despite strengthening investor sentiment in the sector, occupational risks still remain, and in particular over the year we have witnessed pressure on underlying rental levels, in part a reflection of the weakness in the underlying UK economy and occupier demand.  However, the breadth of the Company's investment portfolio, which is diversified geographically, across sectors and tenants, has enabled the Company to withstand the occupational shocks of the year.  Looking further ahead, as the development supply pipeline remains constrained, opportunities for rental growth will follow as the economic position improves.

 

Proactive management has been key to managing these occupier risks, in what remains a fragile market.  The successful sale of the Company's largest void asset and a number of significant lease restructurings over the year demonstrate this and have led to a reduction in the loss of income due from empty premises.

 

Over the year the Company successfully renegotiated its management contract with the Investment Manager moving to a Net Asset Value fee basis, which the Board believes provides greater alignment with shareholders' interests.  I am pleased to report the appointment of Roger Lewis as a non-executive director, with effect from 31 March 2010, and with his strong real estate background, I am confident he will be a valuable addition to our decision making process.

 

In share price terms the Company was one of the best performing Investment Companies in 2009, and although we are in no way complacent, this is recognition of the results of the stabilisation of the Company and also the improved outlook for UK real estate.

 

Whilst risks and uncertainties undoubtedly remain, not least with a forthcoming general election and potential changes in government economic policy and strategy, I am confident that the Company is well positioned to be able to benefit from market opportunities.  The Company will continue to recycle capital where the proceeds can be better re-invested, and equally there remains a continued focus on de-risking both cashflow and capital structure.  The Company is also now in a position to look at opportunities that enhance shareholder value and create a stronger, cashflow driven, investment vehicle.

 

In that vein, I am pleased to be able to confirm that today we are separately announcing our offer for Rugby Estates Investment Trust Plc, a diversified Real Estate Investment Trust, listed on the London Stock Exchange.  We believe that this is an attractive opportunity for both our existing shareholders, and Rugby Estates Investment Trust Plc shareholders that choose to become part of the enlarged entity.  We look forward to explaining the transaction to shareholders in the coming weeks.

 

Nicholas Thompson, Chairman, 14 April 2010

Responsibility Statement

 

 

We confirm to the best of our knowledge:

 

 

 

 

By order of the Board

 

 

 

 

 

 

 

Investment Manager's Report

 

 

ECONOMIC OVERVIEW

 

The UK economy remained in recession for the first three quarters of 2009, with the first quarter registering the worst quarterly decline in output since records began in the 1950s. 

 

The UK base rate started the year at 2%, and saw further cuts by the Bank of England to a historic low of 0.5% in March; the base rate remains at this very low level.  As well as drastically cutting base rates, the Bank of England introduced Quantitative Easing ('QE') in March 2009.

 

To date a total of £200 billion has been injected into the economy through the QE programme.  Despite such low rates of interest and the QE programme, inflation continued to decline for the first nine months of the year to just 1.1% as measured by the Consumer Price Index. 

 

The final quarter saw inflation pick-up however, to 2.9% by the year end.  Unemployment continued to increase throughout 2009, from 6.6% at the start of the year to 7.9% by end November (ILO measure).  However, employment saw only a very marginal fall. 

 

2009 was undoubtedly a dire year for UK economic growth.  However, the final quarter marked the end of the six quarter recession.  The return to growth of 0.3% quarter-on-quarter was relatively muted; however it exceeded most economists' expectations of 0.2% growth and there is the likelihood of further upward revisions to the data.  ING Financial Markets expects the UK to see a steady recovery back towards 2% GDP growth by the end of 2011.    

 

 

STRATEGY

 

2009 was very much a year of two halves insofar as the property market was concerned.

 

Twelve months ago capital values were falling sharply and there was little investor appetite in the sector as the fallout from the financial crisis became ever more apparent.

 

In the six months to June 2009, capital values fell by approximately 12.4% according to the IPD Quarterly Index, with some of the worst monthly and quarterly recorded capital falls on record.

 

With the realisation that financial armageddon had been avoided, and with interest rates at record lows, the relative attractiveness of UK real estate became apparent, particularly compared to other asset classes.

 

By June 2009, the property market had fallen by 42.4% since June 2007 and, with an initial yield of over 7.7%, looked attractive, especially against negligible returns on cash. This resulted in an increasing investor demand for real estate, albeit primarily focussed towards assets with secure and longer term cash flows.

 

As we reached a 'trough' point in the market in August, purchasing opportunities became more scarce and with the IPD Monthly Index showing the first recorded capital gain in 25 consecutive months, it soon became apparent that this would attract significant inflows into the real estate sector.

 

In the final quarter of 2009 more than £2.5 billion was raised by UK Pooled Property Funds.  This represented more than a 10-fold increase on the amount raised in the third quarter.  As such, in the final two quarters of 2009, we saw quarterly capital gains of 1.5% and 8.1% respectively, the latter being the largest quarterly gain recorded in the Index's 23 year history. 

 

The positive picture painted in the second half of the year masks two important factors.

 

Firstly, throughout the year both cashflow and rental values have remained under pressure.  In terms of cashflow, whilst the number of administrations and liquidations appeared to recede as the year progressed, occupational distress has had a negative impact on cashflows.  The IPD void rate increased from 10.4% to 12.1% between December 2008 and December 2009.

 

In turn, these unexpected voids, combined with an immediate weakening of occupier demand as a result of the economic uncertainty, has led to greater supply than demand in many occupational markets.  This, combined with the cashflow impact of empty rates liabilities, has led to short term pressure on rental values which have contributed to negative property performance throughout the year.

 

Finally, it is worth highlighting the range of returns across the IPD subsectors.  For example, retail warehousing, with a 12 month return of 8.4%, was the best performing subsector, while shopping centres were the worst, delivering -8.5% over the year.  The volatility in the market and divergence of returns has led to a significant valuation gap between well secured bond type assets and those with more property specific fundamentals, where market valuations still remain depressed, and in many instances close to construction costs.

 

 

UNDERLYING PERFORMANCE

 

In share price terms, the Company had an exceptional year.  The share price rebounded strongly following the loan restructuring and improved investor sentiment towards the sector as a whole.  The share price rose by 139% over the period from 22.5p to 53.8p.

 

The Net Asset Value fell over the period by approximately 14%.  This was primarily a reflection of the overall reduction in capital values over the twelve month period, and the adverse effect of gearing over the first six months of the year.  However, it did start to deliver strong positive performance towards the end of the year.

 

At an underlying property level, the portfolio delivered a total return of 1.7%, against the IPD benchmark at 2.8%.  The portfolio outperformed for the first six months delivering an -8.4% return, against the benchmark which delivered -9.2%.  In the final six months the portfolio delivered weaker capital growth than the market, which in part may be a reflection of the slightly shorter income profile against the benchmark.  The portfolio's total return for the second half of 2009 was 11.0% against the benchmark return of 13.3%.

 

As a result, no performance fee is payable to the Manager for 2009.

 

The portfolio has, however, outperformed the benchmark both since inception and on a rolling three year basis, the latter being the longer term measure by which future performance fees will be measured.

 

As at 31 December 2009, the property portfolio had an annualised rental income of approximately £28.1 million, which reflected a gross initial yield of 8.1%.  If fully leased, the property portfolio would have an annualised reversionary income of £31.7 million, reflecting a gross reversionary yield of 9.0%.  

 

The Company is entitled to receive a further annualised £1.5 million of additional income during the course of 2010 as contracted rental commitments commence, following the expiration of rent free periods.

 

 

OFFICES

 

The Group's largest exposure is to the office sector which represents over 40% of the portfolio by value.

 

As at 31 December the Group held 19 office assets, with a value of £143 million and reflecting a capital value of approximately £155 per sq ft.  The office portfolio is leased to 137 tenants and had an occupancy rate of 90.2%.

 

Notable transactions over the year included the lease regear to Texas Instruments in Northampton, which involved downsizing their space requirements and facilitating a further letting which completed following the year end.  This increased the income from the asset from £550,000 to £696,000 per annum, following expiry of the rent free periods. 

 

INDUSTRIAL

 

The Group's exposure to the industrial sector is 32%.  This comprises six distribution warehouses and five multi-let industrial estates.

 

As at 31 December the Group held 11 industrial assets with a value of £114 million and reflecting a capital value of £59 per sq ft.  The industrial portfolio is leased to 52 tenants and had an occupancy rate of 96%.

 

There were no significant transactions in the industrial portfolio during the year, but we achieved lettings in three of our industrial estates, totalling £145,000 per annum, and maintained a stable occupancy rate over the period.

 

 

RETAIL

 

The Group's retail exposure totals 22% which is split between high street retail and retail warehousing, representing 13.7% and 8.4% of the total portfolio respectively.

 

As at 31 December, the Group held 10 retail assets with a value of £78 million.  The retail portfolio is leased to 49 tenants and had an occupancy rate of 92%.

 

This sector was the most affected by tenant defaults and in common with the sector as a whole led to a rising vacancy rate over the period from 6% to 8%.

 

Notable transactions over the year included the success in securing Barclays Bank for 15 years in Bristol, which involved changes to the planning consent and our leasehold interest.  Equally, we retained Phones 4 U in the adjacent unit at a time when retail demand was thin.

 

In Huddersfield, following Mark One entering administration in 2008, we re-let their accommodation on flexible terms allowing us later in 2009 to take back accommodation, thus enabling a regear to an existing tenant, Argos, in an adjacent unit.  This active management activity increases the rental income from £123,000 to £150,000 in 2012 and secures an additional 10 years on the lease from 2012.

 

 

ACQUISITIONS AND DISPOSALS

 

The Group made no acquisitions during the course of 2009.

 

The Group made a number of disposals during the early part of 2009, crucially to ensure that it remained compliant with its principal loan obligations, in what at the time was a rapidly deteriorating underlying market.

 

In ten separate transactions, approximately £53 million of net proceeds was realised from asset disposals.  The proceeds of these disposals were used to repay £35 million of debt in July, an integral part of our restructuring negotiations.  In addition, the proceeds were also utilised following the year end to further reduce the overall indebtedness of the Group.

 

Seven of the disposals were in the office sector where there was an ongoing effort to rebalance our office weightings.  Additionally, there was one retail disposal, one industrial disposal, and also the disposal of a small car park at Scots Corner, Birmingham.

 

At a time when there was limited investor interest and liquidity in the market, three disposals were achieved through sales to existing owner occupiers.

 

Our most significant disposal was a vacant office asset in Watford which was sold to a national charity for its own future occupation.  Not only was this our largest single rental void, but the asset had been vacant for some time in what was a relatively weak occupier market. Importantly, this transaction was structured in such a way that there is an element of deferred payment which accrues at a rate of 4.75% per annum, which will further enhance the sale price when payment is due later in 2010.

 

 

DEBT

 

As at 31 December, the Group had £190 million of AAA rated loan notes in the debt market with interest payable on £165 million at 4.795% and a further £25 million at 5.3804%, both fixed by way of interest rate swaps.  These loan notes are repayable on 31 January 2013.  Further details are included in Note 16.

 

The principal covenants in respect of the loan are that currently the loan-to-value ratio must not exceed 60%, and the interest cover must be greater than 1.75 times.

 

As at the 31 December testing date, the loan-to-value was 48.0% and the interest cover was 2.55 times.

 

The most significant impact on the Group's performance in 2009 was the restructuring of this securitised loan.  The ING UK Listed Real Estate Issuer Plc transaction was one of the first consensual loan amendments to occur in the UK market since the market downturn began in 2007.  The success of this loan restructuring was fundamental in a number of ways.

 

Firstly, the restructuring provided much needed headroom against the loan-to-value covenant at a time when there was limited market liquidity to rectify any potential breach through asset disposals.

 

Secondly, by restructuring this transaction, the Group was able to repay a portion of the debt early with the proceeds from the disposals.  This removed the detrimental effect on the dividend cover of holding cash earning little interest, whilst at the same time having to service the underlying debt.

 

Thirdly, the restructuring was negotiated in such a way as to provide the Group with the ability to repay debt in future through a purchase and cancellation of loan notes in the secondary market.  £15 million of debt was repaid following the period end in this manner, with the notes being purchased at a discount to their nominal value.  As such, this transaction was accretive to both the Net Asset Value and the income return.

 

Finally, the restructuring was achieved without any change to either the ongoing interest costs or any consent fee for the revised arrangements.

 

 

OCCUPANCY

 

The portfolio occupancy rate improved in 2009 from 92% to 93% at a time when the overall market witnessed a deterioration in occupancy levels.

 

Most significantly, the asset with the largest rental void within the portfolio was sold to an owner occupier as detailed above.

 

With a weak economic backdrop, there were a number of tenants which went into administration or liquidation over the year, and this had the effect of reducing occupancy in what would have otherwise been a more successful year.

 

With the cashflow driven nature of the Group, we are mindful of reducing voids wherever possible, with particular emphasis on mitigating the holdings costs of empty properties which are a burden for all real estate companies.

 

Outlook

 

 

Having passed the nadir in the market in 2009, the outlook is more positive, although risks to any straight line recovery remain.

 

Despite a peak to trough decline of over 45%, the speed of the rebound has taken most commentators by surprise and this appears to have been driven by weight of money, combined with below average investment volumes. 

 

This sharp rise appears to be stabilising and property performance is likely to be more 'income' driven until economic conditions improve.

 

We have now been in a prolonged period of negative rental growth and rising occupancy rates.  This position will change and as it does rental growth will start to further enhance asset values.  On a more medium term view, the lack of development starts and constrained supply should lead to a more robust rental growth recovery when occupier demand starts to improve.

 

In the meantime we will continue with our 'income focus' philosophy which has led to strong relative underlying performance.  We continue to remain focussed on providing a fully covered dividend, maintaining a cashflow driven product and enhancing value wherever possible.

 

ING Real Estate Investment Management (UK) Limited

 



 

Portfolio Analysis

Geographical

Sector

Covenant Strength

 

 

 

 

 

Longevity of Income

Top Ten Tenants

 

 

 

 

 

Valuation Schedule as at 31 December 2009

 

Properties valued in excess of £20million

Sector

Unit 5320, Magna Park, Lutterworth, Leics.

Industrial

Units A-G2, River Way Industrial Estate, Harlow, Essex

Industrial



Properties valued between £15million to £20million


Phase II, Parc Tawe, Link Road, Swansea

Retail Warehouse



Properties valued between £10million to £15million


Colchester Business Park, The Crescent, Colchester, Essex

Office

Angouleme Way Retail Park, Bury, Greater Manchester

Retail Warehouse

56,Castle Street, 2/12 English Street and 12-21 St Cuthberts Lane, Carlisle, Cumbria

Retail

Lincoln Place (Block 2), Farringdon Road, London EC1

Office

401 Grafton Gate East, Milton Keynes, Bucks.

Office

Vigo 250, Birtley Road, Washington, Tyne and Wear

Industrial



Properties valued between £5million to £10million


L'Avenir, Opladen Way, Westwick, Bracknell, Berks.

Office

Boundary House, Jewry Street, London EC3

Office

City Link House & Tolley House, Addiscombe Road, Croydon

Office

Unit 3220, Magna Park, Lutterworth, Leics.

Industrial

Strathmore Hotel, Arndale Centre, Luton, Beds.

Leisure

17/19 Fishergate, Preston

Retail

1-3 Chancery Lane, London WC2

Office

Regency Wharf , Broad Street, Birmingham

Leisure

Angel Gate Office Village, City Road, London EC1

Office

Units 1-13 Dencora Way, Sundon Park, Luton, Beds.

Industrial

53/55/57 Broadmead, Bristol

Retail

The Business Centre, Molly Millars Lane, Wokingham, Berks.

    Industrial

Westlea Campus, Chelmsford Road, Swindon, Wilts.

Office

171 Bath Road, Slough, Berks.

Office

Scots Corner, High Street/Institute Road,  Birmingham

Retail

Lawson Mardon Buildings, Kettlestring Lane, York

Industrial

Queens House, 17/29 St Vincent Place, Glasgow

Office

Northampton Business Park, 800 Pavilion Drive, Northampton

Office

Sentinel House, Ancells Business Park, Fleet, Hants.

Office

Waterside Park, Longshot Lane, Bracknell, Berks.

Office

Haynes Way, Swift Valley Industrial Estate, Rugby, Warwickshire

Industrial

Longcross Court, Newport Road, Cardiff

Office

Easter Court, Gemini Park, Warrington

Industrial



Properties valued under £5million


Trident House, 42/48 Victoria Street, St Albans, Herts.

Office

Zenith, Downmill Road, Bracknell, Berks.

Industrial

Waterside House, Kirkstall Road, Leeds

Office

6/12 Parliament Row, Hanley, Worcs.

Retail

72/78 Murraygate, Dundee

Retail

Atlas, Third Avenue, Globe Park, Marlow, Bucks.

Office

Units 1- 3, 18/28 Victoria Lane, Huddersfield, West Yorks.

Retail

Merchants House, Crook Street, Chester

Office

7&9 Warren Street, Stockport

Retail

Heron Industrial Estate, Spencers Wood, Reading

Industrial

 

 

Corporate Governance Report

The Combined Code

The UK Listing Authority requires listed companies to disclose how they have applied the principles and complied with the provisions of the revised Combined Code on Corporate Governance ("the Code") which was issued in 2008 by the Financial Reporting Council.  However it only requires corporate governance disclosure and compliance with the Code by those listed companies incorporated in the United Kingdom.

 

The Company is not incorporated in the United Kingdom and as such it has availed itself of the exemption, as an overseas company, under the Listing Rules not to comply with the requirements of the Code.  However, the Board has chosen to adopt where possible the principles of the Code and the Turnbull guidance and has sought to comply throughout the year, insofar as the principles can sensibly be applied to a company of this nature. 

 

The Company complies with the corporate governance guidelines issued by the Guernsey Financial Services Commission on 10 December 2004, whose underlying principles are the same as those of the Code. In addition the Directors believe that the Group has complied with the provisions of the Code where appropriate, and that it has complied throughout the year with the provisions where the requirements are of a continuing nature, except that a separate Nominations Committee has not been established. These duties are performed by the Board for practical reasons.

 

 

The Board

 

The Board meets regularly, normally quarterly, and more frequently if necessary, and retains full responsibility for the direction and control of the Company. Details of the Board including biographies can be found at the end of the Directors' Report. John Gibbon resigned from the Board on 30 March 2009.  Roger Lewis was appointed to the Board on 31 March 2010.

 

The Company is led and controlled by a Board comprising of non-executive Directors, all of whom have wide experience and four of whom were considered to be independent during the year, and three following the resignation of John Gibbon. Tjeerd Borstlap is not considered to be independent due to being an employee of ING Real Estate Investment Management. Notwithstanding Trevor Ash's directorship of ING Global Real Estate Securities Limited, the Board considers him to be independent in character and judgement and does not believe that there are any relationships or circumstances which are likely to affect, or could appear to affect, his judgement.

 

The Board believes that it is in the shareholders' best interests for the Chairman to be the point of contact for all matters relating to the governance of the Company and as such has not appointed a senior independent non-executive Director for the purposes of the Code.  The appointment of Directors is considered by the Board.  The Articles of Association stipulate that all new Directors shall retire at their first Annual General Meeting and offer themselves for re-appointment.  One third, or the number nearest to but not exceeding one third, of the Directors shall retire and offer themselves for re-appointment at each subsequent Annual General Meeting.

 

The Board has reviewed its performance and composition, and is satisfied on both subjects.  In addition, following the informal evaluation of the performance of the Board, its Committees and individual Directors, it is considered that the performance of all Directors continues to be effective and that they have demonstrated commitment to their roles.

 

The Board is responsible for establishing, maintaining and monitoring the effectiveness of the Group's system of internal, financial and other controls.  The internal financial controls operated by the Board include the authorisation of the investment strategy and regular reviews of the financial results and investment performance.  The system of internal financial controls can provide only reasonable and not absolute assurance against material misstatement or loss.

 

The Board has contractually delegated to ING Real Estate Investment Management (UK) Limited the investment management of the Group's properties and Northern Trust International Fund Administration Services (Guernsey) Limited is contracted to provide the Company's administration, registrar and secretarial functions.  The Board reviews regularly the performance of the services provided by these companies. During the year the contract with the Investment Manager was reviewed, with the result of changing the basis of fees from a Gross Asset Value basis to a Net Asset Value basis, with a performance element which is capped. This is detailed further in note 5 to the Financial Statements. Other than this, the Board does not intend to make any changes to the current arrangements. 

 

The performance of the Board is evaluated on an annual basis.  The last evaluation was completed in November 2009.  A Director's Performance Evaluation questionnaire was circulated to the Board for completion by the individual Board members. The Secretary collated these questionnaires and the results were discussed by the Board.  During 2010 it is intended to carry out an external evaluation of the Board as it is three years since the last such review was undertaken.

 

The Company maintains Directors' and Officers' liability insurance which provides insurance cover for the Directors against certain personal liabilities which they may incur by reason of their duties as Directors.

 

The Company has a procedure whereby the Board is entitled to obtain independent advice where relevant.

 

All Directors of the Company are non-executive and Directors' fees are recommended by the Board. The emoluments of the Directors for the year were as follows:

The figures above represent emoluments earned as Directors during the financial year.  The annual emoluments for each Director were independently reviewed during 2007 by New Bridge Street Consultants, with the effect of increasing the annual emoluments of each of the Directors in line with market rates with effect from 1 October 2007.  As previously stated a further external review will be undertaken on the third anniversary in October 2010.

 

The Directors receive no other remuneration or benefits from the Group other than the fees stated above. The Directors have no service contracts or interests in any material contracts with the Group.

 

Attendance at Board Meetings

 

 

 

 

 

Audit Committee

 

The Board has established an Audit Committee (Chairman: Robert Sinclair) which meets when necessary, but at least twice a year, with the auditors of the Group with a view to 

 

The members of the Committee are all the Directors of the Company other than Tjeerd Borstlap.

 

Attendance at Audit Committee Meetings

 

 

 

Remuneration Committee

 

A Remuneration Committee has been established (Chairman: Tjeerd Borstlap) to consider Directors' remuneration.

 

The members of the Committee are all the Directors of the Company.

 

The Committee met at the year end to consider whether the Directors should receive compensation for the additional work performed by them during 2009 as a result of the difficult market conditions.  The Committee agreed that the following amounts would be paid, evidenced by time records held with the Company's Administrator:

 

Trevor Ash                   £5,000

Robert Sinclair              £8,000

Nicholas Thompson      £15,000

 

The Committee noted that the total remuneration in respect of 2009 remained within the limit of £200,000 set by the Company's Articles.

 

Management Engagement Committee

 

In addition, the Board has established a Management Engagement Committee (Chairman: Trevor Ash) to monitor the Investment Manager's compliance with the Investment Management Agreement.

 

The members of the Committee are all the Directors of the Company other than Tjeerd Borstlap.

 

 

A Property Valuation Committee (Chairman: Nicholas Thompson) exists to oversee the valuation process.

 

The members of the Committee are all the Directors of the Company.

 

Trevor Ash currently sits on the Audit, Management Engagement and Property Valuation Committees of the Board. The Board considers Trevor Ash to be independent for the purposes of continuing to be a member of these Committees.

 

 

 

 

 

Relations with Shareholders

 

In conjunction with the Board, the Administrator keeps under review the register of members of the Company. All shareholders are encouraged to participate in the Company's Annual General Meeting.  All Directors normally attend the Annual General Meeting, at which shareholders have the opportunity to ask questions and discuss matters with the Directors and the Investment Manager. Investors are able to direct any questions for the Board via the Secretary.

 

The Chairman regularly attends analyst meetings and road shows to meet investors. The outcome of these meetings is communicated to the rest of the Board at Board meetings.

 

It is recognised that the Code requires notice of Annual General Meetings to be dispatched at least 20 working days before the meeting.  The Company intends to comply with the Code provision in 2010.

 

Accountability and Audit

 

Directors' responsibilities in relation to the Financial Statements

 

The Directors have responsibility for ensuring that the Group keeps accounting records which disclose with reasonable accuracy at any time the financial position of the Group and which enables them to ensure that the Financial Statements comply with the Companies (Guernsey) Law, 2008.  They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

 

Statement of going concern

 

Market conditions led to the Group breaching its loan to value covenant during the year. This was subsequently remedied during the remedy period allowed under the loan documentation. Further information on the actions taken are detailed in the Debt section of the Investment Manager's Report.

 

After due consideration, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. 

 

The Directors acknowledge that they are responsible for establishing and maintaining the Group's system of internal controls and reviewing its effectiveness.  Internal control systems are designed to manage rather than eliminate the failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss.  They have therefore established an ongoing process designed to meet the particular needs of the Group in managing the risks to which it is exposed consistent with the guidance provided by the Turnbull Committee.  Such review procedures have been in place throughout the full financial year and up to the date of the approval of the Financial Statements and the Board is satisfied with their effectiveness.

 

This process involves a review by the Board of the control environment within the Group's service providers to ensure that the Group's requirements are met.

 

The Group, in common with other similar groups, does not have an internal audit function.  The Board has considered the need for an internal audit function but has decided to place reliance on the Administrator's and Investment Manager's systems and internal audit procedures.

 

These systems are designed to ensure effectiveness and efficient operations, internal control and compliance with laws and regulations.  In establishing the systems of internal control regard is paid to the materiality of relevant risks, the likelihood of costs being incurred and costs of control.  It follows therefore that the systems of internal control can only provide reasonable but not absolute assurance against the risk of material misstatement or loss.

 

The effectiveness of the internal control systems is reviewed annually by the Board and the Audit Committee.  The Audit Committee has a discussion annually with the auditor to ensure that there are no issues of concern in relation to the audit opinion on the Financial Statements and, if necessary, representatives of the Investment Manager would be excluded from that discussion.

 

Risk Management

There are a number of potential risks and uncertainties which could have a material impact on the Group's long-term performance and could cause actual results to differ materially from expected and historic results. The main risks and how they are mitigated are summarised below.

 

 



Investment Restrictions

The Company's investment restrictions are as follows:

 

·     

 

·     

 

·     

 

·     

 

·     

 

·     

 

·     

 

·     

 

·     

 

·     

 

·     

 

·     

 

·     

 

·     

 

·     

 

·     

·     

 

Since the Group has no employees other than the Directors, the Board has ensured that the Investment Manager adheres to the corporate responsibility policies of the ING Real Estate Group, as disclosed in their most recent Annual Report.

 

 

Directors' Report

The Directors of ING UK Real Estate Income Trust Limited present their Annual Report and audited Financial Statements for the year ended 31 December 2009.

 

The Company is a closed ended investment company and is registered under the provisions of the Companies (Guernsey) Law, 2008.

 

Principal Activity

The principal activity of the Company is property investment with the objective of providing shareholders with an attractive level of income together with the potential for capital growth, by investing in a diversified UK commercial property portfolio.

 

With effect from 29 October 2008, the Company became regulated under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended).  Under this regulation, the Company was deemed to be authorised by the Guernsey Financial Services Commission (GFSC) on or before 15 April 2009. 

 

Results and Dividends

The results for the year are set out in the Consolidated Statement of Comprehensive Income.  Details of dividends paid and proposed are set out in note 9 to the Consolidated Financial Statements.

 

Listings

The Company is listed on the London and Channel Islands' Stock Exchanges.

 

Share Capital

The issued share capital of the Company as at 31 December 2009 was 330,401,300 (31 December 2008: 330,401,300) ordinary shares of No Par Value.

 

The Directors have authority to buy back up to 14.99% of the Company's ordinary shares in issue subject to the annual renewal of this authority from shareholders. Any buy back of ordinary shares is and will be made subject to Guernsey law, and the making and timing of any buy backs are at the absolute discretion of the Board.

 

Substantial Shareholdings

The Company has received notification that the following shareholders had a beneficial interest of 3% or more of the Company's issued share capital as at 24 March 2010.

 

Rathbone Investment Management

Rensburg Sheppards Investment Management Limited

Scottish Widows Investment Partnership

Schroder Investment Management Limited

Legal & General Investment Management Limited

Merrill Lynch International Bank Limited

Goldman Sachs International

Newton Investment Management Limited

BlackRock Inc.

 

Directors and Directors' Interests

The current Directors of the Company are set out in the Company Information on page 22. All Directors served throughout the year with the exception of John Gibbon, resigned on 30 March 2009, and Roger Lewis, who was appointed on 31 March 2010.

 

 

 

 

 

The Directors' interests in the shares of the Company as at 31 December 2009 are set out below:

           

 




Nicholas Thompson

Robert Sinclair

 

In addition, Mrs Elizabeth Thompson, wife of Nicholas Thompson, owns 21,666 shares, or 0.007% of the issued share capital of the Group.

 

Statement of Directors' responsibilities

In preparing these Financial Statements, the Directors are required to:

 

n

 

n

 

n

 

n

 

Disclosure of information to auditors

 

Auditors

During the year, and following a tender process, Deloitte LLP resigned as auditor of the Company. The Board of ING UK Real Estate Income Trust Limited appointed KPMG Channel Islands Limited

 

Company Information

 

Directors

                                                                                                                                               

Nicholas Thompson (Chairman)

Trevor Ash

Robert Sinclair (Chairman of the Audit Committee)

 

 

- Age 62, has extensive experience in the property sector, most recently as a director of Berkeley Group Holdings plc for over 15 years, the last eight of which was as Chairman, a position from which he retired at the end of July 2007. He currently acts as a consultant to the Berkeley Group and is a director of Berkeley Residential Property Investments Limited, a Jersey based subsidiary company of the Berkeley Group.  Prior to this, he was group chief executive officer of Crest Nicholson Group PLC from 1983 to 1991. He is also currently a director of Camper & Nicholsons Marina Investments Limited and Grand Harbour Marina Plc (Malta).

 

 

 

Managers and Advisers

 

 

Company Website

www.ingreit.co.uk

 

 

 

Independent Auditor's Report

 

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF ING UK REAL ESTATE INCOME TRUST LIMITED ("the Company")

Respective responsibilities of directors and auditors

Opinion

·     give a true and fair view of the state of the Group's affairs as at 31 December 2009 and of its loss for the year then ended;

·     are in accordance with International Financial Reporting Standards;  and

·     comply with the Companies (Guernsey) Law, 2008.

 

E McGill

For and on behalf of KPMG Channel Islands Limited

Chartered Accountants

14 April 2010

 

 

 

 

 

 

 

 

 

Financial Statements

 

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2009

 





2009

2008


Note

Income

Capital

Total

Total



£000

£000

£000

£000







Income






Rental income

3

31,949

-

31,949

35,812

Service charges recharged to tenants


5,219

-

5,219

4,284

Other operating income


779

-

779

5,522

Total operating income


37,947

-

37,947

45,618







Gains and losses on investments






Realised (losses)/ gains arising on disposal of investment properties

12

-

(6,580)

(6,580)

2,524

Unrealised losses on revaluation of investment properties

12

-

(25,339)

(25,339)

(141,161)

Total gains and losses on investments


-

(31,919)

(31,919)

(138,637)







Expenses






Property operating expenses


(4,481)

-

(4,481)

(4,027)

Service charge costs


(5,219)

-

(5,219)

(4,284)

Management expenses                    

5

(3,172)

-

(3,172)

(5,345)

Other operating expenses

6

(3,019)

-

(3,019)

(2,667)

Total operating expenses


(15,891)

-

(15,891)

(16,323)







Profit/(loss) before finance costs and tax


22,056

(31,919)

(9,863)

(109,342)







Financing






Interest receivable

7

311

-

311

2,663

Interest payable

7

(10,399)

-

(10,399)

(14,059)

Realised gains on disposal of interest rate swaps

7

-

259

259

-

Unrealised gains/ (losses) on revaluation of interest rate swaps

7

-

363

363

(19,677)

Total finance costs


(10,088)

622

(9,466)

(31,073)







Total comprehensive profit/(loss) for the year


11,968

(31,297)

(19,329)

(140,415)







Tax

8

(8)

-

(8)

-







Profit/(loss) for the year


11,960

(31,297)

(19,337)

(140,415)







Loss per share






Basic and diluted

10

3.6p

(9.5)p

(5.9)p

(42.5)p

 

There is no comprehensive income other than the loss for the year.

 

The total column of this statement represents the Group's Consolidated Statement of Comprehensive Income.  The supplementary income return and capital return columns are both prepared under guidance published by the Association of Investment Companies.  All items in the above statement derive from continuing operations. 

 

All income is attributable to the equity holders of the parent Company.  There are no minority interests. Notes 1 to 25 form part of these Consolidated Financial Statements.

 

 

 

 

Consolidated Statement of Changes in Equity

For the year ended 31 December 2009

 


Note

Share Capital

Share Premium Account

Distributable Reserve

Retained Earnings

Total



£000

£000

£000

£000

£000








Balance as at 31 December 2007


-

31,389

297,776

40,352

369,517








Net loss for the year


-

-

-

(140,415)

(140,415)

Dividends paid

9

-

-

(893)

(17,899)

(18,792)








Balance as at 31 December 2008


-

31,389

296,883

(117,962)

210,310








Net loss for the year


-

-

-

(19,337)

(19,337)

Dividends paid

9

-

-

-

(9,912)

(9,912)








Balance as at 31 December 2009


-

31,389

296,883

(147,211)

181,061

 

 

Notes 1 to 25 form part of these Consolidated Financial Statements.

 

 

 

 

Consolidated Balance Sheet

As at 31 December 2009

 






2009

2008


Notes

£000

£000





Non-current assets




Investment properties

12

352,599

436,005

Total non-current assets


352,599

436,005





Current assets




Accounts receivable

13

8,810

8,488

Cash and cash equivalents

14

50,569

20,084

Total current assets


59,379

28,572





Total assets


411,978

464,577





Current liabilities




Accounts payable and accruals

15

(13,562)

(13,210)

Total current liabilities


(13,562)

(13,210)





Non-current liabilities




Loans and borrowings

16

(217,355)

(241,057)

Total non-current liabilities


(217,355)

(241,057)





Total liabilities


(230,917)

(254,267)





Net assets


181,061

210,310





Equity




Ordinary share capital

18

-

-

Share premium account

19

31,389

31,389

Distributable reserve

19

296,883

296,883

Retained earnings


(147,211)

(117,962)





Total equity


181,061

210,310





Net asset value per share

21

0.55

0.64

 

 

 

 

 

 

 

 

Consolidated Cash Flow Statement

For the year ended 31 December 2009

 










2009

2008


Notes

£000

£000





Loss before tax


(19,329)

(140,415)





Adjusted for




Interest receivable

7

(311)

(2,663)

Interest payable

7

10,399

14,059

Realised and unrealised gains and losses


31,297

158,313

Amortisation of finance costs

13

479

705

Income tax expense

8

(8)

-

Cash flows from operating profit before working capital changes


22,527

29,999





Decrease/(increase) in trade and other receivables


2,575

(2,470)

Increase/(decrease) in trade and other payables


708

(4,990)





Net cash flows from operating activities


25,810

22,539





Cash flows from investing activities




Purchase of investment properties

12

(1,701)

(2,806)

Disposal of investment properties


49,492

61,370

Interest received

7

311

2,663

Net cash flows from investing activities


48,102

61,227





Cash flows from financing activities




Proceeds from long term borrowings

16

14,000

-

Repayment of long term borrowings

16

(34,950)

(81,981)

Disposal of interest rate swaps

7

(1,830)

-

Interest paid on loans


(10,735)

(14,059)

Dividends paid

9

(9,912)

(18,792)

Net cash flows from financing activities


(43,427)

(114,832)





Net increase/ (decrease) in cash and cash equivalents


30,485

(31,066)





Cash and cash equivalents at beginning of year


20,084

51,150





Cash and cash equivalents at end of year

14

50,569

20,084

 

 

Notes 1 to 25 form part of these Consolidated Financial Statements.

 

 

 

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009

 

1.      General information

2.      Significant accounting policies

Basis of accounting

Changes in accounting policies


- IAS 1 Presentation of Financial Statements
- IAS 40 Investment Property - Amended
- IFRS 8 Operating Segments
- IAS 23 Borrowing Costs (Revised)
- Amendment to IFRS 7 Financial Instruments: Disclosures

The principal effects of these changes are as follows:
 
IAS 1 Presentation of Financial Statements

Effective 1 January 2009, the Group has applied revised IAS 1 'Presentation of Financial Statements' (2007).  The revised Standard requires all owner changes in equity to be presented in the Statement of Changes in Equity, whereas all non-owner changes in equity are presented in the Statement of Comprehensive Income.  The application of the revised Standard did not have any impact on the Group's Financial Statements as the Group has no components of comprehensive income other than the profit or loss for the period.

 

IAS 40 Investment Property - Amended



IAS 23 Borrowing Costs (Revised)

 

 

 

 

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

2.      Significant accounting policies (continued)

Amendment to IFRS 7 Financial Instruments: Disclosures


This amendment deletes much of the existing wording in the Standard to the effect all leases of land (where title does not pass) were operating leases.  The amendment requires that in determining whether the lease of land (either separately or in combination with other property) is an operating or finance lease, the same criteria are applied as for any other asset. This may have the impact in the future that more leases of land will be treated as finance leases rather than operating leases.

Critical accounting judgments and key sources of estimation uncertainty

Fair value of derivatives



Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

2.      Significant accounting policies (continued)

Fair value of investment properties

Basis of consolidation

Business combinations

Presentation of the Statement of Comprehensive Income

Investment properties



Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

2.      Significant accounting policies (continued)

 

Leases

Cash and cash equivalents

Income and expenses

Dividends

Financial liabilities and equity

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

2.    Significant accounting policies (continued)

Derivative financial instruments

 and are held only to mitigate the risk of changes in interest rates as disclosed in note 23.

 

Trade receivables

Loans and borrowings

Other assets and liabilities

Taxation

 

Principles for the Cash Flow Statement

3.      Rental income

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

4.      Business and Geographical segments

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

5.      Management expenses

 

·     

·     

·     

·     

·     

 

6.      Other operating expenses

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

7.      Finance costs/income

8.      Tax

9.      Dividends

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

9.    Dividends (continued)

10.   Loss per share

 

11.   Investments in subsidiaries

Merbrook Swindon Property Unit Trust*

* - ("the JPUTS")

 

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

11.   Investments in subsidiaries (continued)

 

12.   Investment properties                                                                                             

 

 

Additions

Disposals

Realised gains/(losses) on disposal

Valuation of assets held under finance leases

Lease incentives held as debtors


 

13.   Accounts receivable



Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

14.   Cash and cash equivalents              

 

15.   Accounts payable and accruals

16.   Loans and borrowings

 

 

On 17 April 2009 the Group announced it had breached the loan to value ("LTV") covenant on its securitised loan facility. The covenant states that the LTV of the property portfolio must not exceed 50%. As at 17 April 2009 the loan to value was 53.4%. The loan documents allow for a 30 day remedy period from the date of breach of a covenant.

 

A meeting of Noteholders was held on 15 May 2009, when the following measures were approved;

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

16.   Loans and borrowings (continued)

·     

·     

·     

 

The LTV breach was therefore resolved. The Group is in compliance with all loan covenants at the date of reporting.

 

         

17.   Contingencies and capital commitments

 

 

18.   Ordinary Share Capital

 

 

 

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

18.  Ordinary Share Capital (continued)

 

 

 

19.   Share Premium and distributable reserve




 

20.   Obligations under finance leases

 

 

 

Operating leases where the Group is lessor

 

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

20.                             Obligations under finance leases (continued)

 

21.   Net asset value

The net asset value per ordinary share is based on net assets at the year end and on 330,401,300 (31 December 2008: 330,401,300) ordinary shares, being the number of ordinary shares in issue at the year end.

 

At 31 December 2009, the Company had a net asset value per ordinary share of £0.55 (31 December 2008: £0.64). 

 

22.   Financial instruments

Categories of financial instruments

 

Cash and cash equivalents

 

Cash and cash equivalents

 

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

22.   Financial instruments (continued)

Fair Value Hierarchy

The table below analyses financial instruments carried at fair value, by valuation method.  The different levels that have been defined are as follows:

 

·      Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

·      Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

·      Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 

Interest rate swaps

 

23.   Risk management

 

Capital risk management

Since 2007 the Group's strategy has been focussed on reducing capital risks through debt repayment, set against a market backdrop of extreme volatility.

 

The Group manages its capital to ensure that the entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance.

 

The capital structure of the Group consists of debt, which includes the loans disclosed in note 16, cash and cash equivalents and equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings. The Board continues to monitor the balance of the overall capital structure through the payment of dividends, new share issues, share buybacks as well as the issue of new debt or the redemption of existing debt.  The Group is not subject to any external capital requirements.

 

The loan restructuring undertaken in May 2009 has further enabled the Group to manage its capital risks by providing the ability to make early repayments of its debt ahead of loan maturity as appropriate.  

 

Interest rate risk management

 

 

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

23.   Risk management (continued)

Interest rate risk

The following table details the Group's remaining contractual maturity for its non-derivative financial assets and liabilities. The table below has been drawn up based on the undiscounted contractual maturities of the financial liabilities, including interest that will accrue to those liabilities except where the Group is entitled and intends to repay the liability before its maturity.

Cash

Finance lease liability

Fixed interest rate loans

Floating interest rate facility


Cash

Finance lease liability

Fixed interest rate loans

 

 

 

Interest rate swaps


Interest rate swaps

 

 

Interest rate swap contracts

 

 

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

23.   Risk management (continued)

Outstanding

Less than 1 year

1 to 2 years

2 to 5 years

More than 5 years


 

Swap contracts interest risk sensitivity

·     

·     

 

Credit risk

Cash and cash equivalents

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2008 (continued)

 

23.   Risk management (continued)

 

Liquidity risk

 

 

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

23.   Risk management (continued)

 

31 December 2009

Floating

Liquidity facility

Fixed using interest rate swaps

Floating rate notes


31 December 2008

Fixed using interest rate swaps

Floating rate notes


 

Market risks

Notes to the Consolidated Financial Statements

for the year ended 31 December 2009 (continued)

 

23.   Risk management (continued)

24.   Related party transactions

.

25.   Events after the balance sheet date

 

 

END


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