Interim Results

ING UK Real Estate Income Trust Ltd 12 September 2007 ING UK REAL ESTATE INCOME TRUST (The 'Company'/ 'Group') The ING UK Real Estate Income Trust Limited has today announced interim results for the six months to 30 June 2007. FINANCIAL HIGHLIGHTS > Consolidated profit before tax for the six months ended 30 June 2007 ('the period') was £34.4 million, including unrealised gains of £25.9 million. > £9.7 million of this unrealised gain arises from the fixing of interest on borrowings. > Total net asset value per share of 133 pence compared to 126 pence at 31 December 2006, reflecting a 5.74% gain during the period. > Retained profit including property revaluations was £24.0 million for the period. > Shareholders' Funds rose from £418.3 million to £442.3 million for the period. > Two dividends totalling 3.125 pence per share were paid in February and May 2007. > Total expense ratio of 0.96% (calculated as the total annualised expenses as a proportion of total assets less current liabilities). OPERATIONAL HIGHLIGHTS > Gross property assets increased from £702.2 million to £715.5 million, delivering an ungeared total return of 5.1% over the period, ahead of the IPD Quarterly Index. > Performance principally driven through exposure to office market and active asset management initiatives. > One acquisition, of an asset adjacent to an existing holding, was made in the period. Rental terms have already been agreed ahead of expectations. > In line with strategy, two smaller assets were sold during the period, both realising profit ahead of valuation. 30 June 2007 30 June 2006 Net asset value £442.3 million £358.0 million Net asset value per share 133 pence 117 pence Pre-tax profit for the period (inc unrealised £34.4 million £45.3 million gains) Net income for the period £8.3 million £7.3 million Earnings per share 10.4 pence 14.9 pence For further information: The Company Secretary Northern Trust International Fund Administration Services (Guernsey) Limited Trafalgar Court Les Banques St Peter Port Guernsey GY1 3QL Tel: 01481 745439 Fax: 01481 745085 ING Real Estate Investment Management (UK) Limited Selina Sasse, 020 7767 5756, selina.sasse@ingrealestate.co.uk Helen Stott, 020 7767 5648 helen.stott@ingrealestate.co.uk Financial Dynamics Dido Laurimore/Stephanie Highett, 020 7831 3113 ING UK REAL ESTATE INCOME TRUST LIMITED ING UK Real Estate Income Trust Limited is a closed-ended, Guernsey registered investment company, launched on the London and Channel Islands' Stock Exchanges on the 25 October 2005. With approximately 800 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'. GROUP OBJECTIVE 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. It is the current intention of the Group to limit borrowings to a maximum of 50% of gross assets. The investment portfolio is managed by ING Real Estate Investment Management (UK) Limited. Chairman's Statement This Interim Report and Accounts covers the six months from 1 January 2007 to 30 June 2007. I am pleased to advise that the Group has continued to make further progress, delivering a pre-tax profit for the period of £34.4 million. The net asset value of the Group has increased from £418.3 million to £442.3 million, or 133 pence per share from 126 pence per share, which represents an increase of 5.74% over the period. In addition, dividends of £10.4 million have been paid, reflecting 3.125 pence per share for the reporting period. The property portfolio has delivered a total return of 5.1% in the six months under review, out-performing the IPD Quarterly Benchmark which returned 4.9% over the same period. The assets continue to deliver an income return significantly ahead of the IPD Benchmark. The Group has benefited from fixing the interest payable on its borrowings which, in current market conditions, has continued to have a positive impact on the net asset value. While the Group's portfolio has out-performed industry benchmarks and delivered net asset value growth, the Board is acutely aware that, like many other companies within the peer group, its shares are currently trading at a discount to their underlying net asset value. Whilst the discounts on Guernsey Investment Companies are less than many of the newly formed UK Real Estate Investments Trusts, the Board is closely monitoring the level of such discount. Although it has not yet done so, the Board has in place a strategy for the repurchase of shares when it is able. However, with the portfolio being valued quarterly there are only limited trading windows in which it can operate a repurchase programme. Combined with a tight capital structure, and the relative illiquidity of the underlying real estate, the Group has, to date, chosen to use sale proceeds to reduce borrowings. The turbulence in the financial markets over the summer months has affected bond and equity pricing and the property market is starting to see signs of outward yield movement as a result of this structural re-pricing of risk. Nevertheless, the occupational real estate market remains sound and still offers positive rental value growth. The Group's primary focus remains on growing the underlying income. This will be achieved through a reduction of debt costs, realisation of asset management initiatives and the sale of assets with lower income and weaker total return prospects. The Board was delighted that Tjeerd Borstlap's appointment to the Board was confirmed at the recent Annual General Meeting. Whilst the governance issues around his appointment are fully recognised, given his role as Chief Financial Officer of ING Real Estate Investment Management, we welcome the contribution he is making to our affairs, both through his experience and professionalism. He is also able to provide a helpful focus for the Board on our issues. Together we police the governance issues robustly and consequently Tjeerd does not sit on the Audit or Management Engagement committees. The portfolio remains well balanced and benefits from a secure income stream with an average lease length in excess of eight years. We expect the Investment Manager to continue to deliver performance in this more challenging environment and, as a Board, remain fully cognisant of the spectrum of opportunities available to deliver shareholder value. Nicholas Thompson Chairman of the Board 11 September 2007 Investment Manager's Review ECONOMIC OVERVIEW: GDP growth over the year to June 2007 was robust at 3% per annum and slightly above the 2.8% per annum recorded for the calendar year 2006. Financial and business services (FBS) growth continues to be a major driver, expanding at almost double the pace of the rest of the UK economy. This has positive implications for property rental growth, particularly in the office sector. On the consumer side, signals remain mixed with the full effects of previous interest rate increases yet to fully materialise. While surveys suggest consumer confidence may be declining, mortgage approvals and retail sales held firm over the three months to June. The annual CPI inflation rate stood at 1.9% per annum in July, a reduction from 2.4% per annum the previous month. Current inflationary concerns are partly global in nature focused on energy and food price increases. However, to date we have been largely insulated from the full effects of dollar denominated commodity price increases by the strength of Sterling. While inflation still looks set to ease during the remainder of 2007, CPI is not expected to be consistently below 2% until the second quarter of 2008. The RPI inflation at July was 3.8%. The Bank of England raised the base rate by a further 25 basis points to 5.75% in July. The outlook for interest rates has become less clear in recent weeks, due to the turmoil in the financial markets following the US sub-prime mortgage crisis. ING Financial Markets' view is that one more rate rise, to a peak of 6%, is likely this year. However, the recent market volatility indicates a pause until the final quarter of 2007 and a number of market commentators now believe that rates will peak at 5.75%. The current monetary tightening cycle depends upon higher borrowing costs dragging GDP growth back towards trend level. Furthermore, given commodity price increases, it will be important that our currency maintains a degree of parity against the US Dollar. It is also worth noting that investor concerns relating to UK interest rates during July may be beginning to moderate with Sterling swap rates starting to ease downwards in August. UK PROPERTY MARKET OVERVIEW: The IPD Quarterly Index registered a total return of 12.7% for the 12 months to June 2007, compared to a figure of 18% per annum at the beginning of the year. Performance is strongest in the office sector at 18.3% per annum followed by industrial and retail at 12.4% and 9.4% respectively. This compares with 18.4% per annum from the FT All Share and -1.0% from 5 to 15 year Gilts over the same period. June 2007 Total Returns - Property, Equities and Gilts +------------------+--------------+------------------------+-------------------+ | | IPD Monthly| Equities - All Share|Gilts - 5 to 15 yrs| +------------------+--------------+------------------------+-------------------+ |1 month | 0.7%| -0.8%| -1.2%| +------------------+--------------+------------------------+-------------------+ |3 months | 2.1%| 4.5%| -2.4%| +------------------+--------------+------------------------+-------------------+ |6 months | 4.4%| 7.6%| -2.9%| +------------------+--------------+------------------------+-------------------+ |12 months | 12.4%| 18.4%| -1.0%| +------------------+--------------+------------------------+-------------------+ |Per annum | | | | +------------------+--------------+------------------------+-------------------+ |3 years | 17.1%| 18.9%| 3.5%| +------------------+--------------+------------------------+-------------------+ |5 years | 15.3%| 12.2%| 3.9%| +------------------+--------------+------------------------+-------------------+ |10 years | 13.4%| 7.6%| 6.0%| +------------------+--------------+------------------------+-------------------+ |20 years | 11.6%| 9.5%| 8.5%| +------------------+--------------+------------------------+-------------------+ Source: IPD, June 2007. PROPERTY MARKET OVERVIEW (CONTINUED) Property yield-driven capital appreciation is beginning to reverse with the recent financial markets turbulence. A year ago falling property yields alone added over 13% per annum to capital values during the preceding 12 months. This year yield movements have added approximately 4% to the value of the average UK property portfolio (IPD Monthly), which is a more conservative increase. This deceleration in yield reduction explains why capital growth, and therefore total returns, is now moderating from an unsustainable 18 to 19% over the last three years. In our view, the financial turmoil in the credit and equity markets has increased the risk free rate, making investors more risk averse. This is affecting all asset classes, not just property. As a consequence we are already seeing some small increases in property valuation yields and expect these to continue through to 2008. Market activity has been slow during the summer period and there have been a very limited number of transactions to provide hard evidence of this shift in sentiment. September and October are expected to provide a clearer picture of the market. Nevertheless, robust economic growth remains a positive indicator for the occupational element of the UK commercial property market because GDP growth (currently a very healthy 3% per annum to June 2007) is a major driver of rental uplifts. These rental increases will offset some of the impact from the rise in yields and, in addition, property performance can be enhanced through active management initiatives such as refurbishment, change of use and tenant engineering. An often overlooked benefit to UK property is the stabilising effect that upward only rent review clauses have on income security. This practice insulates the income stream from most of the underlying volatility in the rental market. As a result, a continuously growing income stream is a long run benefit few outside the UK property market fully appreciate. GROUP PORTFOLIO PERFORMANCE For the period ending 30 June 2007, the underlying Net Asset Value of the Group grew from £418.3 million to £442.3 million, reflecting an increase of 5.74%. Other than its cash holdings, the Group invests solely in direct real estate and has no indirect property investments. This property portfolio delivered an ungeared total return of 5.1%, compared to the IPD Benchmark return of 4.9% over the period. Relative to IPD, the property portfolio remains biased towards the office sector, with a lower retail weighting. This has had a positive effect on performance which has been principally driven through the office sector and the implementation of active management initiatives. The portfolio is structured so that the retail element has direct exposure to the supermarket sub-sector which has also performed well over the period. At 30 June 2007, the value of the Group's portfolio was £715.5 million with an annual net income of £39.8 million, which reflects a running yield at property level of 5.6%. The portfolio comprises 61 properties with an average unexpired lease term of 8.66 years. The void level at 30 June 2007 represented 3.6% of total income. ACQUISITIONS AND DISPOSALS During the period, the Group completed one acquisition of a single vacant industrial unit in Harlow. The unit measured 2,152 sq.m. (23,168 sq.ft.) and the purchase price was £2.6 million. The property is adjacent to the recently acquired Riverway Industrial Estate and is currently being refurbished. Letting terms have already been agreed ahead of those envisaged at purchase, which will have a positive effect on the previously acquired adjacent estate. The Group has disposed of two properties including the smallest asset in the portfolio, Oakwell Park Trading Estate, Birstall, which was sold for £1.21 million in January. Two detached warehouse units at Trafford Park in Manchester were sold for £5.76 million in April. Both sales were in line with the existing strategy, to reduce the number of smaller assets in the portfolio which have little or no active management potential or where asset management initiatives had been exhausted. The sales realised a profit 4.1% ahead of their preceding valuation and 16% above valuation at launch. BORROWINGS The Group's borrowings are fixed, and consequently, have not been directly affected by the recent rises in the cost of debt. The debt is held in two separate tranches, the majority of which is securitised. Proceeds from sales have been used to reduce gearing in the more expensive tranche. The weighted average cost of debt is 5.37% including the relevant amortised set up costs. The Group issued a total of £225 million of AAA rated loan notes on the debt market, with interest payable on the initial £200 million at 4.795% and further £25 million at 5.3804%, both fixed by way of an interest rate swap. These loan notes are repayable on 31 January 2013. The Group also has a loan with JP Morgan with a balance of £87.3 million at 30 June 2007. Interest is payable on this loan at 6.0%, also fixed by way of a swap. This loan is repayable on 4 December 2009. A further loan repayment of £5.3 million was made on 31 July 2007. ASSET MANAGEMENT HIGHLIGHTS Asset management remains vital to delivering performance across the portfolio and a number of initiatives are being considered throughout the majority of properties. Achievements over the period include: Longcross Court, Cardiff Through the engineering of a number of lease surrenders, the Group facilitated the re-letting of the third and fourth floors. The letting will complete towards the end of 2007, when the building will have been refurbished. City Link House, Croydon The Group re-geared a lease to the Royal Bank of Scotland, one of the principal tenants, for a new term of 15 years and at an enhanced rental level. Angel Gate, London Following a successful letting campaign, the void rate on the multi let office space has reduced from 40% on acquisition to a position where all available space is now let. 593-599 Fulham Road, London Two of the office floors have now been let following surrender, refurbishment and a letting campaign. In addition an assignment of the retail lease (ground floor and basement) has been facilitated to HSBC. As a result of these initiatives, the underlying valuation of these assets increased by 18% over the period. STRATEGY The key aim is to continue the strong active management of the portfolio, increasing income and facilitating capital growth, by means of lease restructuring and identifying opportunities through close tenant liaison. The portfolio has a number of lease expiries over the short- to medium-term and work to renew and re-gear leases continues where possible. It is intended that a number of selective disposals will be made during the second half of the year in order to further reduce gearing and enhance the relative income position by reducing the higher debt costs within the portfolio. OUTLOOK Economic fundamentals remain supportive of rental value growth, which is currently running at 3.8% per annum at 31 July 2007 (IPD Monthly). Set against this we are expecting some outward yield movement in the short term, reflecting investors' attitude to risk, which will reduce the current negative yield gap between the IPD Initial Yield of 4.6%, at 31 July 2007, and 10 year government Gilts currently yielding circa 5%. UK real estate still offers a secure and stable income stream, diversification benefits, a strong residual value and relatively low volatility compared to other asset classes. The portfolio remains well diversified in terms of the number of assets, tenants, regions and sectors; it is also biased towards the office sector which we expect to be the best performing sector. Across the portfolio we are seeing positive results on many lettings, rent reviews and lease renewals. It continues to offer an attractive income return, ahead of the IPD Index, and active management will continue to deliver enhanced returns looking forward. ING Real Estate Investment Management (UK) Limited 11 September 2007 Financial Statements UNAUDITED CONSOLIDATED INCOME STATEMENT FOR THE PERIOD FROM 1 JANUARY TO 30 JUNE 2007 1 Jan to 1 Jan to 15 Sept 30 June 30 June 2005 to 31 2007 2006 Dec 2006 Unaudited Unaudited Audited Income Capital Total Total Total £000 £000 £000 £000 £000 Income Rental income 19,862 - 19,862 14,044 39,329 Service charges recharged to 1,729 - 1,729 872 6,074 tenants Other operating income 1,128 - 1,128 1,750 4,661 Total operating income 22,719 - 22,719 16,666 50,064 Gains and losses on investments Realised gains arising on - 179 179 - 4,572 disposal of investment properties Unrealised gains arising on - 16,202 16,202 32,092 70,421 disposal of investment properties Unrealised gains on interest - 9,653 9,653 6,230 8,727 rate swaps Total gains on investments - 26,034 26,034 38,322 83,720 Expenses Property operating expenses (1,545) - (1,545) (1,508) (2,572) Service charge costs (1,729) - (1,729) (872) (6,074) Management expenses (3,259) - (3,259) (2,443) (5,977) Other operating expenses (1,011) - (1,011) (796) (1,607) Total operating expenses (7,544) - (7,544) (5,619) (16,230) Profit before finance costs and 15,175 26,034 41,209 49,369 117,554 tax Finance costs Interest receivable 862 - 862 643 1,617 Interest payable (7,702) - (7,702) (4,739) (12,549) Total finance costs (6,840) - (6,840) (4,096) (10,932) Profit before tax 8,335 26,034 34,369 45,273 106,622 Tax - - - 300 (460) Profit for the period 8,335 26,034 34,369 45,573 106,162 Dividends (10,360) - (10,360) (8,304) (17,835) Retained earnings (2,025) 26,034 24,009 37,269 88,327 Earnings per share Basic 10.4p 14.9p 34.4p Diluted 10.4p 14.9p 34.4p The total column of this statement represents the Group's Income Statement, prepared in accordance with International Financial Reporting Standards. 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. UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD FROM 15 SEPTEMBER 2005 TO 30 JUNE 2007 Share Share Distributable Retained Total Capital Premium Reserve Earnings Account £000 £000 £000 £000 £000 Balance as at 15 September - - - - - 2005 Net profit for the period - - - 106,162 106,162 Dividends paid - - - (17,835) (17,835) Issue of ordinary shares - 337,198 - - 337,198 Issue costs - (7,199) - - (7,199) Transfer to distributable - (298,610) 298,610 - - reserves Balance as at 31 December 2006 - 31,389 298,610 88,327 418,326 Net profit for the period - - - 34,369 34,369 Dividends paid - - - (10,360) (10,360) Balance as at 30 June 2007 - 31,389 298,610 112,336 442,335 UNAUDITED CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2007 30 June 2007 30 June 2006 31 Dec 2006 Unaudited Unaudited Audited £000 £000 £000 Non-current assets Investment properties 715,531 553,746 702,167 Total non-current assets 715,531 553,746 702,167 Current assets Accounts receivable 5,175 4,809 7,437 Cash and cash equivalents 33,929 12,999 37,873 Total current assets 39,104 17,808 45,310 Total assets 754,635 571,554 747,477 Current liabilities Accounts payable and accruals (18,426) (19,714) (24,428) Total current liabilities (18,426) (19,714) (24,428) Non-current liabilities Loans and borrowings (293,874) (193,770) (304,723) Total non-current liabilities (293,874) (193,770) (304,723) Total liabilities (312,300) (213,484) (329,151) Net assets 442,335 358,070 418,326 Equity Ordinary share capital - - - Share premium account 31,389 - 31,389 Distributable reserve 298,610 298,544 298,610 Retained earnings 112,336 59,526 88,327 Total equity 442,335 358,070 418,326 Net asset value per share 1.33 1.17 1.26 UNAUDITED CONSOLIDATED CASH FLOW STATEMENT FOR THE PERIOD FROM 1 JANUARY TO 30 JUNE 2007 1 Jan to 30 1 Jan to 30 15 Sept June 2007 June 2006 2005 to 31 Unaudited Unaudited Dec 2006 Audited £000 £000 £000 Profit before tax 34,369 45,273 106,622 Adjusted for: Interest received (862) (643) (1,617) Interest paid 7,702 4,739 12,549 Realised and unrealised gains on (26,034) (38,322) (83,720) investments Amortisation of finance costs 280 145 331 Operating profit before working capital 15,455 11,192 34,165 changes Decrease/(increase) in trade and other 1,981 (316) (4,930) receivables (Decrease)/increase in trade and other (6,001) (2,907) 23,968 payables (4,020) (3,223) 19,038 Net cash inflow from operating activities 11,435 7,969 53,203 Cash flows from investing activities Purchase of investment properties (4,018) (16,024) (652,930) Disposal of investment properties 7,035 - 25,756 Interest received 862 643 1,617 Net cash inflow/(outflow) from investing 3,879 (15,381) (625,557) activities Cash flows from financing activities Equity raised - - 337,198 Proceeds from long term borrowings - - 738,000 Repayment of long term borrowings (1,196) - (424,550) Issue costs of borrowing and equity - - (10,037) raising Interest paid on loans (7,702) (3,981) (12,549) Dividend paid (10,360) (8,304) (17,835) Net cash (outflow)/inflow from financing (19,258) (12,285) 610,227 activities Net (decrease)/increase in cash and cash (3,944) (19,697) 37,873 equivalents Cash and cash equivalents at beginning of 37,873 32,696 - period Cash and cash equivalents at end of 33,929 12,999 37,873 period This information is provided by RNS The company news service from the London Stock Exchange

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