Final Results

 

 

 

 

 

 

 

 

Real Estate Investors Plc

(“REI” or the “Company” or the “Group”)

 

Final Results

For the year ended 31 December 2016

 

Continued growth driving profitability and income returns

 

Financial Highlights

·    Gross property assets of £201.9 million (2015: £157.5 million), up 28.2%

·    EPRA** NAV per share of 66.2p (2015: 64.5p), up 2.7%

·    EPRA** EPS 2.8p (2015: 0.8p), up 250%

·    Revenue £13.5 million (2015: £8.4 million), up 60.7%

·    Underlying profit before tax* of £5.2 million (2015: £1.4 million), up 271%

·    Total dividend per share for 2016 of 2.625p, up 31.3%, final dividend 0.75p per share

·    Net loan to value of 37.2% (2015: 22.4%)

·    Average cost of debt reduced to 4.1% (2015: 5.9%)

·    Cash and available facilities of £17 million

 

 

Operational Highlights

·    Contracted rental income of £14.9 million (2015: £11.9 million) up 25.2%

·    Like for like portfolio valuation of £158.3 million (2015: £152.3 million), up 3.9%

·    Acquisitions of criteria compliant properties totalling £38.6 million, at a net initial yield of 8.98% and reversionary yield of 9.97%

·    Non-core property disposal proceeds totalling £5.2 million, as REI recycle capital into criteria compliant assets

·    Active asset management with 25 new lettings and 5 lease renewals

·    Overall occupancy increased to 93% (2015: 89%) – up 4.4%

·    232 tenants (2015: 211) up 9.9%

·    £45.2 million of new bank facilities, £41million secured at 1.75% above LIBOR and £4.2 million at 2.0% above base

·    WAULT*** 4.71 years to break and 6.76 years to lease expiry (2015: 5.28 years to break and 6.67 years to lease expiry)

·    Total ownership 1.4 million sq ft (2015: 1.1 million sq ft) up 27.2%

·    Prime Birmingham City ownership of 156,425 sq ft

·    £6.1 million of acquisitions since the year end

 

 

Definitions

*      underlying profit excludes profit/loss on revaluation and interest rate swaps and tax

**     EPRA = European Public Real Estate Association

***   WAULT = Weighted Average Unexpired Lease Term

 

Paul Bassi, CEO of Real Estate Investors Plc commented:

“Another excellent year of progress, despite an uncertain economic and political backdrop, during which we secured record property ownership, revenue and contracted rental income, with our underlying profits rising 271% to £5.2 million, and set to grow further as we start to see the full contribution from the acquisitions made in the prior year. Our like for like portfolio valuation was up 3.9% over the year, reflecting the active asset management that we have undertaken.  With the benefit of our clear pathway to future growth in rental income, we also anticipate further growth in our dividend payments.

 

London and the South East have enjoyed over 50 years of exceptional economic prosperity, but we are now seeing a political, social and economic re-balancing within the UK.  The regions, in particular Birmingham and the West Midlands, look set to enter a new golden era, propelled in part by the arrival of major projects such as HSBC’s HQ move and HS2, but also by the continued commercial growth in the area.”

 

Enquiries:

Real Estate Investors Plc Paul Bassi	+44 (0)121 212 3446
Smith & Williamson Corporate Finance Limited Azhic Basirov/David Jones	+44 (0)20 7131 4000
Liberum Jamie Richards/Ben Roberts	+44 (0)20 3100 2000
Gable Communications Limited John Bick	+44 (0)20 7193 7463 +44 (0)7872 061 007

 

 

About Real Estate Investors Plc

 

Real Estate Investors Plc is a publicly quoted property investment company with a portfolio of 1.4 million sq ft of commercial property managed by a highly-experienced property team with over 100 years of combined experience of operating in the Midlands property market across all sectors.

 

The Company’s strategy is to invest in well located, real estate assets in the established and proven markets of central Birmingham and the Midlands, with income and capital growth potential, realisable through active portfolio management, refurbishment, change of use and lettings.  The portfolio has no material reliance on a single asset or occupier.

 

On 1st January 2015, the Company converted to a REIT.  Real Estate Investment Trusts are listed property investment companies or groups not liable to corporation tax on their rental income or capital gains from their qualifying activities.

 

The Company aims to deliver capital growth and income enhancement from its assets, supporting a progressive dividend policy. Further information on the Company can be found at www.reiplc.barques.dev.

 

 

Chairman’s and Chief Executive’s Statement

 

Overview – Another Strong Financial Performance in a year of Change

 

The marketplace has been dominated by the European Referendum which resulted in uncertainty that provided a small window of opportunity shortly before and after the referendum result. Since then, strong demand for investment property within our region has resulted in valuations holding firm or rising, due to the level of demand from a cross section of investors. These investors have been property companies, with access to debt, quoted REITs and high net worth individuals, of which foreign investment represented 21% of volume.  Equally, there has been limited demand from institutional investors.

 

We find ourselves in a strong regional investment market, with demand outstripping supply against the backdrop of a resurgent regional economy which has been boosted by the fall in sterling and, also the availability of capital and investors who are increasingly recognising the attractiveness of the commercial property market in the Midlands.

 

We secured £38.6 million of criteria compliant assets, during the period of uncertainty, and as demand returned, we sold £5.2 million of our assets into a strong investment market (all sales were exchanged during the year but completed in 2017). 

 

Occupancy has improved to 93% and rental income increased by 27.2%.  Retail demand was exceptionally strong and we anticipate rent reviews and lease renewals to improve our rent roll and WAULT during 2017.  Active asset management has resulted in 25 new lettings, 5 lease renewals and a number of soft rent deals are set to be reviewed.

 

The record contracted rental income has supported our dividend payment to our shareholders, and will continue to support our dividend strategy going forward.  Our revenue was £13.5 million, up 60.7%, and our underlying profit £5.2 million, up by 271%, despite receiving no material benefit in H1 from our acquisitions.

 

We believe that 2017 will continue to see demand for regional real estate as investors look outside London, and we will see the return of institutional and pension fund buyers alongside existing demand from property companies, HNWs and REITs.

 

Financial Results – Well placed for further growth in 2017

 

We are pleased with our performance this year, delivering underlying profits of £5.2 million, up 271% on 2015, having absorbed our purchase costs, including the increased stamp duty charge in March 2016.  We delivered pre-tax profits of £8.2 million, which included a £1.6 million reduction in value of our BHS property in Walsall.  We anticipate recovering this in 2017 as part of the property is under offer to a national retailer, and the loss on our interest rate swap of £566,000, both non-cash items. Furthermore, these results have been achieved, despite receiving no material benefit in H1 from our £38.6 million of acquisitions. 

 

The investment property market was strong in the final quarter of 2016, with limited available opportunities that matched our strict investment criteria. Our available capital will be allocated during H1 2017 and will contribute towards our growing rent roll and further support our dividend growth objectives. 

 

At the year end, our portfolio was valued at £201.9 million, up 28.2%, (pre-sales) and it is our intention to maintain the portfolio at this level or above, whilst delivering on our commitment of paying a progressive, fully covered dividend.  Our contracted rent is up 25.2%, despite disposals comprising £509,000 of contracted rent, and our revenue is up 60.7% to £13.5 million.  Our like for like valuation and capital value per square foot have also increased by 3.9%.

 

Net loan to value has increased to 37.2%, capitalising on our ability to secure debt on favourable terms and benefit from historically low interest rates, and investing this capital to grow our portfolio.  Average cost of debt has fallen to 4.1%.

 

Post year end, we have secured a further £6.1 million acquisition, providing £469,875 of rent per annum, with a WAULT of 12.29 years to break, which represents a net initial yield of 7.22%.  Our total contracted rents have risen to £15.5 million, up from £14.9 million at 31 December 2016, plus an additional £370,000 of new lettings in legals.

 

 

Dividend – continued growth

 

One of our key objectives is to deliver on our commitment to a progressive, fully covered, dividend, which has now risen for 4 consecutive years.  Our total dividend paid for 2016, is 2.625p, which is 31.3% up on the previous year.  This was paid quarterly at a rate of 0.625p for each of the first three quarters, with the final quarter payment being 0.75p.  The first three quarterly payments for 2017 will be 0.75p per quarter, with a final dividend for the fourth quarter to be confirmed.  The proposed dividend timetable for the final dividend is as follows:

 

 

Dividend Timetable 

 

Ex-dividend date:	30 March 2017
Record date:	31 March 2017
Dividend payment date:	28 April 2017

 

Finance and Banking

Whilst the banking industry continues to restructure, we believe that it has finally normalised in respect of its lending objectives and appetite to lend.  All of our bankers have a strong desire to lend to us, on competitive terms.  The general market place also has access to bank debt, and this has in part contributed to the strengthening and competitiveness of the regional investment market.  Our average cost of debt has reduced significantly to 4.1%, and is set to reduce further.

 

We have secured new facilities of £41 million with RBS at 1.75% above Libor and £4.2 million with AIB(GB) at 2% above base.

 

Outlook – Strong regional economy and investor appetite

 

We anticipate some volatility and uncertainty around Brexit discussions, but also opportunities. We believe that there will be windows that will allow us to secure property on favourable terms where we know we can add value.  At the same time, we also anticipate a strong marketplace for making strategic sales where we can secure a premium, mindful of our need to retain income to underpin our dividend capability. 

 

In overall terms, the combination of our market reputation, financial strength, access to capital, regional knowledge and the foundation of our existing portfolio and the income derived from it, places us in an excellent position to continue to grow the rent roll and occupancy and deliver on our commitment to pay a progressive dividend.

 

 

The REI Portfolio

 

Market Update – income and capital growth potential

 

Much of the capital chasing regional property assets is seeking “defensive-income” rather than the intensive asset management opportunities that are sought by REI. We believe that other investors are proceeding mainly on a macro basis; that these markets offer good value and that yields will continue to run close to long-term averages and rental growth will further bolster performance. All of this is likely, but the strategy of REI is at a more micro level; we acquire property assets, from distressed vendors or less asset management intensive organisations, which require significant time and resources to manage, and produce a stable, growing income stream.

 

We have seen yields continue to fall for the ‘stabilised-income’ property assets, driven by the weight of money from investors now seeking opportunities in the UK’s regions.

 

Investment activity in UK commercial property reached a record level of £61.5 billion, according to Lambert Smith Hampton.  Regional commercial property markets are now well placed to see capital growth through demand, reaching a record investment volume of £39.5 billion in 2016. This is set to continue, which should drive further outperformance in the regional markets.

 

Passing rents in regional office markets are below the levels of rent required to make new development viable. This low level of rent limits supply and leads to rental growth as the need for new space forces tenants to accept higher rents.

 

Retail is split between high street and retail warehousing. On the high street, strong competitive retail pitches in dominant regional towns continue to show very low vacancy rates and offer stable long-term cash flow, with the opportunity for rental growth. We are also witnessing rental growth in some smaller market towns where rents over-corrected in the downturn.

 

It would be wrong to deduce from the failure of BHS and Austin Reed that high street retailing is finished. Both of these retailers had structural problems, some of which continue to be debated in the press, but it is important to remember that shopping remains the nation’s favourite pastime. Our high streets are constantly evolving and remain an essential element of multi-channel retailing. This is evidenced by most BHS units having been re-let across the UK, and our unit in Walsall is also under offer to a national retailer.

 

Retail warehousing is witnessing close to record low vacancy rates as a restrictive planning policy and lack of development combine with retailers’ requirements to offer large format stores, free parking and ‘click and collect’ to consumers.

 

With our improving portfolio, we expect rental growth to offer REI the potential for further dividend growth and sustainable capital growth over time. The occupational market story is particularly resonant in smaller lot size regional property. As the majority of fund managers set a minimum target lot size for individual assets of £10 million to £15 million, market pricing of smaller lots has been more stable, having not experienced the excess demand pressure seen in the broader investment market. Accordingly, returns have been more closely linked to the underlying occupational market performance, and across the REI portfolio, we are witnessing rental growth and low vacancy rates, with the portfolio moving from a position of over-rent, to one of reversionary potential over the last two years.  We are also seeing significant investor demand from HNW and private property companies, supported by traditional bank debt for property valued between £1 million to 5 million.

 

Property Report – Continued Portfolio Growth

 

Our property portfolio continues to grow in size and scale and was valued at £201.9 million at the year-end (2015: £157.5 million), up 28.2%.  The investment market was characterised by changeable degrees of investor confidence, brought about by political and economic instability, which we sought to take advantage of. We committed to acquiring in the first half of the year while prices were still discounted and selling towards the end of the year when we saw investor confidence improving and demand returning. 

 

We acquired six properties with a purchase price of £38.6 million and a combined average net yield of 8.98%. We have seen good value in well located regional offices, having purchased office properties during the year with average net initial yields of 8.86% and capital value prices of £91 per square foot.   We have witnessed an improving appetite from the institutional and UK funds, refocusing from London to UK regions. In taking advantage of this position, we successfully disposed of 3 properties with a total value of £5.2 million.

 

The current sector weightings are (table below excludes disposal properties which completed in 2017):

 

	Value £m	%	Sq Ft	Contracted Rent £	ERV £	Net Initial Yield %	Reversionary Yield %	Occupancy %
Birmingham City Centre	37.5	19.0	156,425	1,979,148	2,770,970	5.28	7.40	78.77
Other Midlands	151.4	77.0	1,190,356	12,596,613	13,786,086	8.32	9.10	87.77
Total Core	188.9	96.0	1,346,781	14,575,761	16,557,006	7.72	8.76	86.72
Non-Core Portfolio	4.1	2.1	32,007	332,826	382,326	8.04	9.23	100.00
Land	3.7	1.9	–	–	–	–	–	–
Total Portfolio	196.7	100	1,378,788	14,908,587	16,939,332	7.58	8.62	92.93%

 

 

The portfolio is split between the main commercial property sectors, in line with the Company’s objective to maintain a suitably balanced investment portfolio, but with a relatively high exposure to retail and offices and a low exposure to industrial and ‘other’ property sectors.  The portfolio is split (by income) into the following sectors: Retail (56%); Offices (42%); and other (2%).

 

Acquisitions – Successful Strategy acquiring income growth

 

REI has an investment strategy of targeting income generation in a well-diversified regional portfolio. We believe it is still possible to identify ‘value’ in the market, despite recent price inflation, by targeting properties where provable rental growth will underpin long term capital growth. We remain confident this strategy can deliver enhanced income cover to the Company’s target dividend in the years ahead and provide the stable long term returns to reward our shareholders.

 

We have enjoyed an active period, successfully executing property acquisitions of £38.6 million with a combined income of £3.5 million and a potential reversion to £3.9 million, showing an 8.98% net initial yield and 9.97% reversionary yield (excluding land acquisition).  New tenants from acquisitions include Grafton Group, C&J Clark, Iceland, Argos, B&M Ltd, Wilko Retail, Sainsburys, Bathstore, Hewlett Packard, Boots Opticians and Premier Inn. We have seen our contracted rental income rise to a record £14.9 million per annum, up 25.2% since the same time last year, even after deducting contracted rental income from investment sales of £509,000.  We would have liked to have secured additional assets during H2, but this reflects the limited number of criteria compliant opportunities available and the desire by vendors to retain assets for income, unless they secure a premium sale price. We remain disciplined and well placed to acquire further criteria compliant properties in the region with longer term income and capital growth potential.

 

 

New acquisitions include:

 

·      Market Square Shopping Centre, Crewe – June 2016 (Retail – £20 million, excluding acquisition costs), acquired from a major UK based fund, representing a net initial yield of 9.0%. The covered shopping centre incorporates 25 retail units with predominantly ground floor retail accommodation and first floor ancillary. In total, there is 154,130 square feet of retail and ancillary accommodation, with 294 external car parking spaces. Current tenants include River Island, Halifax, Superdrug, Brighthouse, Ernest Jones, Hutchinson 3G, Argos, Iceland, B&M, Peacocks and Poundworld. The retail space has 100% occupancy, with a weighted average unexpired lease term (WAULT) of 5.1 years to expiry and 4.4 years to break.

 

The acquisition provides significant opportunities to ‘add value’ through rent reviews, lease renewals and the creation of additional units on the substantial external car parking facility to increase the retail footprint of the overall site which is attractive for retailers and consumers alike. There is also scope to restructure the scheme, which will provide potential for significant capital uplift. The location will further benefit from nearby substantial developments of a new college and offices.

 

Since acquiring the property in June we have opened discussions with adjoining land owners and are in discussions to amalgamate the adjoining land which would significantly improve overall value and open better prospects for sale value. 

 

·      West Plaza, West Bromwich – May 2016 (Mixed Hotel and offices – £8 million, excluding acquisition costs). This investment comprises a ten-storey building adjoining Metro Court – an existing REI building. 95,400 sq ft with a strong / diverse spread of tenants. The current rent reflects a low overall rental rate of £6.90 per square foot, with good scope for reversionary potential. Broadly 50% of the income is underpinned to Whitbread, trading as Premier Inn, at £310,000 p.a., which is reversionary following an outstanding rent review. The existing WAULT to expiry is 10.6 years and 4.7 years to break options. We are currently in discussions with Premier Inn. There is also a longer-term opportunity for residential development, as the building lends itself to residential occupation, with significant capital upside potential.

 

·      Titan House, Euston Park, Telford – February 2016 (offices – £2.75 million, excluding acquisition costs). Acquired from receivers, the building is situated on a modern business park, adjacent to Telford Central Station and Junction 5 of the M54. Titan House comprises 33,166 sq ft of modern office accommodation over four floors and 103 car parking spaces. The property is let to Hewlett Packard Enterprise Service UK Ltd with 4.5 years remaining and a current rental income of £270,000 p.a. The purchase price reflects a net initial yield of 9.9% and a low capital value rate of £83 per square foot. Whilst the property is fully occupied, the tenant currently benefits from a rent-free period until lease expiry in October 2020 over the entire first floor, which offers good prospects for rental improvement.

 

·      Boundary House, 2 Wythall Green Way, Birmingham – February 2016 (offices – £2.45 million, excluding acquisition costs). This comprises a modern 2-storey office building, positioned in a good strategic location on the southern side of Birmingham. The property is fully let to Grafton Group (UK) Plc with an unexpired term of 6.5 years at a low rent equivalent to £11.4 per square foot, producing total rental income of £243,547 p.a. at a net initial yield of 9.4%. Grafton Group (UK) Plc, (which has a Dun & Bradstreet rating of 5A1), has historically expanded within the building as space has become available, taking the majority for its Selco subsidiary and the remainder for its group executive.

 

·      Commodore Court, Nuthall Road, Nottingham – April 2016 (Mixed Retail and Residential – £2.38 million, excluding acquisition costs), acquired from a private property company. The investment comprises a prominent mixed use development, situated on a busy arterial route in Nottingham. The building incorporates three fully occupied retail units, occupied by Sainsbury’s Supermarkets, Barnardos and Bathstore, with WAULT to expiry of 11.3 years and 5.3 years to break options. Since acquisition, we have extended the lease to Bathstore for a further 5 years. The property produces a rental income of £216,710 p.a. and the purchase price reflects a net initial yield of 8.53%.

 

·      62/68 High Street, Bromsgrove – November 2016 (Mixed Retail with Residential – £1.3 million excluding acquisition costs). The property occupies a prominent and improving location on the High Street and was acquired at an attractive initial yield of 8.44%, which offers good prospects for capital improvement. The investment is well let to Boots Opticians, Thorntons, Smart Ideas and Loritas Bakery. Rents within the subject property have been ‘rebased’ over the past five years to a level where we feel there is good scope for medium term future improvement.

 

·      Land at Bourne Street, Coseley – April 2016 (Land £1.1 million, excluding acquisition costs) which has been acquired with a view to securing planning approval for approximately 100 residential units for subsequent sale. The application has the support of the planning officers.

With our established regional contacts, we actively sought new investments throughout H2 and appraised and made formal offers on over ninety million pounds’ worth of opportunities.  In the majority of cases, we felt that pricing was unrealistic and decided not to take them further, and we felt comfortable in the knowledge that better opportunities would come along in the future. 

Sales

 

We regularly receive approaches for our assets although we firmly believe that we are set to benefit from rental and capital growth, and so decline most approaches, unless we can secure a premium or strategic sale.

 

We have seen an improvement in competition for assets and investment values have risen as a consequence. We have identified a number of properties that are suitable for sale. In principle, we will only make sales at or above existing book values and will consider sales on the basis that we can maintain our income to support our dividend growth strategy.  Two of the property assets sold, Norwich and Crawley, were classified as non-core. Total sales were £5.2 million, with contracted rental of £509,000 per annum, all of which exchanged in 2016 but completed in 2017.

 

Asset management

 

Successful asset management strategies including rent reviews, new lettings, lease extensions and the retention of tenants beyond their contractual break clauses have helped to minimise the natural decrease in WAULT and offset the impact on valuations of acquisition costs and the recent increase in SDLT.   We have actively sought to vacate some of our properties for refurbishment and re-letting at higher rents and longer lease terms, which will improve our WAULT over the next 12 months.

 

As part of our usual activities we are in proactive discussions with a number of tenants across the portfolio regarding various asset management initiatives, including new lettings, lease renewals, lease extensions, rent reviews, lease surrenders, refurbishment, or a combination of the above.  Our portfolio has continued to benefit from steady occupier demand. In terms of rental levels, new benchmarks set over the previous twelve months are still being achieved on lettings. We are also now seeing higher rental values starting to be reflected in our current property valuations. This combined activity should provide further revaluation surplus.

 

Key asset management initiatives include: –

 

·      Gateway House, 50-53 High St, Birmingham – the building comprises a mixed retail and office scheme of 26,878 sq. ft. extending over seven floors. In the ground floor retail unit, we have recently agreed a surrender from the previous tenant Arcadia, which has allowed a new 10 year lease to Holland & Barrett. Shelter has surrendered their lease, previously on a single floor and we have agreed a new overriding 10 year lease over two floors with Shelter, at higher rents and overall improved WAULT. The second floor offices have also been refurbished, with prospects to increase rental and capital values.

 

·      Acocks Green Shopping Centre, Acocks Green – the property comprises a 65,645 sq ft retail scheme in Acocks Green on the outskirts of Solihull and Birmingham. The scheme is anchored by Wilkinson, Boots, Argos and Lloyds Bank, with a WAULT at purchase of 3.7 years. We have agreed dilapidations on two retail units, where the proceeds will support the cost of capital improvements. We have recently agreed a new lease to a national retailer on 10 year terms at levels in excess of our assumed rental tone. We are also under offer for a new 20-year lease term to a national restaurant operator – the agreement incorporates three void units and eliminates a void unit which was otherwise difficult to let. We have re-geared a number of existing leases, which has extended the unexpired lease term. Since acquiring the property in 2015, our management initiatives have reduced voids and associated costs and we further future anticipate capital appreciation through current lease restructuring and letting activity.  The Wilkinson lease is to be extended by 10 years and Lloyds Bank has agreed to remove the December 2017 break, effectively adding 5 years to the term.  The successful implementation of these events should provide further capital growth potential.

 

·      Peat House, 1 Waterloo Way, Leicester – a prominent 43,295 sq. ft. office building located in the city’s central office core and directly opposite Leicester railway station. We have increased the rental tone during the year, having recently completed the refurbishment of two floors, utilising dilapidations receipts. We have subsequently completed a new 10 year lease to Bellrock FM at £13.50 per square foot and the remainder of the space is either in legals or under offer.

 

·      Dudley Street, Wolverhampton -acquired from NAMA (as a distressed asset) for the sum of £2 million in December 2015. The unit is occupied by River Island, with a lease expiry in March 2016.  River Island were suggesting that they would like to vacate the property and we were under offer to sell the freehold to a well-known owner occupier at £3.2 million.  However, negotiations with the tenant continued throughout the year and we are pleased to confirm that we have agreed a new 10-year lease at £189,000, which is a proven market rent.  

 

·      Bearwood Shopping Centre – a number of tenant negotiations concluded during the year; Alan Warwick took a new 10-year lease at a higher rent, Greggs subsequently agreed to a lease renewal for 10 years, Lloyds Pharmacy extended their lease by a further 5 years at the same rent and we are in solicitors hands to let the former Store 21 Unit (which went into receivership) to Costa Coffee on a 10 year lease at a higher rent than the previous tenant.

 

·      Park Street, Walsall – we are under offer to Poundstretcher to take the whole of the ground floor of the store previously occupied by BHS. Additionally, we are in discussions with local developers to buy a long leasehold of the upper floors with a view to re-developing the upper floors for residential use.  The collapse of BHS has continued to have a negative impact on our December 2016 valuation figures, but we are working to an effective solution and remain confident of a positive outcome.

 

·      Commodore Court, Nottingham – we have extended Bathstore’s lease from June 2021 to June 2026 at the same rent with a 6 month rent free period.

 

·      Dutton Road Coventry – we have agreed a 5 year extension to the lease expiry to July 2024, subject to a reduction in the rent of £5.50 per square foot (open market rent) and a 3-month rent free period.  Subsequently, we are under offer to sell the long leasehold interest to a local authority at a level significantly above historical valuations.

 

New tenants to our existing portfolio include: Holland & Barrett, Viva Brazil, Footasylum, Costa Coffee and Poundworld.

 

We expect recent asset management initiatives to improve the WAULT of the portfolio, with tenants keen to agree lease extensions or to waive their options to break, enhancing the rent roll as increases are agreed at review or renewal.

 

 

REI’s Regional Review

 

Economy/Trade/Business/Employment

·      Prime Minister Theresa May confirmed a HS2-fuelled £1 billion investment in Birmingham city centre, with new offices, tram line and 4,000 new homes around the planned Curzon Street HS2 rail station, creating 36,000 new jobs and generating £1.4 billion for Birmingham’s economy

·      City’s region economic growth outperforms UK rivals with 4.7 per cent increase in economic output between 2014 and 2015 to £44.5 billion

·      Birmingham has been named the most entrepreneurial city outside London in a report released by Start-Up Britain, with figures showing that 17,473 new businesses were registered in Birmingham during 2016, a 25% increase on 2015

·      Firms in the West Midlands experienced the fastest rate of growth in 3 months during June to August following the Brexit vote

·      The Office for National Statistics confirms that the West Midlands is bucking the national trend with a 0.9% rise in employment thanks to a buoyant local economy, compared to a decrease across the UK of 0.1%

·      West Midlands companies took on new staff at the highest rate since April 2015 in February 2017, according to the latest Lloyds Bank Regional Purchasing Managers’ Index (PMI) survey. 

 

Property

·      Regional commercial property markets experience record investment volume of £39.5 billion in 2016

·      In 2016, office take up in Birmingham city centre hit 800,000 sq ft, ahead of the 5 year average

·      City centre prime headline rents have risen by 8% to above pre-recession levels at £32.50psf, compared to £30 psf in 2015 with further uplift to £33.50 psf anticipated by year-end 2017

·      Deals in the City were up in 2016 with 139 transactions completed, compared to 132 in 2015

·      In 2016, two City centre deals above 50,000 sq ft completed, with the largest being the pre-let of 90,000 sq ft to PwC at One Chamberlain Square

·      The £200 million forward funding of Three Snowhill agreed between M&G Real Estate and developer Ballymore was the largest investment transaction of any major regional city during 2016

·      Birmingham continued to see strong interest from overseas buyers in 2016, with foreign investment representing 21% of volumes

·      JLL forecasts that Birmingham house price growth will outpace the rest of the UK over the next 5 years, with a predicted growth of 21.7%, driven by the increasing appetite for City centre living

·      HMRC led amalgamation of government departments set to relocate to 240,000 sq ft in Birmingham City centre

·      The Annual Crane Survey states that Birmingham and Leeds are building offices at the highest rate in a decade with 1.4 million sq ft of new office space being built, a 50% rise on the previous year and the highest activity since the report began 15 years ago

·      The 148-acre Birmingham Business Park, home to 24 businesses, enjoyed its lowest vacancy rates for a decade thanks to a surge in regional investment and development

·      A joint venture between Singaporean wealth manager GIC and student property group Unite announced a deal to purchase Aston Student Village for £227 million.

 

Manufacturing/Technology

·      Jaguar Land Rover achieved best February on record with sales at 40,978, a 9% increase on February 2016, having sold more than 580,000 vehicles worldwide in 2016, its best ever performance and equal to one vehicle sold per minute, a 20% increase on 2015

·      London Stock Exchange listed global technology firm Lombard Risk has revealed plans for a major new technology hub in Birmingham

·      Birmingham has over 400 schools, 15 universities and 3 university colleges within an hour’s drive of the City centre.

 

Travel/Tourism

·      Birmingham voted a better place to live than Rome, LA and Dubai.  The quality of life in Birmingham is better than major global cities such as Rome, Los Angeles and Dubai, according to a new report.  Birmingham is the highest-ranked English city aside from London in the 2017 Quality of Living Index which is published by financial services firm Mercer

·      HS2 is expected to spark a West Midlands renaissance with the Midlands HS2 growth strategy estimating that the project will create 104,000 jobs and 2,000 apprenticeships 

·      Birmingham Airport has reported not only its busiest year in history but also plans to invest £100 million in its facilities and infrastructure and has since reported a record January with 775,176 passengers using the terminal, a rise of 16.1% on January 2016.  The airport also announced that British Airways is to return to operation from the airport following a decade-long hiatus

·      Birmingham announces it is bidding to host the 2026 Commonwealth Games, bringing the biggest sporting event in the history of the city, in a move that could generate £390 million for the local economy

·      Official statistics reveal that in the first 9 months of 2016, there were a record breaking 12.2 million visits to English regions outside London, up 4% on 2015, with spend up 2%

·      With under 25s accounting for over 40% of its population, Birmingham is one of the youngest cities in Europe. One third of the city’s inhabitants are of ethnic minority, making it one of the most multicultural places in the UK.

 

Our Stakeholders

 

Our thanks to the dedicated support of our staff, advisers, tenants and shareholders, without whom our continued growth would not be possible, and for this we thank them and look forward to another year of progress and prosperity for Real Estate Investors Plc.

 

 

 

 

John Crabtree                                                                         Paul Bassi

Chairman                                                                                Chief Executive

17 March 2017                                                                       17 March 2017

 

 

 

FINANCE DIRECTOR REPORT

 

FINANCIAL REVIEW

 

Overview

 

Our main objectives for the year were to continue to increase shareholder value, refinance unencumbered properties and deploy the funds generated in criteria compliant investment properties, continue our progressive dividend policy, and increase our underlying profit before tax, EPRA earnings per share and net assets per share. All of these objectives have been achieved.

 

	31 December 2016	31 December 2015	Change
Gross Property Assets	£201.9 million	£157.5 million	+28.2%
Underlying profit before tax	£5.2 million	£1.4 million	+271%
EPRA EPS	2.8p	0.8p	+250%
EPRA NAV per share	66.2p	64.5p	+2.7%
EPRA NNNAV per share	64.2p	62.8p	+2.2%
Net Assets	£121.2 million	£117.9 million	+2.8%
Loan to value	43.1%	28.0%	-53.9%
Loan to value net of cash	37.2%	22.4%	-66.1%
Dividend per share	2.625p	2.0p	+31.3%
Like for like growth in rental income	£11.3 million*	£11.4million	-0.9%
Like for like capital value per sq ft	£149.33 sq ft	£143.68 sq ft	+3.9%
Like for like valuation	£158.3 million	£152.3 million	+3.9%

 

*Includes loss of BHS rental income at Walsall

 

Results for the year

 

Our underlying profit before tax rose to £5.2 million (2015: £1.4 million). Profit before tax (IFRS) totalled £8.2 million (2015: £12.2 million), including a surplus on sale of investment properties of £nil (2015: £1.7 million) and a surplus on revaluation of investment properties of £3.5 million (2015: £8.6 million), together with a deficit on the market value of our interest rate hedging instruments of £566,000 (2015: profit £669,000).

 

Acquisitions of investment properties totalled £38.6 million during the year on criteria compliant properties. Rental income for the year was up 60.7% to £13.5 million (2015: £8.4 million) but the full benefit of these purchases will be realised in 2017. The investment properties are revalued externally at 31 December and generated a surplus on revaluation of £3.5 million.

 

The decision to dispose of certain properties during the year resulted from properties reaching maturity, receiving an offer that could not be refused and continuing to dispose of the “legacy” portfolio which we inherited and is out of area.

 

We continue to review our overhead base and administrative expenses of £3.5 million (2015: £3.1 million) rose mainly as a result of an increase in employee numbers, a bonus provision, (plus employers’ National Insurance) of £865,000 (2015: £732,000) and a provision for costs of the Long Term Investment Plan of £500,000 (2015: £300,000).

 

Interest costs for the year rose to £3.2 million (2015: £2.6 million) and the weighted average cost of debt reduced to 4.1% (2015: 5.9%) as a result of the new facilities taken out during the year with Royal Bank of Scotland of £41 million at 1.75% over LIBOR and with Allied Irish Bank (GB) of £4.2 million at 2% over base rate.

 

Earnings per share were:

Basic – 4.3p (2015: 7.5p)

Diluted – 4.3p (2015: 7.4p)

EPRA – 2.8p (2015:  0.8p)

 

Shareholders’ funds increased to £121.2 million at 31 December 2016 (2015: £117.9 million) and the NAV per share increased:

 

Basic NAV – 65p (2015: 63.1p)

EPRA NAV – 66.2p (2015: 64.4p)

EPRA NNNAV – 64.2p (2015: 62.6p)

 

 

 

Finance and banking

 

Total drawn debt at 31 December was £85 million (2015: £44 million) with undrawn facilities of £5 million (2015: £2 million).  During the year, the Group agreed a new £41 million facility with Royal Bank of Scotland at 1.75% above LIBOR and a new £4.2 million facility with Allied Irish Bank GB at 2% above base. The weighted average cost of debt is 4.1% (2015: 5.9%) and the weighted average debt maturity was 5 years (2014: 5.8 years). The loan to value (LTV) at 31 December 2016 was 43% (2015: 28%) and the LTV net of cash was 37.2% (2015: 22%). 

 

Long Term Incentive Plan (LTIP)

 

On 8 June 2015, the terms of the LTIP were revised and previous options cancelled. The LTIP is designed to promote retention and to incentivise the executive directors to grow the value of the Group and to maximise returns.  A provision has been made in the accounts of £500,000 (2015: £300,000) in respect of the LTIP.

 

Taxation

 

The Group converted to a Real Estate Investment Trust (REIT) on 1 January 2015. Under REIT status the Group does not pay tax on its rental income profits or on gains from the sale of investment properties. The tax charge for the year is in respect of bank interest received and the movement on the deferred tax asset is in respect of the financial instruments. The Group continues to meet all of the REIT requirements to maintain REIT status.   

 

Dividend

 

Under the REIT status the Group is required to distribute at least 90% of rental income taxable profits arising each financial year by way of a Property Income Distribution. REI commenced paying quarterly dividends in 2016. Interim dividends of 0.625p per share were paid in July, October and January and the Board proposes a final dividend of 0.75p per share payable in April 2017 making a total of 2.625p for the year (2015: 2.0p) an increase of 31.3%. All of these dividends were paid as ordinary dividends and the allocation of future dividends between PID and non PID will continue to vary.

 

 

 

 

Marcus Daly

Finance Director

17 March 2017

 

 

 

 

Real Estate Investors plc

Consolidated statement of comprehensive income

For the year ended 31 December 2016

 

 

	Note	2016	2015
		£000	£000
Revenue		13,453	8,381
Cost of sales		(1,600)	(1,477)
Gross profit		11,853	6,904
Administrative expenses		(3,503)	(3,072)
Surplus on sale of investment property		–	1,687
Change in fair value of investment properties		3,531	8,552
Profit from operations		11,881	14,071
Finance income		45	113
Finance costs		(3,157)	(2,609)
(Loss)/profit on financial liabilities at fair value through profit and loss		(566)	669
Profit on ordinary activities before taxation		8,203	12,244
Income tax charge		(121)	(157)
Net profit after taxation and total comprehensive income		8,082	12,087
Total and continuing earnings per ordinary share
Basic	3	4.34p	7.46p
Diluted	3	4.28p	7.40p
EPRA	3	2.81p	0.81p

 

The results of the Group for the period related entirely to continuing operations.

 

 

Real Estate Investors plc

Consolidated statement of changes in equity

For the year ended 31 December 2016

 

 

	Share capital	Share premium account	Capital redemption reserve	Other reserve	Retained earnings	Total
	£000	£000	£000	£000	£000	£000
At 1 January 2015	11,142	15,533	45	–	37,843	64,563
Issue of new shares	7,500	–	–	–	–	7,500
Premium on issue of new shares	–	37,500	–	–	–	37,500
Expenses of share issue		(1,312)				(1,312)
Share based payment	–	–	–	300	–	300
Dividends	–	–	–	–	(2,700)	(2,700)
Transactions with owners	7,500	36,188	–	300	(2,700)	41,288
Profit for the year and total comprehensive income	–	–	–	–	12,087	12,087
At 31 December 2015	18,642	51,721	45	300	47,230	117,938
Share based payment	–	–	–	500	–	500
Dividends	–	–	–	–	(5,359)	(5,359)
Transactions with owners	–	–	–	500	(5,359)	(4,859)
Profit for the year and total comprehensive income	–	–	–	–	8,082	8,082
At 31 December 2016	18,642	51,721	45	800	49,953	121,161

 

Real Estate Investors plc

Consolidated statement of financial position

At 31 December 2016

 

 

	Note	2016	2015
		£000	£000
Assets
Non current
Intangible assets		–	171
Investment properties	4	198,202	155,092
Property, plant and equipment		14	16
Deferred tax		685	806
		198,901	156,085
Current
Inventories		3,695	2,380
Trade and other receivables		2,925	3,385
Cash and cash equivalents		11,775	8,777
		18,395	14,542
Total assets		217,296	170,627
Liabilities
Current
Bank loans		(20,412)	(20,499)
Provision for current taxation		(23)	(23)
Trade and other payables		(6,000)	(4,554)
		(26,435)	(25,076)
Non current
Bank loans		(65,106)	(23,585)
Financial liabilities		(4,594)	(4,028)
		(69,700)	(27,613)
Total liabilities		(96,135)	(52,689)
Net assets		121,161	117,938

 

		2016	2015
		£000	£000
Equity
Share capital		18,642	18,642
Share premium account		51,721	51,721
Capital redemption reserve		45	45
Other reserve		800	300
Retained earnings		49,953	47,230
Total Equity		121,161	117,938
Net assets per share	3	65.0p	63.3p

 

 

 

 

 

 

 

Real Estate Investors plc

Consolidated statement of cash flows

For the year ended 31 December 2016

 

 

		2016	2015
		£000	£000
Cash flows from operating activities
Profit after taxation		8,082	12,087
Adjustments for:
Depreciation		4	3
Net goodwill written off		53	–
Net surplus on valuation of investment property		(3,531)	(8,552)
Surplus on sale of investment property		–	(1,687)
Share based payment		500	300
Finance income		(45)	(113)
Finance costs		3,157	2,609
Loss/(profit) on financial liabilities at fair value through profit and loss		566	(669)
Income tax charge		121	157
Increase in inventories		(1,315)	(14)
Decrease in trade and other receivables		461	360
Increase in trade and other payables		281	1,291
		8,334	5,772
Interest paid		(3,157)	(2,609)
Net cash from operating activities		5,177	3,163
Cash flows from investing activities
Purchase of investment properties		(39,462)	(58,175)
Purchase of property, plant and equipment		(2)	(13)
Proceeds from sale of investment properties		–	15,339
Interest received		45	113
		(39,419)	(42,736)
Cash flows from financing activities
Proceeds from issue of share capital net of expenses		–	43,688
Equity dividends paid		(4,194)	(2,700)
Proceeds from new bank loans		42,200	7,000
Payment of bank loans		(766)	(5,912)
		37,240	42,076
Net increase in cash and cash equivalents		2,998	2,503
Cash, cash equivalents and bank overdrafts at beginning of period		8,777	6,274
Cash, cash equivalents and bank overdrafts at end of period		11,775	8,777

 

NOTES:

Cash and cash equivalents consist of cash in hand and balances with banks only.

Real Estate Investors plc

Notes to the preliminary announcement

For the year ended 31 December 2016

 

1.  Basis of preparation

The consolidated financial statements have been prepared under the historical cost convention, except for the revaluation of properties and financial instruments held at fair value through the profit and loss account, and in accordance with International Financial Reporting Standards (IFRS) adopted by the European Union.

It should be noted that accounting estimates and assumptions are used in preparation of the financial statements.  Although these estimates are based on management’s best knowledge and judgement of current events and actions, actual results may differ from those estimates.  The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are set out in the Group’s annual report and financial statements.

The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries made up to 31 December each year.  Material intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated on consolidation.  Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

 

The principal accounting policies are detailed in the Group’s annual report and financial statements.

 

Going concern

 

The Group has prepared and reviewed forecasts and made appropriate enquiries which indicate that the Group has adequate resources to continue in operational existence for the foreseeable future. These enquiries considered the following:

 

·      the significant cash balances the Group holds and the low levels of historic and projected operating cashflows

·      any property purchases will only be completed if cash resources or loans are available to complete those purchases

·      the Group’s bankers have indicated their continuing support for the Group. The Group’s £20 million facility with Lloyds Banking Group is due for renewal in April 2017. Whilst the process of agreeing terms for the renewal of these facilities, which would be subject to credit approval, documentation and due diligence, has not commenced at the present time the bank have confirmed the intention to roll the facilities at a similar level for a period of three to five years from the expiry of the facilities.

·      In June 2016, the Group agreed a new £41 million facility with Royal Bank of Scotland and a £4.2 million facility with Allied Irish Bank (GB).

 

For these reasons, the directors continue to adopt the going concern basis in preparing the financial statements.

 

2.  Gross profit

	2016	2015
	£000	£000
Revenue             -     Rental income	13,019	8,152
-    Surrender premiums	434	229
	13,453	8,381
Cost of sales       -     Direct costs	(1,600)	(1,477)
	11,853	6,904

 

 

3.  Earnings per share

 

The calculation of earnings per share is based on the result for the year after tax and on the weighted average number of shares in issue during the year.

 

Reconciliations of the earnings and the weighted average numbers of shares used in the calculations are set out below.

 

	2016			2015
	Earnings	Average number of shares	Earnings per Share	Earnings	Average number of shares	Earnings per share
	£000			£000
Basic earnings per share	8,082	186,420,598	4.34p	12,087	161,968,543	7.46p
Diluted earnings per share	8,082	188,827,343	4.28p	12,087	163,968,543	7.40p

 

The European Public Real Estate Association indices below have been included in the financial statements to allow more effective comparisons to be drawn between the Group and other business in the real estate sector.

 

 

 

 

EPRA EPS per share

 

	2016			2015
	Earnings	Shares	Earnings per Share	Earnings	Shares	Earnings per share
	£000	No	p	£000	No	p
Basic earnings per share	8,082	186,420,598	4.34	12,087	161,968,543	7.46
Net surplus on valuation of investment properties	(3,531)			(8,552)
Profits on disposal of investment properties	–			(1,687)
Change in fair value of derivatives	566			(669)
Deferred tax	121			134
EPRA earnings	5,238	186,420,598	2.81	1,313	161,968,543	0.81

 

EPRA NAV per share

	2016			2015
	Net assets	Shares	Net asset value per share	Net assets	Shares	Net asset value per share
	£000	No	P	£000	No	P
Basic	121,161	186,420,598	65.0	117,938	186,420,598	63.3
Dilutive impact of share options and warrants	–	2,406,745		–	1,375,000
Diluted	121,161	188,827,343	64.2	117,938	187,795,598	62.8
Adjustment to fair value of derivatives	4,594	–		4,028	–
Deferred tax	(685)	–		(806)	–
EPRA NAV	125,070	188,827,343	66.2	121,160	187,795,598	64.5
Adjustment to fair value of derivatives	(4,594)	–		(4,028)	–
Deferred tax	685	–		806	–
EPRA NNNAV	121,161	188,827,343	64.2	117,938	187,795,598	62.8

 

 

 

4.  Investment properties

 

Investment properties are those held to earn rentals and for capital appreciation.

 

The carrying amount of investment properties for the periods presented in the consolidated financial statements is reconciled as follows:

		£000
Carrying amount at 1 January 2015		102,017
Additions – acquisition of new properties		57,689
Additions – subsequent expenditure		486
Disposals		(13,652)
Change in fair value		8,552
Carrying amount at 31 December 2015		155,092
Additions – acquisition of new properties		38,642
Additions – subsequent expenditure		820
Adjustment		117
Change in fair value		3,531
Carrying amount at 31 December 2016		198,202

 

 

5.  Publication

The financial information set out in this preliminary announcement does not constitute statutory accounts as defined in section 434 of the Companies Act 2006.  The consolidated statement of financial position at 31 December 2016 and the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of cash flows and the associated notes for the year then ended have been extracted from the Group’s financial statements upon which the auditor’s opinion is unqualified and does not include any statement under section 498 of the Companies Act 2006.  The statutory accounts for the year ended 31 December 2016 will be delivered to the Registrar of Companies following the Group’s Annual General Meeting.

 

6.  Copies of the announcement

 

Copies of this announcement are available for collection from the Company’s offices at 2^nd Floor, 75-77 Colmore Row, Birmingham, B3 2AP.