Half-Year Results to 31 December 2016
The underlying pre-tax profit* increased by 5.3% during the first six months to £7.9m (31 December 2015: £7.5m).
Statutory pre-tax profit for the half year was £9.1m (31 December 2015: £14.4m), including a revaluation surplus of £0.5m (31 December 2015: £6.9m).
EPRA adjusted earnings per ordinary share increased by 5.5% to 12.54p (31 December 2015: 11.89p).
EPRA net asset value per ordinary share increased marginally to 448p (30 June 2016: 446p).
Shareholders' funds rose to £282.3m (30 June 2016: £280.6m), while net debt to equity gearing and loan to value (LTV) were 28% and 21% respectively (30 June 2016: 25% and 20%).
Dividend
The Directors have declared an interim dividend of 9.88p per ordinary share, an increase of 3% over last year (31 December 2015: 9.59p). The dividend will be paid as a Property Income Distribution (PID) and split into two quarterly dividends of 4.94p each. The first quarterly dividend will be paid on 18 April 2017 to Shareholders on the register at the close of business 17 March 2017 and the second dividend will be paid on 17 July 2017 to shareholders on the register at the close of business on 16 June 2017.
Property Review
The number of tenant enquiries for Midlands' industrial property has remained steady during the first six months of our financial year and, so far, there has been no sign of any slowdown in activity.
Our vacancy rate at 31 December 2016 was 4.1% (30 June 2016: 3.2%), but would have been a record low of 2.5% if we had not voluntarily taken back a 64,000 sq ft industrial unit just prior to our half-year end.
Average rental increases on new lettings and lease renewals have been maintained at around 10% and, in some popular industrial locations, rental levels are continuing to rise in excess of this rate due to the tight supply of available space.
Industrial property values in the Midlands have remained stable and property yields unchanged since our previous valuation on 30 June 2016. The high yield and growing rental returns offered by industrial property are still very attractive to investors, but capital growth has been restricted, mainly due to a limited number of investment transactions.
During the period we acquired a prominent 70,182 sq ft industrial/warehouse building in Barton-under-Needwood for £5.6m. The property is located at the front of Barton Business Park, in the popular A38 corridor, midway between A50 and A5 trunk roads. Built in 2005, the unit is currently let at a rent of £0.41m per annum.
We also completed the acquisition of a pre-let office development at Grove Park, Leicester for £4.7m. The property comprises 20,829 sq ft of high quality offices let at an initial rent of £0.35m per annum.
Terms were agreed in November 2016 on our first pre-let development at i54 Wolverhampton. We shall be building a 44,250 sq ft industrial unit for Tentec Limited, a subsidiary of Atlas Copco. Completion is expected in December 2017 and the initial rent will be £0.28m per annum.
We sold a 12,000 sq ft office building in Henley-on-Thames during the half-year for £4.1m. The property became vacant in August 2016 and attracted considerable interest from local residential developers. The property was last valued for office use at £2.2m in June 2016.
Property Valuation
Cushman & Wakefield revalued our property portfolio at 31 December 2016. The investment properties and development land were valued at £373.6m (30 June 2016: £364.2m), which showed a revaluation surplus of £0.5m after acquisitions.
The initial yield on the investment properties was 6.3% (30 June 2016: 6.4%). The equivalent yield was unchanged at 7.2% (30 June 2016: 7.2%).
Cushman & Wakefield also revalued our trading properties at 31 December 2016. The total value was £1.9m, which showed an unrecognised surplus of £1.4m against book value.
Finance
We renewed our £64m banking facilities with HSBC during the half-year for a further 5 years to 2021 on a 30% lower margin.
We also repaid a £20m, 5.23% fixed rate loan we had with Lloyds Bank, which was due to expire in 2022, incurring an early debt repayment cost of £1.2m and took out a new £40m term loan facility with Scottish Widows for a period of 15 years, fixed at 3.5%.
As such, our weighted average cost of debt has reduced to 3.14% (30 June 2016: 4.1%) and our weighted average term remaining on debt has increased to 8.3 years (30 June 2016: 5.5 years).
Following the refinancing, total net borrowings at 31 December 2016 were £79.7m (30 June 2016: £71.2m), while undrawn banking facilities were £38.5m (30 June 2016: £27.0m).
Net debt to equity gearing at 31 December 2016 was 28% (30 June 2016: 25%) and LTV was 21% (30 June 2016: 20%).
Principal Risks and Uncertainties
The process for identifying, assessing and reviewing the risks faced by the Group is described in the Principal Risks and Uncertainties section on pages 16 and 17 of the 2016 annual report and financial statements, which is available on the Company's website.
A summary of the principal risks and uncertainties is set out below.
· Investment portfolio – tenant default, change in demand for space and market pricing affecting value.
· Financial – reduced availability or increased cost of debt finance, interest rate sensitivity and REIT compliance.
· People – retention/recruitment.
· Development – speculative development exposure on lettings, cost/time delays on contracts, inability to acquire land and holding too much development land.
In the view of the Board these principal risks and uncertainties are as equally applicable to the remaining six months of the financial year as they were to the six months under review.
Outlook
It is still too early to predict what the longer-term impact of leaving the EU will have on the UK economy and our business. However, for our second half-year, we expect to continue to benefit from the robust, regional industrial property market and remain positive about prospects for the full year.
Rupert Mucklow, Chairman
13 February 2017
*Excludes the profit on disposal of investment, development and trading properties, the revaluation of investment and development properties and derivative financial instruments and early repayment costs. See note 8.