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The results for the first half of 2008 reflect the decreases in property values which, under IFRS, are reflected in profit before tax. Investment profit, which is the recurring measure of profitability for a UK REIT, fell marginally by £0.9m or 3.9%, which, if it were not for a charge of £1.6m relating to empty rates, would have shown an increase of 3.0%. This misguided, ill-conceived tax will continue to act as a drag on profit and regeneration until it is, hopefully, reformed. Results| | June 2008 | June 2007 | | | Net rental income | £39.4m | £34.7m | +13.5% |
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| Investment profit | £22.3m | £23.2m | -3.9% |
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| Profit/(loss) before tax | (£236.7m) | £192.3m | n/a | | Adjusted earnings per share | 8.2p | 8.6p | -4.7% |
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| Earnings/(loss) per share | (86.8p) | 70.9p | n/a |
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| Dividend per share | 4.9p | 4.8p | +2.1% |
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Net rental income increased by £4.7m compared with the first half of 2007. An analysis of this increase is as follows:| | £m | | Acquisitions/(net of sales) | 4.6 |
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| Lettings – investments | 2.0 |
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| Lettings – developments | 1.4 |
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| Rent reviews and renewals | 0.8 |
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| Voids – expiries/breaks | (1.8) |
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Voids – insolvencies | (0.4) | | Reduction in surrender premiums | (1.2) |
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| Empty rates | (1.6 |
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| Other outgoings | 0.9 |
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| Increase in net rental income | 4.7 |
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Administration expenses reduced by £0.3m reflecting lower staff costs whilst the Group’s share of joint venture profits fell by £0.4m due to a performance fee paid to Brixton for 2007.
Net interest payable increased by £5.5m to £15.3m over the previous half year figure, reflecting the effect of the acquisitions in the second half of 2007. Interest capitalised on developments increased from £3.7m to £6.0m reflecting the significant increase in development activity. Income cover at June 2008 was 1.8 times compared with 2.6 times and 2.2 times at June and December 2007 respectively.
The calculation of investment profit is shown below:
| | June
2008
£m | June
2007
£m | Dec
2007
£m | | Net rental income | 39.4 | 34.7 | 72.5 | | Administration expenses | (3.9) | (4.2) | (8.3) | | Net interest payable | (15.3) | (9.8) | (22.4) | | Share of joint ventures’ investment profit | 2.1 | 2.5 | 4.8 | | Investment profit | 22.3 | 23.2 | 46.6 |
Adjusted earnings per share were 8.2p compared with 8.6p in the previous first half, a decrease of 4.7% which is higher than the 3.9% reduction in investment profit due to the increase in the number of shares in issue in the first half of 2008. Excluding the effect of empty rates, adjusted earnings per share would have increased by 2.3%.
The revaluation deficit of £245.3m was the principal driver behind the loss before tax of £236.7m. Included within this figure is a profit of £0.5m arising on the repurchase of £5m nominal of the 5.25% 2015 Bond and disclosed separately as exceptional interest income. Basic earnings per share showed a loss of 86.8p compared with a positive result of 70.9p in the first half of 2007.
Dividend
The Board has resolved to pay an interim dividend of 4.9p per share, an increase of 2.1% over last year’s interim dividend of 4.8p. The dividend of 4.9p will be 100% in the form of a Property Income Distribution (“PID”). Payment of the dividend will be made on 30 December 2008. The record date is 28 November 2008 and the ex-dividend date is 26 November 2008.
Our dividend policy is to aim to achieve consistent, progressive dividend growth each year based on the level of investment profit. The Board remains committed to its policy of distributing a significant proportion of its investment profit. Given the current economic environment and, in particular, the imposition of empty rates, the Board has decided to increase the interim dividend by only 2.1%.
Balance Sheet | | June
2008 | Dec
2007 | | | Adjusted NAV per share | 448p | 545p | -17.8% | | Net debt/property | 42% | 37% | | | Net debt/equity | 69% | 55% | | Note: Adjusted net asset value (“NAV”) per share is a UK property industry measure which excludes deferred tax relating to the revaluation of investment properties and the fair value of derivative financial instruments net of attributable taxation. The table below sets out this calculation.
| | June
2008
£m | Dec
2007
£m | | Basic net asset value per balance sheet | 1,161.7 | 1,432.6 | | Adjustments: | | | | Deferred tax on revaluation surpluses | 4.1 | 5.7 | | Fair value of derivative financial instruments | 50.2 | 35.9 | | Adjusted net asset value | 1,216.0 | 1,474.2 | | Basic NAV per share from IFRS balance sheet | 428p | 529p | | Adjusted NAV per share | 448p | 545p |
During the first half of 2008 capital expenditure on acquisitions and development amounted to £14.9m. Capital commitments at 30 June 2008 amounted to £61.7m compared with £70.1m at the end of 2007.
Adjusted NAV per share as at 30 June 2008 was 448p, compared with 545p at 31 December 2007, a decrease of 17.8% due predominantly to the deficit of £245.3m, equivalent to 90p per share, arising from the revaluation of the Group’s portfolio.
Finance
Net debt at the half year excluding interest rate derivatives was £835.4m compared with £804.1m at the end of 2007 – an increase of £31.3m reflecting capital expenditure on developments and the final installment of the REIT conversion charge paid during the first half. Net debt/equity was 69% (2007: 55%) based on adjusted net assets and net debt/property was 42% (2007: 37%).
We commented at the time of our Preliminary Announcement in March 2008 and also in previous reports during both 2007 and 2006 that the level of gearing was below the level at which Brixton has operated its business over the last few years and that maintaining a relatively low level of gearing at that stage of the property cycle was appropriate. This was because we believed that there would be future opportunities to use our balance sheet capacity and the acquisitions in 2006 and particularly in2007 are evidence of this. In addition we anticipated that there would be a potential correction of pricing in the direct property market. This low level of gearing of prior periods has provided the balance sheet strength to withstand the reduction in property values evidenced since June 2007.We also have the benefit of our unsecured funding strategy which gives us the financial flexibility to react quickly to opportunities as they arise.
The main financial risks for the Group are liquidity risk and interest rate risk. The Group maintains a mixture of short term funding through, typically, 5 year unsecured bank facilities and longer term funding through the unsecured bond market.
All of the Group’s on-balance sheet debt is now unsecured and all of its wholly owned properties are unencumbered.
Since 1995 all debt on the balance sheet has been raised on an unsecured basis and this is a fundamental part of our liability strategy.
At 30 June 2008 the Group had £415m of committed, bilateral bank facilities available of which £185m were undrawn. Bank facilities continue to be an important source of short term finance for the Group providing it with flexibility on competitive terms to fund its current and future business requirements. The weighted average maturity of all borrowings was 5.5 years with 41% of gross debt repayable after more than 5 years and 51% repayable in 2 to 3 years. It is the Group’s policy to extend and spread maturities whenever possible as part of the process of managing its funding risk.
The average cost of Group debt at 30 June was 4.8% or 5.0% including share of joint ventures’ debt compared with 5.3% and 5.5% respectively at the end of 2007. At the half year end 87% of the Group’s debt was at fixed or capped rates compared with 63% at the end of 2007.
The Company raises finance at both fixed and floating rates of interest. It uses interest rate derivatives on a non-speculative basis to manage its exposure to floating rate debt in order to protect it against adverse interest rate movements and also to reduce the level of fixed rate debt when it considers that it can benefit from falls in short term interest rates. It does not operate with any pre-determined ratios of fixed to floating rate debt but management constantly review the interest rate profile against existing and forecast market conditions.
The hedging strategies used in the joint ventures are subject to the agreement of the joint venture partners and the banks who provide the finance.
The market value of our net debt as at 30 June 2008 was £768.8m compared with a book value of £835.4m.This reduction of £66.6m compares with £13.5m at the end of 2007 and is equivalent to 25p per share. This amount is not recognised in the balance sheet unlike the fair value of derivative financial instruments, equivalent to 18p per share.
Risks and Uncertainties
The principal risks and uncertainties facing the Group for the remaining six months of the financial year are consistent with those outlined on page 11 of the Annual Report and Accounts 2007.
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