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Aug 19 2003
Steven Owen, Deputy Chief Executive
BRIXTON - Interim results 2003
Results and dividend
Q.
These numbers are a bit of a mixed bag. Could you take me through the key elements of them?
A.
Sure. The four key measures that we have, and I’ll go through them individually. But the first one is the net rental income. That was up 3.2 per cent on a like-for-like basis over the first half of last year. Because of the affect of acquisitions and sales, we actually saw a slight decrease in our investment profits of 1.9 per cent. But our pre-tax profits were up 0.5 per cent because of various exceptional profits that have come through. On the capital side of the business, our adjusted net asset value is down 2.2 per cent over the December 2002 figure to 318p and that reflected the £24.9m valuation deficit on the half-year revaluation of our portfolio. But overall, although the numbers do look slightly mixed, I think the performance has been quite resilient based on a weak economic background, and also based on weak occupier demand that we’ve seen over the last 18 months to two years. So in summary, I would say that these results are quite encouraging in a difficult market.
Q.
As you say, achieved against a mixed economic outlook, yet you’ve actually raised the dividend again. At what point will you find that something must give and that that thing might just be dividend growth?
A.
One of the key things that we have been emphasising over the last two or three years, is the strong cashflow that is generated from the portfolio. We have been selling high yielding properties and reinvesting in lower yielding but better growth properties. And we’re starting to see the benefits of that through the rent review increases that we’ve been able to generate through that process, and through the increases that we’re generating from lettings. On the cost side, we try and keep our administrative costs low, and we have one of the lowest administrative costs in the sector. We’ve been able to reduce our average cost of interest over the last four or five years. And so if we can continue to maintain strong cashflow from the portfolio and keep our costs low, then we should be able to maintain our increase in dividend and maintain our unbroken record, which currently goes back over 35 years.
Valuation
Q.
Could you talk me through the pressures which are continuing to drive down net asset values?
A.
Sure. The key reason for the falling in net asset value at the half-year was the £24.9m deficit on the valuation of the portfolio. And as was the case in the whole of 2002, it was the office portfolio that suffered the largest decrease. It suffered a decrease of 8.7 per cent in the first half compared with a decrease of 8.2 per cent for the whole of last year andthat reflects weakening rental levels in the South East office market. On the industrial portfolio, the deficit was only 0.5 per cent, which in pounds terms is only £6.6m out of a total portfolio of £1.3bn. So it’s a very, very marginal reduction.
Q.
So, are you moderately happy with the performance of the industrial sector at valuation therefore?
A.
Yes I think we are, particularly in this climate. And what we have seen over the first half year and now moving into the second half year, is an increase in the level of enquiries and lettings and that should translate through the higher income in due course into higher values, assuming all of the factors remain the same.
Q.
So what are the problems you are facing on the office side? I know that it’s only 13 per cent of the overall portfolio, but nevertheless places like Aviator Park haven’t let yet, have they?
A.
That’s right, but we only completed the first phase of Aviator Park at the end of last year. It’s 100,000 sq ft. But the key drivers on the office portfolio valuation have been the reduction in the value as estimated rental values for South East office properties and the lack of tenant demand.
Q.
When do you think valuations are going to turn around?
A.
That’s a very good question, and the valuation is an external process, and it is outside our control. The valuation process depends on many things; what rental levels are doing; what yields are doing and what the general market is doing as well as sentiment within that market. All I can say is that so far this year, particularly in the second half of this year, the level of enquiries and lettings are up. There seems to be cautious signs of optimism coming back into the market. And if we can continue to drive the income stream forward, then that will have to be reflected in the valuation, assuming that existing factors remain the same as they do in 12 months time.
Q.
And do you hold out any hopes for a better performance from the office side of the portfolio.
A.
Again, that really depends on how much occupier demand does come back into the market. But occupier demand has been weak so far this year. And it remains to be seen how strong the economic recovery is, particularly in the South East office market. But the key driver for our performance going forward is going to come from the industrial portfolio.
Balance sheet
Q.
Gearing fell slightly at the half year to 86 per cent. Why was that?
A.
We sold three properties in the first half, and we didn’t buy any properties in the first half, and development expenditure was quite limited. So our debt actually fell by £29.7m. So that enabled the gearing to fall despite the asset value falling, the gearing did fall by 2 per cent to 86 per cent.
Q.
And where would you like your gearing to be normally?
A.
We operate in the range of 80-90 per cent on a normalised basis. And we’re quite happy operating at that level, partly because of the long and expired income stream that we’ve got. Partly because our income cover at two times is quite high. And with that strong cash flow that comes from the portfolio, we’re then able to operate with a relatively high, but in my opinion, safe level of gearing. And the reason for doing that, is that we are then able to augment our property returns into higher equity returns which should be more appealing to equity investors.
Q.
If any acquisition opportunities came along, would you be in a position to actually move quickly for those?
A.
Yes, we’re not constrained in terms of being able to raise finance to fund acquisitions. We have access to the bond markets. We have access to the banking markets. Through our joint ventures we have access to equities through our joint venture partners. And we also, through the joint ventures, again, have access to non-recourse debt finance. There are more sales that we will be making, so that should realise cash for future investment into the business. And at the half-year we had £266m of unutilised bank facilities, again capable of use for taking advantage of future opportunities.
Q.
And how would you sum up your balance sheet position for me?
A.
We have a strong balance sheet. We’ve had a strong balance sheet for the last two or three years. We also have £1.1bn of unencumbered assets which gives us considerable flexibility and strength to the balance sheet.
FORWARD LOOKING STATEMENT
This interview contains certain forward-looking statements with respect to the financial condition, results of operations and businesses of the Brixton plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors which could cause actual results or developments to differ materially from those expressed or implied by these forward looking statements and forecasts. The statements have been made with reference to forecast price changes, economic conditions and the current regulatory environment. Nothing in this announcement should be construed as a profit forecast.
Past share performance cannot be relied on as a guide to future performance.
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