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Article Excerpt
Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good morning and welcome to Brixton plc's 2008 half year results presentation. A web link to the slides that accompanies the presentation can be found in the email notification of this conference call. Alternatively the presentation can be downloaded at the Company's website at www.brixton.plc.uk.
I would now like to hand over to Brixton's Chief Executive, Tim Wheeler, to give a presentation of the results. This will be followed by a question and answer session.
TIM WHEELER, CEO, BRIXTON PLC: Good morning ladies and gentlemen and welcome to this presentation of Brixton's 2008 half year results. My name is Tim Wheeler, Chief Executive and I have Steven Owen, the Deputy Chief Executive here with me. The accompanying slide presentation can also be found on our website www.brixton.plc.uk.
So please let me start. All observers will be aware that the UK commercial property market is in something of an apocalyptic mood. But given our underlying performance and core strengths as a business, there is some way out of here, at least for Brixton.
So perhaps I could explain the format of the presentation. The content that we will be running through today are first an introduction and overview. I'll then pass over to Steve for the financial and valuation review. I'll end here with operations and the outlook.
So the introduction and overview. First slide, slide three, the background. Most of you will be familiar with the background of the Company, but suffice to say that in the last 10 years Brixton has grown to dominate the West London industrial market, which is the powerhouse of the UK's service-based economy, and the location of the highest value real estate of its type in the world.
As you will also be aware Brixton become a REIT at the start of 2007. Our portfolio is shown on this slide. Brixton's share of the total portfolio is just over GBP2.2b worth of property, that's 19m square feet, in 1,300 units on 90 estates. The concentration means that nearly 80% by value is in Greater London.
Turning to a highlighted commentary on the results, and it's worth me just reading out this quotation. As we anticipated, the commercial property market has become more challenging in response to the credit crunch and slowing economies. There is confusion and an element of denial over direct property pricing due to lack of transactions.
However, Brixton continues to see good levels of rental growth, nearly 4% in the first half of 2008, from its activities and our financial strength, cost of debt at 5%, and flexibility make us very competitive.
Net rental income grew 13.5%. And whilst profit before tax and non-adjusted earnings per share under IFRS reflect the downward valuation movements, investment profit, which is the true measure of recurring profit for a UK REIT, only marginally reduced. And this would have increased by 3% if the surprise imposition of empty rates is ignored.
Brixton has an advantage and a resilience, given the focus of our portfolio, finances and human resources. And potential near-term distress should bring opportunities in our specialist sector.
Looking at an overview, Brixton continues to show positive rental growth against a low and declining market trend. This is because of our unrivalled business model and our strong operational performance.
The key to this is really fourfold. Firstly, our strategic delivery. You will remember that we exited from the majority of our secondary markets in 2006 with over GBP0.5b worth of sales. We reinvested some of the proceeds in more prime areas through to the end of 2007, taking advantage of opportunist purchases, particularly with the market becoming less certain.
Our development program was timed to conclude in the early part of this year and deliver into what are predominantly supply-constrained markets and untypical of the rest of the UK for industrial space.
We have no immediate plans to start any new developments in the second half of 2008. And we have deliberately made no new investment acquisitions in the year-to-date.
The second key differential is our financial strength. All the on balance sheet debt is unsecured. And we have GBP185m worth of committed un-drawn facilities. And the first refinancing is at the end of next year and only amounts to GBP60m.
Our debt equity gearing stands at 69%, which is a loan to value ratio of 42%. We have taken the decision this year to increase the fixed element of our debt to 87% at June, the average cost of our total debt being 4.8%, or 5% including the JVs, which is one of the most, if not the most competitive in the sector.
The absolute key to Brixton's business is the third point, which is our pricing power. We continue to exert with 3.9% transactional rental growth in the first half of this year compared with IPD's industrial rental growth of 0.5% for the same period.
The fourth and final point relates to the resilience of our portfolio with a diverse customer base, no non-UK government tenants paying more than approximately 2% of the rent, and a good spread of the top 100 tenants paying just over 60% of the total rent.
The average unexpired lease term in our portfolio is more than seven years. And the annualized loss of rent, i.e. the exposure to insolvencies, is only 1.2% of our rent roll.
I'd now like to pass you over the Steven Owen for his summary of the financial and valuation review.
STEVEN OWEN, DEPUTY CEO, BRIXTON PLC: Thank you Tim. And now I will deal with the financial and valuation review.
Looking at the financial summary of our results, adjusted NAV per share as at June 30, 2008 was down 17.8% to GBP4.48 due predominantly to the valuation deficit of 10%, or GBP245.3m, which is equivalent to GBP0.90 per share. Over the 12 months to June 2008 the NAV has fallen by nearly 25% from an all time high of GBP5.95.
On the whole portfolio, the valuers increased their estimated rental values, or ERVs, by 0.9% in the first half. And on our combined lettings, rent reviews and lease renewals we exceeded their December 2007 estimates by 3.9%.
Net rental income was up 13.5% to GBP39.4m due to acquisitions and lettings. On a like-for-like basis, and excluding empty rates, the increase was 5.5%.
I will be commenting frequently on the various items, both including and excluding empty rates which came into effect on April 1, 2008, as this misguided, ill-conceived tax, as indicated in previous reports, is a significant drag on our recurring earnings and will continue to be until it is reformed or abolished.
Investment profit, or underlying profit was down 3.9% to GBP22.3m, the key reasons for which I'll explain later. Excluding empty rates it was up 3%.
Adjusted earnings per share were down by 4.7% to GBP0.082. This decrease of 4.7% 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 empty rates, adjusted EPS went up 2.3% to GBP0.088.
The IFRS loss before tax of GBP236.7m and the corresponding loss per share of GBP0.868 were due to the revaluation deficit of GBP245.3m referred to above.
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% to GBP0.049.
Turning now to the components of investment profit, net rental income for the six months to June 30, 2008 was GBP39.4m, an increase of GBP4.7m or 13.5% over the previous half year figure. An analysis of this increase is set out in detail in the financial review in the half year report.
But in summary, the increase in rent from acquisitions net of sales was GBP4.6m. Lettings contributed GBP3.4m, of which GBP1.4m was from developments, with reviews and renewals showing a GBP0.8m increase.
These uplifts were offset by reductions due to voids of GBP2.2m of which GBP0.4m related to insolvencies.
No surrender premiums were received in the first half of 2008 compared with GBP1.2m in the first half of 2007.
The empty rates charge for the first half of 2008 was GBP1.6m compared with GBP60,000 for first half of 2007.
Other outgoings decreased by GBP0.9m thus benefiting net rental income.
Administration expenses reduced by GBP0.3m reflecting lower staff costs. Whilst the Group's share of joint venture profits fell by GBP0.4m due to a performance fee paid to Brixton for 2007.
Net interest payable increased by GBP5.5m to GBP15.3m over the previous half year figure, reflecting the effect of the acquisitions in the second half of 2007.
Interest capitalized on developments increased from GBP3.7m to GBP6m, 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.
In summary, investment profit decreased by GBP0.9m or 3.9% to GBP22.3m, mainly due to the effect of empty rates. Excluding empty rates, it would have been 3% higher due to the increase in like-for-like net rental income and the reduction in administration costs offset in part by the reduction in share of JV profit and the increase in net interest payable.
Adjusted earnings per share were GBP0.082, or GBP0.088 excluding empty rates, compared with GBP0.086 in the previous first half. Following the conversion to REIT status on January 1, 2007, no corporation tax has been charged against investment profit.
Turning now to the summarized Group balance sheet, adjusted NAV per share fell by GBP0.97 to GBP4.48. The valuation deficit equivalent to GBP0.90 per share was the key reason for this reduction, as I previously explained, together with dividends paid of GBP0.136, offset by the contribution from investment profit.
Gearing increased from 55% to 69%...
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