F&C UK Real Est. Inv. Annual Results

 
TIDMFCRE 
 
To:                   RNS 
Date:                21 September 2017 
From:               F&C UK Real Estate Investments Limited 
LEI:                  2138001XRCB89W6XTR23 
 
(Classified Regulated Information, under DTR Annex 1 section 1.1) 
 
·     Share price total return* of 26.8 per cent for the year 
 
·     Portfolio ungeared total return* of 6.6 per cent for the year 
 
·     NAV total return* of 6.1 per cent for the year 
 
·     Dividend of 5.0 pence per share for the year, giving a yield* of 4.7 per 
cent on the year-end share price 
 
·     Dividend cover* increased to 94.4 per cent for the year 
 
* See Alternative Performance Measures 
 
Chairman's Statement 
 
The Group's net asset value ('NAV') total return* for the year was 6.1 per cent 
with a NAV per share as at 30 June 2017 of 100.1 pence, up from 99.2 pence per 
share at the prior year-end. 
 
The share price total return* for the year was 26.8 per cent with the shares 
trading at 106.8 pence per share at the year-end, a premium* of 6.7 per cent to 
the NAV. The increase in the share price for the year can primarily be 
explained by the fact that the share price at the previous year-end was trading 
at a 10.8 per cent discount, reflecting the initial fall experienced following 
the result of the EU referendum on 23 June 2016. Despite the move to a 
discount, the strength of the closed-ended sector was demonstrated as many 
open-ended funds were forced into short term selling of property to finance 
redemptions. In many cases, this was followed by the suspension of redemptions 
until the market stabilised. The share price rebounded relatively quickly 
following the initial shock and has been trading at a gradually increasing 
premium over the year. 
 
Property Market and Portfolio 
 
The UK commercial market delivered a total return of 5.6 per cent as measured 
by the MSCI Investment Property Databank ('IPD') UK Quarterly Index for all 
assets in the year to 30 June 2017. The first quarter of the year witnessed a 
price correction following the EU Referendum result, however, the subsequent 
three quarters saw a re-balancing and by the year-end, capital values had 
recorded a modest 0.9 per cent annual growth. Performance was driven by 
strength in investment demand for industrial property and alternative assets 
such as student accommodation, healthcare and self-storage, coupled with 
overseas buying of London property. All the standard segments of the IPD Index 
delivered positive benchmark total returns for the year. 
 
In the year to 30 June 2017, All Property performance was driven by a 4.7 per 
cent income return. Open market rental value growth was 1.9 per cent for the 
year, led by industrials, but the structural weakness of regional retail 
persisted with rental growth for this sector negative. After a fall in 
investment volumes around the time of the EU Referendum, activity has seen some 
recovery, driven by overseas buyers and local authorities. 
 
The Group's property portfolio produced an ungeared return* of 6.6 per cent 
over the year to June, outperforming the IPD Quarterly Index. Performance was 
driven primarily by an above market income return of 5.9 per cent. 
Unsurprisingly given the positive sentiment for the Industrial sector over the 
year, the portfolio's industrial and distribution assets, being exclusively 
located within the South East, were again the key contributors to performance, 
producing a total return comfortably in excess of both the IPD UK Quarterly 
Index and the market average in the sector for the period. Encouragingly, the 
portfolio's retail assets also outperformed their peers, though at a lower 
overall level of return. The portfolio's office assets offered poorer 
performance over the period and although the Central London assets performed 
broadly in line with their peers, they contributed negatively at the portfolio 
level. 
 
The portfolio offers an above market income yield, a predominantly fully let 
portfolio with a void rate of 5.6 per cent and contractual income with an 
average weighted lease term of approximately 7 years. As demonstrated by the 
present portfolio composition, the overall strategy is to retain an overweight 
position to Industrial and Warehouse property. 
 
The Company continues its cautious approach to the deployment of capital, with 
the primary focus having been on the disposal of non core and secondary assets 
at a time of low yields and discernible structural change in certain retail 
submarkets. Nevertheless, a number of buying opportunities are currently being 
actively considered with the Company's favourable cash position allowing for a 
planned and cautious approach to acquisitions. 
 
Borrowings and Refinancing 
 
The Group currently has in place a secured GBP90 million non-amortising term loan 
facility with Canada Life Investments, repayable in November 2026 and a GBP20 
million 5-year revolving credit facility agreement with Barclays Bank plc, GBP16 
million of which was drawn down at the year-end. This facility is available 
until November 2020. 
 
The Group's gearing* level, net of cash, represented 28.3 per cent of 
investment properties at 30 June 2017. The weighted average interest rate 
(including amortisation of refinancing costs) on the Group's total current 
borrowings was 3.2 per cent. The Company continues to maintain a prudent 
attitude to gearing. 
 
The Group had GBP16.6 million of cash available and an undrawn facility of GBP4 
million at 30 June 2017. 
 
Dividends and Dividend Cover 
 
Three interim dividends of 1.25 pence per share were paid during the year with 
a fourth interim dividend of 1.25 pence per share to be paid on 29 September 
2017. This gives a total dividend for the year ended 30 June 2017 of 5.0 pence 
per share, a yield* of 4.7 per cent on the year-end share price. In the absence 
of unforeseen circumstances, it is the intention of the Group to continue to 
pay quarterly interim dividends at this rate. 
 
The level of dividend cover* for the year was 94.4 per cent, compared to 91.7 
per cent for the previous year. The improvement in the level of cover can 
primarily be attributed to a reduction in the finance costs following the 
refinancing exercise in November 2015. 
 
Share Issues 
 
The Group has experienced continued market demand for its shares and issued 2 
million Ordinary Shares early in 2017 at a premium to the published net asset 
value at the time of each issuance, raising proceeds of GBP2.0 million. There 
continues to be demand for the shares, however, the Company currently has a 
significant amount of cash and further share issuances will only be made if it 
is considered to be in the interest of shareholders. 
 
At the year-end, there were 240,705,539 Ordinary Shares in issue. 
 
Responsible Property Investment 
 
The Company has taken measures to strengthen its approach to responsible 
property investment. An outline of the main actions is included in the 
Manager's Review. 
 
Outlook 
 
The outlook continues to be dominated by Brexit, with considerable uncertainty 
still remaining about the likely outcome of negotiations and the nature of the 
exit process. The UK general election occurred towards the end of the reporting 
period and, although the property market appears to have been little affected 
at the headline level, the result has added to the uncertainty, particularly 
surrounding business investment. Economic growth has disappointed recently and 
the extent to which fiscal austerity will be pursued is also unclear. Monetary 
policy was eased further in the wake of the Brexit vote but the timing and 
extent of policy normalisation will be a factor affecting the property market 
outlook. 
 
In an environment of relatively lower growth and increased economic and 
political uncertainty, property's income return should prove an attractive 
defensive characteristic to investors. The Board believes that the existing 
portfolio remains well placed to continue to deliver on the Company objective. 
 
Vikram Lall 
Chairman 
 
                                         * See Alternative Performance Measures 
 
Manager's Review 
 
Property Market 
 
The UK commercial property market delivered a total return of 5.6 per cent in 
the year to June 2017, as measured by the MSCI Investment Property Databank 
("IPD") all Quarterly and Monthly Funds Index for all-property. Performance was 
driven by an annual income return of 4.7 per cent, with capital values rising 
by 0.9 per cent. 
 
The first months of the review period witnessed a fall in capital values as the 
market absorbed the shock of the EU referendum result. Property has since seen 
a re-balancing with capital value growth returning to recover the ground lost 
during the early months of the financial year. The income return was largely 
unaffected during this period. 
 
The UK economy has continued to see growth, although the pace slackened in the 
second half of the period. Inflation has moved higher, in part reflecting the 
depreciation of sterling in the aftermath of the vote. Monetary policy was 
eased in August 2016 in response to the referendum result, with the bank rate 
reduced to 0.25 per cent. Gilt yields finished the reporting year higher than 
at the start, but with ten-year yields at 1.28 per cent, they remain at very 
low levels by historic standards. The Brexit decision has dominated the 
political sphere over the past year, with Article 50 invoked in March 2017 and 
negotiations commencing in June 2017. The Government called a snap election in 
June which failed to produce an overall majority and has widened the debate not 
just on Brexit but on fiscal policy and the UK's austerity programme generally. 
 
Property investment activity suffered during the immediate aftermath of the 
vote but has since recovered, helped by strong investment flows from overseas 
and also by purchases from local authorities taking advantage of low borrowing 
costs. Although there were some price reductions, most notably from the open 
ended vehicles that attempted to satisfy redemptions, these were on the whole 

fairly minor and available for only a brief window. Most deals proceeded and 
there was no flight of capital from the UK. Institutions were net sellers of 
property, but this was primarily in the first half of the reporting period. The 
open-ended retail funds struggled with liquidity issues in the immediate 
aftermath of the vote, but all have since re-opened and modest net inflows 
resumed towards the end of the reporting period. The year to June 2017 saw GBP52 
billion invested in property versus GBP59 billion in the previous year. 
Investment in offices and town centre retail assets was lower but the year saw 
growth in investment in industrials and logistics, and alternative assets. The 
banks have remained cautious in their new lending to property, both for 
standing investments and development. 
 
The year saw considerable equity invested in the market, but investors were 
generally cautious and favouring long-term secure income. There was some yield 
compression evident, particularly in the industrial market and some specialist 
markets such as healthcare and leisure, but shopping centres and retail parks, 
especially at the secondary end, fell from favour, with yields softening. 
 
Total return performance by segment saw some changes following the Brexit vote. 
Industrials and distribution property was seen as being relatively immune from 
Brexit and beneficiaries of both technological change and a structural change 
in retailing. As a result, they pulled further ahead of offices and retail to 
deliver a total return of 12.0 per cent. Offices delivered a 3.4 per cent 
return. The gap between London offices and the regions narrowed, with Rest of 
UK offices overtaking the City on an annual basis in terms of total returns. 
For retail, total returns were 3.3 per cent. As in previous years, a strong 
Central London shops market boosted the South East numbers but standard retail 
elsewhere under-performed the all-property average and shopping centres and 
retail warehousing were particularly weak. 
 
Open market rental growth was 1.9 per cent at the all-property level, 
representing a deceleration from the pace seen in the previous reporting 
period. At the market level, although retail property and regional offices 
recorded some moderation in rental growth, the main factor was a sharp 
deterioration in rental growth for Central London offices, although it did 
remain positive. In contrast, industrials saw some improvement in rental growth 
year on year and were the major driver behind rental growth performance. 
 
Gross income growth for the year to June 2017 was 2.7 per cent, with offices 
and alternatives performing well but all the main sectors seeing positive 
growth. This compares with 3.0 per cent in the previous year. 
 
The property market appears to have stabilised following the referendum result 
but considerable uncertainty remains and both investors and occupiers are 
cautious. The yield premium against gilts remains attractive and an 
all-property annual income return of 4.7 per cent may look appealing when 
compared against other assets. 
 
Portfolio 
 
The Company's property portfolio produced an ungeared total return* of 6.6 per 
cent over the year to June 2017 versus the IPD Quarterly index of 5.6 per cent. 
This outperformance was driven primarily by an income return* of 5.9 per cent, 
which was an improvement on 2016, and some way above the income return derived 
from the IPD Quarterly Index of 4.7 per cent. Capital growth was marginally 
below that of the Quarterly Index at 0.6 per cent. Portfolio turnover and 
thereby the burden of associated transaction costs were low, as were non 
recoverable costs linked to property voids, which is key in a relatively low 
returns environment. Over the three years to June 2017 the portfolio has 
delivered an ungeared total return* of 10.0 per cent per annum. 
 
At 30 June 2017 the value of the portfolio was GBP335.4 million. No assets were 
acquired over the year apart from some additional car parking space at Lochside 
Way, Edinburgh Park. This reflects the Manager's continued focus on driving 
performance from the existing portfolio at a time when market pricing has 
offered few attractive opportunities to acquire assets of an appropriate 
quality to satisfy the Company objective. On the other hand a sales programme 
has been undertaken to dispose of the secondary and non-core holdings to take 
advantage of investor appetite. A majority of these assets have been from the 
high street retail sector with a further three assets sold over the year at net 
premium to valuation. 
 
At the sector level the portfolio's industrial and distribution warehouse 
assets continued their run of outperformance, producing a total return* of 16.5 
per cent, in excess of both the IPD Quarterly Index and the sector average for 
the period. This is the fourth year in a row that industrial holdings have led 
the portfolio's returns, being primarily located in the core South East where 
limited supply and good levels of demand have driven performance. The 
portfolio's Retail sector outperformed its peer group over the year but Offices 
again underperformed, despite a generous yield advantage, on account of below 
market capital growth. 
 
Unsurprisingly the majority of the best performing assets were in the 
industrial and logistics sector, driven by a combination of both capital and 
income growth. Some of the addresses are familiar from last year, Lakeside 
Road, Colnbrook; Hemel Gateway, Hemel Hempstead and the two assets in 
Eastleigh, Hampshire all featuring in the top 5 performing assets. Chippenham 
Drive, Milton Keynes was the best performing asset over the year by weighted 
contribution following the refurbishment in 2016 that came in below budget, and 
the successful onward letting at, what was then, a new benchmark level of rent 
for refurbished stock in the locality. Following the expiration of the tenant's 
rent free incentive the property is now income producing and offers a 
meaningful contribution to the dividend. 
 
The portfolio's overweight position to retail warehousing acted as a brake on 
performance over the year, despite the sector experiencing an improvement in 
sentiment towards the end of the period as investors saw relative value against 
an earlier pick up in pricing elsewhere. Pleasingly the portfolio's assets 
within this sub-sector outperformed their peers over the year, a position 
mirrored by the portfolio's South East retail holdings. 
 
Challenges remain, in particular within the underperforming Offices sector. 
Despite a substantial yield advantage, negative capital growth associated with 
shorter unexpired lease terms, and risks associated with near term capital 
expenditure has weighed more heavily on some of the Company's assets than for 
the market as a whole. While this has led to poorer performance over recent 
quarters, this should provide a more sustainable base from which to approach 
lease events and asset management projects in order to enhance value. As an 
example of the work being undertaken in this regard since the period end, the 
lease on the office property at 15 London Road, Redhill has been re-geared to 
the Department for Work & Pensions to extend the term for a further five years 
at no capital cost. This has de-risked the asset in the short term and extended 
the income due without interruption. 
 
Following on from a sustained period of outperformance the portfolio's London 
assets at 24 Haymarket and 14 Berkeley Street, in Central London, are now 
performing below the overall quarterly return for the IPD Index, and therefore 
someway below the overall portfolio return. The lower yielding nature of the 
assets was supported by rental growth in the period to mid-2016 but this has 
since moderated somewhat. Both assets are multi-let, mixed use properties which 
offer underlying reversion in the rents particularly on the retail element. 
Given the point in the London capital cycle, the key to their success moving 
forward will be the ability to capture this improvement in rents receivable 
through either active management (Berkeley Street) or the rent review mechanism 
(24 Haymarket). The portfolio retains a relatively low weighting to central 
London of less than 10 per cent of assets. 
 
Despite the volatility in capital values triggered by the vote to leave the 
European Union and the corresponding market uncertainty created by well 
publicised redemptions from the open ended funds, the story remains very much 
about income, with real estate's contractually backed rental income set to be 
the key driver of returns moving forward. The portfolio's above market yield, 
low void rate of 5.6 per cent and weighted unexpired lease term of c.7 years, 
secured primarily to low risk corporate tenants are all good defensive 
characteristics, and leave the portfolio well placed to deliver on the Company 
objective. The portfolio offers a relatively high exposure to Industrial and 
Logistics property at over 30 per cent of total assets and to the wider South 
East (60 per cent of assets by value), sectors and geographies supported by 
robust supply side characteristics backed by strong tenant demand. 
 
Considerable weight of money has been targeting the sector over the last 6 
months, initially from opportunistic buyers in the wake of Brexit and followed 
by yield driven investors, UK Institutions and Overseas buyers, particularly 
for central London trophy assets. The market remains very competitive which has 
had the effect of driving yields to historic lows. Against this backdrop the 
Manager has been particularly selective in identifying new acquisition targets 
at sustainable pricing. The cash position and the flexibility afforded by the 
revolving debt facility provides a good footing from which to approach the 
market. Since the period end the Company has agreed terms to purchase a 
freehold, single let distribution unit located in the South East for a sum of 
c.GBP10 million at a yield of c.5.2 per cent. 
 
The more immediate priority has been to continue the success of last year's 

planned sales programme (three small sales were completed over the previous 
period raising GBP3.5 million) to address the more secondary and non-core tail of 
legacy assets, selling into what has been a market relatively receptive to 
risk. A further three assets, all from the high street retail sub-sector, have 
been sold over the year to June 2017, realising GBP7.5 million in net proceeds at 
a premium to valuation. 
 
Borrowings 
 
The Company refinanced in 2015 to secure a new GBP90 million 11 year 
non-amortising term loan facility agreement with Canada Life Investments and a 
GBP20 million 5 year revolving credit facility agreement with Barclays Bank plc. 
The fixed interest rate payable over the term of the loan with Canada Life 
Investments is at the all-in rate of 3.36 per cent per annum and the interest 
rate that will be payable in respect of the revolving credit facility with 
Barclays Bank plc is 1.45 per cent per annum over 3 month LIBOR. 
 
The Company continues to adopt a prudent approach to borrowing, with net 
gearing* of 28.3 per cent at 30 June 2017. 
 
Responsible Property Investment Update 
 
The principles of Responsible Property Investment (RPI), through which 
environmental, social and governance (ESG) factors are integrated into 
investment processes and asset ownership activities, have continued to gain 
significant traction and momentum in the UK property market. In particular, the 
emergence of new regulations which target the energy performance of existing 
buildings, together with the ratification and coming into force of the Paris 
Agreement on Climate Change during 2016, have been key stimulants of investor 
engagement on the topic. Increasingly, investment decision-making is influenced 
by these factors, in terms of capital allocation strategies and commercial 
property transactions. 
 
The Company has taken measures to strengthen its approach to RPI during 2016 
and 2017, most notably through the actions of its Managers, which have 
included: 
 
*         Formalising an ESG Committee with representation from across its 
investment management teams, with the purpose of leading on, monitoring and 
overseeing the Property Managers' approach to RPI. 
 
*         Establishing a new RPI Strategy for its corporate and investment 
activities, which is reflective of strengthening market expectations with 
respect to ESG factors, and which has the mutual goals of: ensuring portfolio 
resilience; driving environmental improvements; and engaging with our 
stakeholders. 
 
*         Putting in place comprehensive RPI requirements for asset and 
property managers to ensure continued attendance to ESG factors across the 
property investment lifecycle. 
 
*         Introducing Responsible Property Management Guidelines to support 
property managers in identifying and capturing opportunities for improving the 
ESG performance and attributes of assets, covering factors such as energy 
efficiency, water conservation, health and well-being, waste management and 
procurement. 
 
*         Implementing a system for the classification of all assets under 
management according to their energy performance risk and energy consumption 
characteristics, which the Company is using as a basis for prioritising actions 
and determining the frequency of its comprehensive ESG monitoring activities at 
the property level. 
 
*         Installing a market-leading RPI Appraisal system, which is now 
applied to all acquisitions made by the Company. We are also in the process of 
applying the Appraisal system to all assets under management, a process which 
will be completed by Q4 2017. 
 
*         Preparing Guidelines for Sustainable Development & Refurbishment 
which is to be applied to all significant capital projects undertaken on the 
portfolio. 
 
*         Delivering training to its fund, investment, asset and property 
management teams to ensure that they are cognisant of the evolving RPI agenda, 
aware of the expectations which the Company places upon them in relation to ESG 
factors, and knowledgeable about what needs to be done to implement the new RPI 
Strategy. 
 
*         In carrying out the above, the Property Managers appointed a 
specialist RPI consulting and training firm, Hillbreak, which will continue to 
support and advise by taking an independent role on the Property Managers' ESG 
Committee. 
 
The Company and its Property Managers will remain vigilant of the evolving 
nature of the RPI agenda and will continue to develop its approach to ESG 
factors so that it remains on track to realising its RPI goals, whilst ensuring 
that these remain relevant. 
 
Outlook 
 
The Manager believes that the property portfolio is appropriately placed to 
deliver solid performance over the coming years led by a defendable top 
quartile (IPD Quarterly Index) income return. The intention is to continue to 
dispose of the smaller, and non-core assets, whilst looking for new investment 
opportunities which will complement the existing portfolio composition. We will 
remain selective in our acquisition strategy given that a significant weight of 
money continues to compete for quality commercial property assets. 
 
Brexit will inevitably be a major factor influencing investors for several 
years. There remains considerable uncertainty about the outcome of 
negotiations, the timetable for withdrawal and the impact on the economy. The 
consensus economic outlook is for sustained but fairly modest economic growth 
and some moderation in inflation. In this environment, we would expect 
investors to continue to favour core products and prioritise the longevity of a 
secure income stream. The other major uncertainty is the likely path of 
interest rates. Sentiment is moving towards a likely upward move, although the 
timing and speed of change is unclear. The scope for further yield compression 
to drive performance may be limited, and we would expect income to be the major 
driver of performance over the coming years. 
 
Peter Lowe 
 
BMO Rep Property Management Limited 
 
* See Alternative Performance Measures 
 
 
F&C UK Real Estate Investments Limited 
Consolidated Statement of Comprehensive Income 
 
 
 
                                                      Year ended 30        Year ended 
                                                          June 2017      30 June 2016 
 
                                                                  GBP 
                                                               '000             GBP'000 
 
Revenue 
 
Rental income                                                19,191            19,562 
 
Total revenue                                                19,191            19,562 
 
Gains on investment properties 
 
Gains/(losses) on sale of investment properties                 781             (144) 
realised 
 
Unrealised gains on revaluation of investment                 2,008             4,951 
properties 
 
                                                             21,980            24,369 
 
Expenditure 
 
Investment management fee                                   (2,013)           (2,084) 
 
Other expenses                                              (1,966)           (1,883) 
 
Total expenditure                                           (3,979)           (3,967) 
 
Net operating profit before finance costs and 
taxation                                                     18,001            20,402 
 
Net finance costs 
 
Interest receivable                                               4                 9 
 
Finance costs                                               (3,598)           (4,455) 
 
Gain on redemption of interest rate swap                          -             1,485 
 
                                                            (3,594)           (2,961) 
 
Net profit from ordinary activities before taxation          14,407            17,441 
 
Taxation on profit on ordinary activities                     (306)             (264) 
 
Profit for the year                                          14,101            17,177 
 
Other comprehensive income 
Items that are or may be reclassified subsequently 
to profit or loss 
 
Net change in fair value of swap reclassified to                  -           (1,485) 
profit or loss 
Movement in fair value of effective interest rate                 -             1,293 
swap 
 
Total other comprehensive income                                  -             (192) 
 
Total comprehensive income for the year, net of tax          14,101            16,985 
 
Basic and diluted earnings per share                           5.9p              7.2p 
 
 
All items in the above statement derive from continuing operations. 
 
All of the profit and other comprehensive income for the year is attributable 
to the owners of the Company. 
 
 
F&C UK Real Estate Investments Limited 
Consolidated Balance Sheet 
 
                                                           30 June 2017    30 June 2016 
                                                                  GBP'000           GBP'000 
 
 
Non-current assets 
 
Investment properties                                           330,834         333,798 
 
Trade and other receivables                                       3,894           5,333 
 
                                                                334,728         339,131 
 
Current assets 
 
Trade and other receivables                                       1,291           1,681 
 
Cash and cash equivalents                                        16,565          11,931 
 
                                                                 17,856          13,612 
 
Total assets                                                    352,584         352,743 
 
Non-current liabilities 
 
Interest-bearing bank loans                                   (105,061)       (108,845) 
 
Trade and other payables                                          (352)           (832) 
 
                                                              (105,413)       (109,677) 
 
Current liabilities 
 

Trade and other payables                                        (6,023)         (6,040) 
 
Tax payable                                                       (306)           (284) 
 
                                                                (6,329)         (6,324) 
 
Total liabilities                                             (111,742)       (116,001) 
 
Net assets                                                      240,842         236,742 
 
Represented by: 
 
Share capital                                                     2,407           2,387 
 
Special distributable reserve                                   177,161         175,367 
 
Capital reserve                                                  61,274          58,485 
 
Revenue reserve                                                       -             503 
 
Equity shareholders' funds                                      240,842         236,742 
 
Net asset value per share                                        100.1p           99.2p 
 
 
F&C UK Real Estate Investments Limited 
Consolidated Statement of Changes in Equity 
For the year ended 30 June 2017 
 
 
                                       Special 
                          Share  Distributable   Capital      Other  Revenue 
                        Capital        Reserve   Reserve    Reserve  Reserve    Total 
                          GBP'000          GBP'000     GBP'000      GBP'000    GBP'000    GBP'000 
 
 
At 1 July 2016            2,387        175,367    58,485          -      503  236,742 
 
 
Profit for the year           -              -         -          -   14,101   14,101 
 
Total comprehensive           -              -         -          -   14,101   14,101 
income for the year 
 
Issue of ordinary            20          1,965         -          -        -    1,985 
shares 
 
Dividends paid                -              -         -          - (11,986) (11,986) 
 
Transfer in respect of 
gains on investment           -              -     2,789          -  (2,789)        - 
properties 
 
Transfer to revenue           -          (171)         -          -      171        - 
reserve 
 
 
At 30 June 2017           2,407        177,161    61,274          -        -  240,842 
 
For the year ended 30 June 2016 
 
 
                                       Special 
                          Share  Distributable   Capital      Other  Revenue 
                        Capital        Reserve   Reserve    Reserve  Reserve    Total 
                          GBP'000          GBP'000     GBP'000      GBP'000    GBP'000    GBP'000 
 
 
At 1 July 2015            2,339        170,620    53,678        192        -  226,829 
 
 
Profit for the year           -              -         -          -   17,177   17,177 
 
Other comprehensive           -              -         -      (192)        -    (192) 
losses 
 
Total comprehensive           -              -         -      (192)   17,177   16,985 
income for the year 
 
Issue of ordinary            48          4,747         -          -        -    4,795 
shares 
 
Dividends paid                -              -         -          - (11,867) (11,867) 
 
Transfer in respect of 
gains on investment           -              -     4,807          -  (4,807)        - 
properties 
 
 
At 30 June 2016           2,387        175,367    58,485          -      503  236,742 
 
 
F&C UK Real Estate Investments Limited 
Consolidated Statement of Cash Flows 
 
 
                                                             Year ended      Year ended 
                                                           30 June 2017    30 June 2016 
 
                                                                  GBP'000           GBP'000 
 
Cash flows from operating activities 
 
Net profit for the year before taxation                          14,407          17,441 
 
Adjustments for: 
 
     (Gains)/losses on sale of investment properties              (781)             144 
realised 
 
     Unrealised gains on revaluation of investment              (2,008)         (4,951) 
properties 
 
     Decrease/(increase) in operating trade and other             1,829           (153) 
receivables 
 
     Decrease in operating trade and other payables               (497)            (40) 
 
     Interest received                                              (4)             (9) 
 
     Finance costs                                                3,598           4,455 
 
     Gain on redemption of interest rate swap                         -         (1,485) 
 
                                                                 16,544          15,402 
 
     Taxation paid                                                (284)            (58) 
 
Net cash inflow from operating activities                        16,260          15,344 
 
Cash flows from investing activities 
 
Purchase of investment properties                                 (450)               - 
 
Capital expenditure                                             (1,257)           (636) 
 
Sale of investment properties                                     7,460           3,519 
 
Interest received                                                     4               9 
 
Net cash inflow from investing activities                         5,757           2,892 
 
Cash flows from financing activities 
 
Shares issued (net of costs)                                      1,985           4,795 
 
Dividends paid                                                 (11,986)        (11,867) 
 
Bank loan interest paid                                         (3,382)         (2,057) 
 
Interest on interest rate swap arrangement                            -         (2,561) 
 
Redemption of interest rate swap arrangement                          -         (5,294) 
 
Bank loan repaid - Lloyds Loan                                        -       (102,000) 
 
Bank loan drawn down, net of costs - Canada Life Loan                 -          88,503 
 
Bank loan (repaid)/drawn down, net of costs - Barclays          (4,000)          19,520 
Loan 
 
Net cash outflow from financing activities                     (17,383)        (10,961) 
 
Net increase in cash and cash equivalents                         4,634           7,275 
 
Opening cash and cash equivalents                                11,931           4,656 
 
Closing cash and cash equivalents                                16,565          11,931 
 
F&C UK Real Estate Investments Limited 
 
Principal Risks and Risk Management 
 
The Group's assets consist of direct investments in UK commercial property. 
Its principal risks are therefore related to the commercial property market in 
general, but also the particular circumstances of the properties in which it is 
invested and their tenants.  More detailed explanations of these risks and the 
way in which they are managed are contained under the headings of Credit Risk, 
Liquidity Risk, Interest Rate Risk and Market Price Risk.  The Manager also 
seeks to mitigate these risks through active asset management initiatives and 
carrying out due diligence work on potential tenants before entering into any 
new lease agreements. All of the properties in the portfolio are insured. 
 
Other risks faced by the Group include the following: 
 
·     Market - the Group's assets comprise of direct investments in UK 
commercial property and it is therefore exposed to movements and changes in the 
market. 
 
·     Investment and strategic - poor investment processes and incorrect 
strategy, including sector and geographic allocations and use of gearing, could 
lead to poor returns for shareholders. 
 
·     Regulatory - breach of regulatory rules could lead to suspension of the 
Company's Stock Exchange listing, financial penalties or a qualified audit 
report. 
 
·     Tax efficiency - changes to the management and control of the Group or 
changes in legislation could result in the Group no longer being a tax 
efficient investment vehicle for shareholders. 
 
·     Financial - inadequate controls by the Manager or third party service 
providers could lead to misappropriation of assets. Inappropriate accounting 
policies or failure to comply with accounting standards could lead to 
misreporting or breaches of regulations. 
 
·     Reporting - valuations of the investment property portfolio require 
significant judgement by valuers which could lead to a material impact on the 
net asset value.  Incomplete or inaccurate income recognition could have an 
adverse effect on the Group's net asset value, earnings per share and dividend 
cover. 
 
·     Credit - an issuer or counterparty could be unable or unwilling to meet a 
commitment that it has entered into with the Group.  This may cause the Group's 
access to cash to be delayed or limited. 
 
·     Operational - failure of the Manager's accounting systems or disruption 
to the Manager's business, or that of third party service providers through 
error, fraud, cyber   attack or business continuity failure could lead to an 
inability to provide accurate reporting and monitoring, leading to a loss of 
shareholders' confidence. 
 
·     Environmental - inadequate attendance to environmental factors by the 
Manager, including those of a regulatory and market nature and particularly 
those relating to energy performance, flood risk and environmental liabilities, 
leading to the reputational damage of the Company, reduced liquidity in the 
portfolio, and/or negative asset value impacts. 
 
The Board seeks to mitigate and manage these risks through continual review, 
policy-setting and enforcement of contractual obligations. It also regularly 
monitors the investment environment and the management of the Group's property 
portfolio. 
 
The Manager seeks to mitigate these risks through active asset management 
initiatives and carrying out due diligence work on potential tenants before 
entering into any new lease agreements. 
 
Principal risks encountered during the year 
 
·     Valuation Accuracy - There was concern over the accuracy of property 

valuations following the Brexit vote. A caveat on the accuracy of the 
valuations was included in the June 2016 external valuations and whilst this 
was subsequently removed for future valuations, a degree of uncertainty still 
exists. 
 
·     Discount/Premium to Net Asset Value - The share price went through a 
period of instability and fell significantly to a discount of 22 per cent 
following the Brexit vote. The share price recovered reasonably quickly and has 
subsequently settled at a small premium. 
 
Financial Instruments and Investment Property 
 
The Group's investment objective is to provide ordinary shareholders with an 
attractive level of income together with the potential for income and capital 
growth from investing in a diversified UK commercial property portfolio. 
 
Consistent with that objective, the Group holds UK commercial property 
investments.  In addition, the Group's financial instruments comprise cash, 
receivables, interest-bearing loans and payables that arise directly from its 
operations. 
 
The Group is exposed to various types of risk that are associated with 
financial instruments.  The most important types are credit risk, liquidity 
risk, interest rate risk and market price risk. There was no foreign currency 
risk as at 30 June 2017 or 30 June 2016 as assets and liabilities are 
maintained in Sterling. 
 
Credit risk 
 
Credit risk is the risk that an issuer or counterparty will be unable or 
unwilling to meet a commitment that it has entered into with the Group. 
 
In the event of default by an occupational tenant, the Group will suffer a 
rental shortfall and incur additional costs, including legal expenses, in 
maintaining, insuring and re-letting the property until it is re-let. The Board 
receives regular reports on concentrations of risk and any tenants in arrears. 
The Manager monitors such reports in order to anticipate, and minimise the 
impact of, defaults by occupational tenants. 
 
The Group has a diversified tenant portfolio. The maximum credit risk from the 
rent receivables of the Group at 30 June 2017 is GBP502,000 (2016: GBP597,000). It 
is the practice of the Group to provide for rental debtors greater than three 
months overdue unless there is certainty of recovery. As at 30 June 2017 the 
provision was GBP136,000 (2016: GBP17,000). Of this amount GBP99,000 was subsequently 
written off and GBP10,000 has been recovered. 
 
All of the cash is placed with financial institutions with a credit rating of A 
or above.  Bankruptcy or insolvency may cause the Group's ability to access 
cash placed on deposit to be delayed or limited.  Should the credit quality or 
the financial position of the banks currently employed significantly 
deteriorate, the Manager would move the cash holdings to another financial 
institution. 
 
The Group can also spread counterparty risk by placing cash balances with more 
than one financial institution.  The Directors consider the residual credit 
risk to be minimal. 
 
Liquidity risk 
 
Liquidity risk is the risk that the Group will encounter in realising assets or 
otherwise raising funds to meet financial commitments.  The Group's investments 
comprise UK commercial property. 
 
Property in which the Group invests is not traded in an organised public market 
and may be illiquid.  As a result, the Group may not be able to liquidate 
quickly its investments in these properties at an amount close to their fair 
value in order to meet its liquidity requirements. 
 
The Group's liquidity risk is managed on an ongoing basis by the Manager and 
monitored on a quarterly basis by the Board.  In order to mitigate liquidity 
risk the Group aims to have sufficient cash balances (including the expected 
proceeds of any property sales) to meet its obligations for a period of at 
least twelve months. 
 
In certain circumstances, the terms of the Group's bank loans entitle the 
lender to require early repayment, for example if covenants are breached, and 
in such circumstances the Group's ability to maintain dividend levels and the 
net asset value attributable to the Ordinary Shares could be adversely 
affected. 
 
Interest rate risk 
 
Some of the Group's financial instruments are interest-bearing.  These are a 
mix of both fixed and variable rate instruments with differing maturities.  As 
a consequence, the Group is exposed to interest rate risk due to fluctuations 
in the prevailing market rate. 
 
The Group's exposure to interest rate risk relates primarily to the Group's 
borrowings.  Interest rate risk on the GBP90 million Canada Life term loan is 
managed by fixing the interest rate on such at 3.36 per cent until maturity on 
9 November 2026. 
 
In addition, tenant deposits are held in interest-bearing bank accounts and the 
interest rate on these accounts was nil at the year end.  Interest accrued on 
these accounts is paid to the tenant. 
 
Market price risk 
 
The Group's strategy for the management of market price risk is driven by the 
investment policy. The management of market price risk is part of the 
investment management process and is typical of commercial property investment. 
The portfolio is managed with an awareness of the effects of adverse valuation 
movements through detailed and continuing analysis, with an objective of 
maximising overall returns to shareholders. Investments in property and 
property-related assets are inherently difficult to value due to the individual 
nature of each property. As a result, valuations are subject to substantial 
uncertainty. There is no assurance that the estimates resulting from the 
valuation process will reflect the actual sales price even where such sales 
occur shortly after the valuation date. Such risk is minimised through the 
appointment of external property valuers. 
 
F&C UK Real Estate Investments Limited 
 
Going Concern 
 
In assessing the going concern basis of accounting the Directors have had 
regard to the guidance issued by the Financial Reporting Council. They have 
reviewed detailed cash flow, income and expense projections in order to assess 
the Company's ability to pay its operational expenses, bank interest and 
dividends. The Directors have examined significant areas of possible financial 
risk including cash and cash requirements and the debt covenants, in particular 
those relating to loan to value and interest cover. The Directors have not 
identified any material uncertainties which cast significant doubt on the 
Company's ability to continue as a going concern for a period of not less than 
12 months from the date of the approval of the financial statements. The Board 
believes it is appropriate to adopt the going concern basis in preparing the 
financial statements. 
 
Directors' Responsibilities in Respect of the Annual Report & Consolidated 
Accounts 
 
In accordance with International Financial Reporting Standards as adopted by 
the EU and applicable law, we confirm that to the best of our knowledge: 
 
·     the financial statements, prepared in accordance with IFRS as adopted by 
the European Union, give a true and fair view of the assets, liabilities, 
financial position and profit or loss of the Company and the undertakings 
included in the consolidation taken as a whole and comply with The Companies 
(Guernsey) Law, 2008 (as amended); 
 
·     the Strategic Report includes a fair review of the development and 
performance of the business and the position of the Company and the 
undertakings included in the consolidation taken as a whole together with a 
description of the principal risks and uncertainties that it faces; 
 
·     the Annual Report and financial statements, taken as a whole, are fair, 
balanced and understandable and provide the information necessary for 
shareholders to assess the Group's position and performance, business model and 
strategy; and 
 
·     the financial statements and Directors' Report includes details of 
related party transactions. 
 
On behalf of the Board 
 
V Lall 
Chairman 
20 September 2017 
 
 
F&C UK Real Estate Investments Limited 
Notes to the Consolidated Financial Statements 
for the year ended 30 June 2017 
 
1.         The audited results of the Group which were approved by the Board on 
20 September 2017 have been prepared on the basis of International Financial 
Reporting Standards as adopted by the EU, interpretations issued by the IFRS 
Interpretations Committee, applicable legal and regulatory requirements of the 
Companies (Guernsey) Law, 2008 (as amended) and the Listing Rules of the UK 
Listing Authority as well as the accounting policies set out in the statutory 
accounts of the Group for the year ended 30 June 2017. 
 
2.         The fourth interim dividend of 1.25p will be paid on 29 September 
2017 to shareholders on the register on 8 September 2017. The ex-dividend date 
was 7 September 2017. 
 
3.         There were 240,705,539 Ordinary Shares in issue at 30 June 2017. The 
earnings per Ordinary Share are based on the net profit for the year of GBP 
14,101,000 and on 239,568,005 Ordinary Shares, being the weighted average 
number of shares in issue during the year. 
 
4.         Three properties were sold during the year with net proceeds 
totalling GBP7.5 million.  No properties were purchased in the year apart from 
some additional car parking space at Lochside Way, Edinburgh Park. 
 
5.         These are not full statutory accounts. The full audited accounts for 
the year ended 30 June 2017 will be sent to shareholders in September 2017, and 
will be available for inspection at Trafalgar Court, Les Banques, St. Peter 
Port, Guernsey, the registered office of the Company.  The full annual report 
and consolidated accounts will be available on the Company's websites: 
fcre.co.uk or fcre.gg 
 
6.         The Annual General Meeting will be held on 22 November 2017. 
 
Alternative Performance Measures 
 
The Company uses the following Alternative Performance Measures ('APMs'). APMs 
do not have a standard meaning prescribed by GAAP and therefore may not be 
comparable to similar measures presented by other entities. 
 

Discount or Premium - The share price of an Investment Company is derived from 
buyers and sellers trading their shares on the stock market. If the share price 
is lower than the NAV per share, the shares are trading at a discount. This 
usually indicates that there are more sellers than buyers. Shares trading at a 
price above the NAV per share, are said to be at a premium. 
 
Dividend Cover - The percentage by which Profits for the year (less Gains/ 
losses on investment properties) cover the dividend paid. 
 
A reconciliation of dividend cover is shown below: 
 
                                                                30 June      30 June 
                                                                   2017         2016 
 
                                                                  GBP'000        GBP'000 
 
Profit for the year                                              14,101       17,177 
 
Add back:             Realised (gains)/losses                     (781)          144 
 
                      Unrealised gains                          (2,008)      (4,951) 
 
                      Gain on redemption of swap                      -      (1,485) 
 
Profit before investment gains and losses                        11,312       10,885 
 
Dividends                                                        11,986       11,867 
 
Dividend Cover percentage                                          94.4         91.7 
 
Dividend Yield - The annualised dividend divided by the share price at the 
year-end. 
 
Net Gearing - Borrowings less net current assets divided by value of investment 
properties. 
 
Ongoing Charges - All operating costs incurred by the Company, expressed as a 
proportion of its average Net Assets over the reporting year.  The costs of 
buying and selling investments and derivatives are excluded, as are interest 
costs, taxation, non-recurring property costs and the costs of buying back or 
issuing Ordinary Shares. 
 
Portfolio (Property) Capital Return - The change in property value during the 
period after taking account of property purchase and sales and capital 
expenditure, calculated on a quarterly time-weighted basis. 
 
Portfolio (Property) Income Return - The income derived from a property during 
the period as a percentage of the property value, taking account of direct 
property expenditure, calculated on a quarterly time-weighted basis. 
 
Portfolio (Property) Total Return - Combining the Portfolio Capital Return and 
Portfolio Income Return over the period, calculated on a quarterly 
time-weighted basis. 
 
Total Return - The return to shareholders calculated on a per share basis by 
adding dividends paid in the period to the increase or decrease in the Share 
Price or NAV. The dividends are assumed to have been reinvested in the form of 
Ordinary Shares or Net Assets, respectively, on the date on which they were 
quoted ex-dividend. 
 
All enquiries to: 
 
Peter Lowe 
Scott Macrae 
F&C Investment Business Limited 
Tel: [phone] 
 
The Company Secretary 
Northern Trust International Fund Administration Services (Guernsey) Limited 
PO BOX 255 
Trafalgar Court 
Les Banques 
St Peter Port 
Guernsey GY1 3QL 
Tel: [phone] 
 
 
 
END 
 

(END) Dow Jones Newswires

September 21, 2017 02:00 ET (06:00 GMT)