MILL RESIDENTIAL REIT PLC - Half-yearly Report

25 June 2015

Mill Residential REIT plc

("MRR", the "Company" or the "Group")

Interim results for the period from 20 October 2014 to 30 April 2015

Highlights

• Completed £3.5m IPO on AIM in December 2014 to form the first UK REIT with the principal activity of investment in mainstream residential property

• Initial portfolio has risen in value by 1.8% to £2,515,000 in the six months since purchase, before allowing for certain purchase costs

• NAV of 94.7p per share as at 30 April 2015

• No interim dividend declared

Chairman’s statement

Business and financial review

The Board hereby presents MRR’s inaugural set of interim financial results as a public company.  The Company became the first REIT to invest in UK residential property as its principal focus after completing an Initial Public Offering on AIM in December 2014.

At IPO, the intention of the Company was to grow rapidly from its small size, grasping the market opportunity of being the first mainstream UK residential REIT and seeking out further equity funding to deploy in opportunistic investments. The Group’s stated strategy of investing in “buy-to-let” properties aimed to provide the Group with reliable and increasing rental income over time, together with steady sustained growth in asset value. 

The initial portfolio was acquired in November 2014 and comprises seven properties: four in Surrey, two in South East London and one in Bristol.  These have been independently valued at £2,515,000 as at 30 April 2015, a gross increase of 1.8% over their valuation six months since purchase, before allowing for certain purchase costs.

Since the Company’s admission to trading on AIM, the asset management team has identified, evaluated and recommended a number of acquisition targets which meet the Company’s investment criteria. However, obtaining equity funding for these has so far, not been achieved and so none have yet been pursued to a successful conclusion. Whilst the residential investment sector is attracting investor interest from major institutions, some of whom are initiating their own larger competing offers via unquoted funds or direct investment, the current scale of the Company is seen as a hurdle we have yet to overcome.

The net asset value of the Company has declined as the effect of set up costs and administrative fees have exceeded the net rental income and the positive but modest contribution in this period from value increases in the portfolio.

Recognising that the current costs of operations as a listed vehicle exceed income, the Board has implemented an administrative cost cutting programme which is being retrospectively applied such that it has effect from 1st May, with the support of its key advisers and managers.   Further details are provided below.

Having to accept that the speed of growth of the Company may not be rapid as initially hoped and that at the current scale costs are likely to exceed income, the Board is therefore considering all options to mitigate losses and maintain shareholder value.

No interim dividend is declared in view of the continuing losses.  As at 30 April 2015, the Company had cash at bank of £841,000 and no debt.

UK housing market

The UK housing market continues to perform well and the lack of supply of good private sector rented properties is well evidenced.  With the prospect of a mansion tax and rent control removed, further growth in capital values and some increase in rental levels are expected. HM Treasury Forecasts for the UK economy (April 2015) estimates House Price Inflation for 2015 and 2016 at 4.6% based on an average of forecasts from independent and city sources.

Financial performance

MRR commenced trading on 1 November 2014, when it purchased Investors in Homes (GP) Ltd (the “Subsidiary”) (MRR and the Subsidiary, referred to as the “Group”).  As MRR was incorporated on 20 October 2014, this is the first set of financial statements published by the Company, there are no comparative figures to be provided in these results. The financial performance of the Group is commented upon below.

Rental income

All seven properties in the portfolio were occupied during the period generating a gross income of £51,000 in the period from 20 October 2014 to 30 April 2015.  There was a nil vacancy rate as at 30 April 2015.

During the period one tenancy ended and was re-let immediately with an increase in rental income of 3.3% and one tenant extended their tenancy with an uplift of 3.4% rental income.

Administrative expenses

Administrative expenses incurred in the period of £254,000, included £78,000 for advice concerning the Company’s admission to trading on AIM, £29,000 of investment management and asset management fees payable to Mill Finance Ltd and Mill Residential REIT Management Ltd under the terms of the asset management and investment management agreements (out of which they pay property managers) and a further £29,000 for directors’ remuneration. The balance of £118,000 related to other expenses connected with operating as a public company quoted on AIM.

After taking account of administrative expenses, the Group declared an operating loss for the period from 20 October 2014 to 30 April 2015 of £211,000, before allowing for a revaluation gain of £12,000.

As growing the business will take longer than initially anticipated, the Board has considered it prudent to review all costs within MRR to minimise the impact of costs exceeding the net revenue generated.

I am pleased to be able to report that the Company has been able to negotiate a reduction in administrative expenses such that the resultant expenses will be approximately £17,000 per month at the current level of operation. This reflects a 27% reduction in administrative expenses.

Costs of £510,000 relating to the issue of shares at the time of the IPO have been recognised as a reduction to the share premium account and so will not impact the income statement or distributable reserves. In addition, as noted above, costs of £78,000 were incurred in connection with admission of the Company’s shares on AIM. Under agreements entered into by the Company, Mill Group Limited and others connected to the manager /executive directors contributed £518,000 in cash to offset the major part of these costs and in return were issued warrants over 1,500,000 shares. The exercise price for these warrants will be £1.10 per share and the exercise period will begin on the earlier of the date on which the Company achieves £50 million gross assets or 23 December 2017 (the third anniversary of the Company’s Admission to AIM) and will terminate on 23 December 2020.

Revaluation movement

As noted above, the value of MRR’s portfolio was determined by Gerald Eve at a total of £2,515,000.  Under IFRS, this revaluation movement is reflected in the consolidated income statement.

Related party transactions

David Toplas and Simon Phillips are both directors of Mill Group Limited (“Mill Group”) and shareholders of the Company. On 1 November 2014, the Company acquired Investors in Housing (GP) Limited from Mill Group for consideration of £1. The fair value of net assets acquired totalled £19,000, after allowing for the write down of £100,000 of the loan balance due to Mill Group.

As reported to the market on 7 April 2015, loans to the Group of £840,000 and £663,000 were repaid to Mill Group and Mill Group agreed to reduce its contractual entitlement to interest by 50% (£19,000). Both amounts, totalling £38,000, have been recognised as a capital contribution shown in the statement of changes in equity below.

The Company negotiated 50% fee reductions (the “Fee Reductions”), effective from 1 May 2015, leading to total savings of £4,000 per month for the following:

• asset management fees - including both asset acquisition and disposal services and asset management and monitoring services - charged to the Company by Mill Residential REIT Management Limited (a subsidiary of Mill Group), ;

• investment services fees charged to the Company by Mill Finance Limited (a subsidiary of Mill Group), ; and

• directors’ remuneration.

Due to the fact that Mill Residential REIT Management Limited and Mill Finance Limited are both subsidiaries of Mill Group Limited which is itself a subsidiary of Mill Group Holdings Limited, an entity ultimately controlled by David Toplas' family trusts, and Simon Phillips and Andrew Smith, and each are a substantial shareholder under the AIM Rules, the Fee Reductions constitute related party transactions as defined by the AIM Rules. The Independent Directors, being Ian Ellis and Brian Norton, having consulted with Sanlam Securities UK Limited, the Company's nominated adviser, consider that the terms of the Fee Reductions are fair and reasonable insofar as Shareholders are concerned.

Ian Ellis

Chairman

25 June 2015

For further information please contact:

Mill Residential REIT Plc Ian Ellis (Chairman)	020 7930 8600
Sanlam Securities UK (Nomad and Joint broker) Virginia Bull	020 7628 2200
finnCap Limited (Joint broker) Tom Jenkins	020 7220 0500
ALL MEDIA ENQUIRIES TO:
Positive Profile (Financial PR) Henry Gewanter	07774 228845

Condensed consolidated statement of comprehensive income

for the period from 20 October 2014 to 30 April 2015

	Note	Period from
		20 October 2014
		to 30 April 2015
		(unaudited)
		£'000
Gross rental income		51
Property expenses		(8)
Net rental income		43
Administrative expenses		(254)
Operating loss before net valuation gains on investment property		(211)
Net valuation gains on investment property		12
Interest receivable		4
Interest payable		(37)
Loss before taxation		(232)
Taxation		-
Loss for the period attributable to equity holders of the Company		(232)
Other comprehensive income		-
Total comprehensive loss for the period net of tax		(232)
Loss per share (pence)	3	(8.0)

Condensed consolidated statement of financial position

at 30 April 2015

	Note	30 April 2015
		(unaudited)
		£'000
Assets
Non-current assets
Investment property	4	2,515
		2,515
Current assets
Trade and other receivables		78
Cash		841
		919
Total assets		3,434
Current liabilities
Trade and other payable		118
Total liabilities		118
Net assets		3,316
Equity
Share capital		350
Share premium		1,742
Retained earnings		1,224
Total equity		3,316

Condensed Consolidated Statement of Cash Flow

Period from 20 October 2014 to 30 April 2015

	Period from
	20 October 2014
	to 30 April 2015
	(unaudited)
	£'000
Cash inflow from operating activities
Loss from operations	(199)
Adjustments for:
Increase in receivables	(28)
Increase in liabilities	118
Revaluation of investment properties	(12)
Cash used in operations	(121)
Cash flows from investing activities
Interest paid	(19)
Interest received	4
Purchase of investment property	(1,003)
Net cash used in investing activities	(1,018)
Cash flows from financing activities
Proceeds from issue of new shares	3,452
Costs of issue of new shares	(510)
Proceeds from issue of warrants	518
Other capital contributions	19
Net cash inflow from purchase of Investors in Housing (GP) Ltd	4
Repayment of other loans	(1,503)
Net cash generated from financing activities	1,980
Increase in cash and cash equivalents	841
Cash and cash equivalents at beginning of period	-
Cash and cash equivalents at end of period	841

Condensed Consolidated Statement of changes in equity

Period from 20 October 2014 to 30 April 2015

	Share capital	Share premium	Retained earnings	Total
	£'000	£'000	£'000	£'000
As at 20 October 2014	-	-	-	-
Shares issued	350	3,152	-	3,502
Share issue costs	-	(510)	-	(510)
Warrants issued	-	-	518	518
Reduction in share premium	-	(900)	900	-
Capital contribution	-	-	38	38
Loss for the period	-	-	(232)	(232)
As at 30 April 2015	350	1,742	1,224	3,316

Notes to the Interim Results

1. Accounting policies

a) Basis of preparation

These condensed Interim Results for the period from 20 October 2014 to 30 April 2015 are unaudited and do not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006.

Mill Residential REIT plc is a company incorporated and domiciled in the UK. It is a public limited liability company listed on the Alternative Investment Market and the address of the registered office is given in note 5, below. The Group financial statements consolidate those of the Company and its subsidiary, Investors in Housing (GP) Limited, together referred to as the “Group”.

The interim financial information has been prepared on a historical cost basis except for investment property which has been measured at fair value, which is consistent with the accounting policies detailed below and in compliance with basic principles of IFRS.

b) Rental income

Rental income is recognised on a straight-line basis over the lease term on an accruals basis.

c) Investment property

Property that is held for both long-term rental yield and for capital appreciation is classified as investment property. Investment property is measured initially at cost, including related transaction costs. After initial recognition, investment property is carried at fair value. Fair value is based on active market prices of similar properties. The majority of investment property falls within Level 3 of the fair value hierarchy as defined by IFRS 13. Subsequent expenditure is included in the carrying amount of the property when it is probable that the future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred. Gains or losses arising from changes in the fair value of the Group’s investment properties are included in the income statement of the period in which they arise.

d) Dividends

Dividend distributions to the Company’s shareholders are recognised as a liability in the Group financial statements in the period in which the dividends are either approved by the Company’s shareholders or are appropriately authorised and no longer at the discretion of the Group. Interim dividends are recognised on payment.

2. Segmental information

The Group operates in a single activity in one geographical location, being the investment in residential property for the UK private rented sector.

3. Loss per share

This has been calculated on the loss for the period of £232,000 and the number of shares used was 2,890,166, being the weighted average number of share in issue during the period.

4. Investment property

	£’000
Opening balance	-
Additions	2,470
Acquisition costs	33
Net valuation gain	12
Closing balance	2,515

5. Copies of Interim Results

The Interim Results will be posted on the Company's web site www.millresidentialreit.co.uk and copies are available from the Company's registered office at 8^th Floor, Alhambra House, 27-31 Charing Cross Road, London WC2H 0AU.

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