Great Portland Estates Half Year Results 2018

Toby Courtauld, Chief Executive, said:

 

"We are pleased to report another strong operational performance, led by leasing successes and development progress, delivering a solid set of financial results for the first half and continued capital discipline through a further return of surplus capital to shareholders.

 

With healthy occupier demand, we maintained our strong leasing momentum across our high quality, sensibly priced office and retail portfolio, capturing reversion and leasing well ahead of ERV. We also continued the roll-out of our flexible space offering, meeting the evolving needs of our occupiers, and we have a further 100,000 sq ft being evaluated for the product. When combined with £2.7 million of investment lettings currently under offer at a 6.9% premium to ERV and good onsite progress across our three committed development schemes which are already 11% pre-let, we have raised the interim dividend by 7.5% and increased our rental guidance for the financial year. Taking advantage of a still competitive investment market, we have also crystallised further surpluses with £329 million of net sales so far this financial year, reducing our LTV to only 5.8%, and we expect further sales in the second half. As a result, we currently intend to return up to £200 million of surplus equity to shareholders through a share buyback programme, which will be kept under regular review by the Board.

 

Whilst we expect, and are planning for, continued political and economic uncertainty, particularly given the ongoing Brexit negotiations, GPE remains exceptionally well positioned: Our well-located portfolio is full of opportunity, with 92% in close proximity to a Crossrail station; our properties are let off low rents with significant further reversionary potential; our exceptional income-producing development pipeline offers nearly 1.3 million sq ft of flexible future growth potential, meaning that we have no need to buy. But if any market weakness should emerge, we retain significant financial capacity to exploit it; meanwhile, our talented team remains focused on maximising the opportunity we have to generate long-term value across our business."

 

Contacts:
Great Portland Estates plc	+44	(0)	20	7647	3000
Toby Courtauld, Chief Executive
Nick Sanderson, Finance Director
Finsbury Group	+44	(0)	20	7251	3801
James Murgatroyd
Gordon Simpson
The results presentation will be broadcast live at 9.00am today on:
www.gpe.co.uk/investors/latest-results

A conference call facility will be available to listen to the presentation at 9.00am today on the following numbers:

 

UK: 0808 109 0700 (freephone)

International: +44 (0) 20 3003 2666

 

For further information see www.gpe.co.uk or follow us on Twitter at @GPE_plc

 

This announcement contains inside information. The person responsible for arranging the release of this announcement on behalf of GPE is Desna Martin, Company Secretary.

 

Disclaimer

This announcement contains certain forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward-looking statements.

 

Any forward-looking statements made by or on behalf of Great Portland Estates plc ("GPE") speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. GPE does not undertake to update forward-looking statements to reflect any changes in GPE's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

 

Information contained in this announcement relating to the Company or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance.

 

To view the accompanying appendices please paste the below into your web browser:

 

http://www.rns-pdf.londonstockexchange.com/rns/4069H_1-2018-11-14.pdf

 

Half Year Results

 

Our market

Introduction 

London's commercial real estate markets have continued to lack clear direction as the ongoing Brexit negotiations have yet to provide clarity regarding the UK's future relationship with the EU and the potential implications on both the UK economy and political landscape. Business confidence surveys have deteriorated as the perceived likelihood of no deal with the EU being reached has increased. Notwithstanding this unsettled backdrop, activity in London's commercial property markets was maintained over the last six months, with transaction levels in both the occupational and investment markets remaining above the 10 year average, supporting property valuations.

 

For the remainder of the financial year, absent any economic disruption from an adverse settlement with the EU, we expect capital values and rental levels to continue to trend broadly flat, although we expect a softening in some secondary yields. However, whilst the near-term economic and political outlook is challenging to predict, over the longer term we believe London will remain a truly global city, adapting to prevailing market conditions and continuing to attract a diverse range of businesses and investors as Europe's business capital. Moreover, its population continues to grow and Oxford Economics forecast the creation of 152,000 new office-based jobs in inner London over the next five years (up from 140,500 at May 2018).

 

Low levels of economic growth

While the global economy continues to grow at above trend rates, downside risks have increased over the last six months with an escalation in the trade war between the US and China, rising US interest rates and weakness in emerging markets. Closer to home, with employment levels at a record high and real wage growth starting to emerge, UK base rates were increased to their highest level since 2009 over the summer. However, the most recent Deloitte UK CFO survey undertaken in September indicated a further deterioration in business confidence, with only 12% of CFOs believing now is a good time to take greater risk and Brexit being rated as the biggest threat over the next twelve months. As a result, UK GDP forecasts have decreased marginally over the period with Oxford Economics forecasting annual GDP growth over the next three years of 1.6%, down from 1.7% in March. However, London's forecast outperformance has been maintained with annual GDP growth of 2.1% forecast over the next three years.

 

The attractions of investing in central London real estate, particularly to the overseas buyer, remain intact, with transaction volumes of £4.3 billion in the quarter to 30 September 2018. Investor demand has largely been focused at the prime end of the market, albeit more recently we have also seen strong demand for secondary assets with redevelopment or refurbishment potential. With the level of equity capital looking to invest in London remaining at elevated levels, prime office yields were unchanged over the period.

 

Occupational markets; open for business

Our occupational markets remained resilient over the six months to 30 September 2018, with businesses continuing to commit to London despite the uncertain backdrop. Central London office take-up was 6.9 million sq ft, in line with the preceding six months and 9.5% above the ten-year average of 6.3 million sq ft. Central London availability marginally reduced over the six months to 13.7 million sq ft at 30 September 2018, down 0.6 million sq ft and below the ten-year average of 14.9 million sq ft. This has helped broadly maintain rental values and pre-letting activity across our markets. Furthermore, tenant incentives (including rent frees) remain largely unchanged.

 

In the central London office market as a whole, development completions in the six months to 30 September 2018 were 2.1 million sq ft, with an overall vacancy rate of 4.8%. However, in the core of the West End, the focus of our development activities, completions totalled only 0.3 million sq ft in the six month period. This supply shortage has meant that occupiers continue to secure space well in advance of building completion, with 48.7% of the 13.8 million sq ft of space under construction already pre-let or under offer. Looking ahead, the speculative development pipeline continues to be modest. In central London, we estimate that 10.3 million sq ft of new speculative space could be delivered over the period to December 2022, of which only 2.1 million sq ft is in the West End core, equating to only 0.7% of core stock per annum.

 

 

West End occupational market

Over the six months to 30 September 2018, West End office take-up was 1.7 million sq ft, down 22.6% on the preceding six months and marginally below the 10 year average, albeit current availability of 4.3 million sq ft is 0.6 million sq ft also below the ten-year average. Vacancy rates remain low at 3.7% at 30 September 2018, with grade A vacancy estimated by CBRE to be only 2.5%. CBRE reported that prime office rental values remain unchanged over the last six months at £105 per sq ft with rent frees increasing on average by around one month to 24 months on a ten-year lease.

 

Although the squeeze on UK consumer spending has continued, with a number of high profile retailer administrations during the period, the West End retail market (where 40.1% of our West End portfolio by value is located) has continued to demonstrate relative strength. Vacancy on Oxford Street, Regent Street and Bond Street remains low at c.3.5% with prime Zone A rents on Oxford Street and Bond Street stable at £1,000 per sq ft and £2,200 per sq ft respectively.

 

City, Midtown and Southbank occupational markets

Over the six months to 30 September 2018, City office take up of 3.0 million sq ft is well ahead of the ten-year average of 2.6 million sq ft. Availability reduced to 5.2 million sq ft (from 6.4 million sq ft at 31 March 2018), with the amount of space under offer at 1.7 million sq ft, 42% above the 10-year average, suggesting a potentially strong final leasing quarter for 2018. The City vacancy rate was greater than that of the West End at 5.4%, although grade A vacancy was estimated by CBRE to be 3.5%, down from 4.1% at March. CBRE also reported that City prime rental values remained stable at £68.50 per sq ft, unchanged since December 2017, with rent free periods on a ten-year lease also unchanged at 24 months.

 

Take-up in Midtown and Southbank was strong, up 63.7% on the preceding six months, at 1.8 million sq ft, with the increase attributable to a small number of large pre-lets in Kings Cross. Prime office rental values remained £80 and £65 per sq ft for Midtown and Southbank respectively. Rent frees also remained unchanged at 24 months on average on a ten-year lease.

 

Investment market activity supported by overseas purchasers

The investment market continues to be robust with £9.4 billion of transactions in the last six months, up from £5.8 billion in the preceding six months. Interest from overseas investors continues to dominate transactional activity, accounting for 85% of transactions over the last six months (and 90% over the last three months). London's relative value, the low value of Sterling and London's safe haven status continued to attract international interest, particularly from Asian and continental European investors.

 

We reported in May 2018 that we estimated £37.0 billion of equity capital was seeking to invest in commercial property across central London compared to only £6.0 billion of stock on the market available to buy. Today we estimate that there is currently £4.3 billion of stock on the market available to buy, whilst the weight of money seeking to invest remains strong at £34.0 billion. With levels of equity demand at elevated levels and debt availability still good for prime quality assets and sponsors, investment yields for office properties remain unchanged. At 30 September 2018, prime yields were 3.75% and 4.00% in the West End and City respectively, according to CBRE.

 

Poor visibility on market outlook continues

Given the cyclical nature of our markets, we actively monitor numerous lead indicators to help identify key trends in our marketplace. Over the last six months, our property capital value indicators are largely unchanged and continue to provide limited market visibility. Investment activity in the central London commercial property market remains healthy and the real yield spread over gilt yields continues to be supportive. However, we expect to witness some modest expansion in the medium term, given the uncertain macro-economic backdrop and the challenging rental outlook. We do not expect significant rental value movements in the very near-term and, given the rental performance of the portfolio in the first half of the year, we have marginally upgraded our rental value growth range for the financial year to 31 March 2019 to +1.5% to minus 1.0% (previously +1.0% to minus 2.5%) (see Portfolio Management below).

 

 

Our business

 

Our business is accompanied by graphics (see Appendix 1 and 3)

Investment management

 

Investor demand for long-let, well-located, prime assets remained strong during the six months to 30 September 2018. As a result, we have continued to take advantage of these supportive market conditions by selling assets and crystallising further surpluses. We made no acquisitions in the period.

£329 million of disposals since 1 April 2018, 0.6% below book value

In April, we sold the freehold of the recently redeveloped and long let 78/92 Great Portland Street and 15/19 Riding House Street, W1 to a UK institution. The headline price of £49.6 million, equated to £48.2 million after deductions for tenant incentives or 2.4% ahead of the 31 March 2018 book value. This reflected a net initial yield of 3.9% on a topped up basis and a capital value of £1,362 per sq ft. Over the course of the six months, we also sold five residential units, adjoining the office space, for a combined price of £6.8 million.

In August, we sold 160 Great Portland Street, W1 to a Middle Eastern investor. We comprehensively refurbished the property in 2012 to provide 95,923 sq ft of Grade A office and restaurant space. The building was fully let with the offices, accounting for 97% of the income, let to Double Negative Limited until May 2032. The headline price of £127.3 million was 2.0% below the 31 March 2018 book value, reflecting a headline net initial yield of 4.08% and a capital value of £1,328 per sq ft.

 

In October, we completed the sale of 55 Wells Street, W1 to a European investor for a headline sale price of £65.5 million, equating to £64.6 million after deduction of tenants' incentives and vendor top ups, 3.0% below the 31 March 2018 book value. The headline price reflects a net initial yield of 3.99% and a capital value of £1,674 per sq ft. The BREEAM 'Excellent' building was developed by GPE in 2017 and comprises 39,095 sq ft of high quality office space arranged over six upper floors, a ground floor restaurant unit and D1 accommodation at lower ground floor. The offices are let to Williams Lea Limited and Synova Capital, and the ground floor is home to Yotam Ottolenghi's new flagship restaurant ROVI.

 

We also sold three smaller buildings for a total of £82.4 million, where our portfolio management activities were complete and the resulting forward look returns muted:

 

·           32/36 Great Portland Street, W1 for £18.9 million, 7.3% above book value, reflecting a net initial yield of 3.94% and a capital value of £1,465 sq ft;

·           27/35 Mortimer Street, W1 for £38.5 million, 0.8% above book value, reflecting a net initial yield of 3.90% and a capital value of £1,242 sq ft; and

·           Percy House, 33/34 Gresse Street, W1 for a headline price of £25.0 million, in line with book value after deductions for rent guarantees, reflecting a net initial yield of 3.76% and a capital value of £1,445 per sq ft.

 

Likely net seller for the second half of the year

Our sales since 1 April 2018 have further reduced the proportion of the portfolio represented by long-dated properties, from 16% of the portfolio at March to 9% today following the sale of 55 Wells Street, W1. With investment pricing strong and prime yields currently trending flat, we are likely to remain a net seller as we continue to explore opportunities to crystallise further returns from the long-dated portfolio as it continues to see robust demand from international capital. We currently have c.£90.0 million (our share) of commercial property in the market for sale, with a further c.£30.0 million of residential property.

 

 

 

Portfolio management

 

During the six months to 30 September 2018, our leasing activity has remained healthy, letting ahead of ERV and continuing to capture the reversion across the portfolio. Key highlights include:

 

·           37 new leases were signed during the first half (2017: 37 leases), generating annual rent of £8.4 million (our share: £6.6 million; 2017: £9.8 million), with market lettings 4.8% above March 2018 ERVs;

·           17 rent reviews securing £7.6 million (our share: £6.1 million; 2017: £7.9 million) of rent were settled during the half year, representing an annualised increase of £1.3 million per annum, or 20.6% above the previous passing rent and 4.1% above the ERV at the review date;

·           total space covered by new lettings, reviews and renewals during the first half was 243,400 sq ft (2017: 310,200 sq ft);

·           £1.9 million of reversion was captured (our share) in the six months to 30 September 2018, with a further reversionary potential of £9.8 million (9.8%) of which 85% is available in the next 18 months; and

·           95% (by area) of the 101 leases with breaks or expiries in the twelve months to 30 September 2018 were retained, re-let, under offer or under refurbishment, leaving only 5% still to transact.

As we continued to be a net seller over the period, Group rent roll decreased by 7.5% to £99.3 million at 30 September 2018 (31 March 2018: £107.3 million). However, after adjusting for sales, the rent roll has increased by 2.5% on a like-for-like basis.

Key leasing transactions

The notable transactions during the six months included:

·           at 160 Old Street, EC1, further to the 116,500 sq ft of space pre-let to Turner Broadcasting, we completed two office lettings to Pusher and Bosch totalling 23,350 sq ft of space for a combined rent of £1.5 million, equating to £66.00 per sq ft and 9.1% above March 2018 ERV;

·           at Kingsland House, Regent Street, W1, we settled a rent review with Folli Follie (UK) Limited, capturing reversion of £0.3 million, an increase of 102% on the previous passing rent and 29% above ERV at the review date;

·           the continued roll out of our flexible offering:

o    at Elm Yard, WC1, we completed three flex space lettings (11,900 sq ft) at a combined annual rent of £0.7 million, 14.2% ahead of March 2018 ERV or 35% ahead on a net effective basis; and

o    at New City Court, SE1, we entered into a partnership arrangement with Runway East, a co-working and flexible office provider, for 26,000 sq ft of the office space (including 6,000 sq ft signed in October) on a three year term. Runway East will operate the space and we will share the revenue that is paid by the businesses in occupation.

We are currently appraising a further 100,000 sq ft of flex and co-working space across our existing portfolio.

 

The Group's vacancy rate has marginally decreased to 4.8% at 30 September 2018 (31 March 2018: 4.9%) due to our letting successes offset by refurbishment and development completions. At 30 September 2018, the average rent across our office portfolio was £54.10 per sq ft, up from £52.80 per sq ft at 30 September 2017.

 

 

 

The table below summarises our leasing transactions in the period:

Leasing Transactions		Three months ended 30 September 2018	Six months ended 30 September 2018	Six months ended  30 September 2017
New leases and renewals completed
Number		24	37	37
GPE share of rent p.a.		£4.7 million	£6.6 million	£9.8 million
Area (sq ft)		90,000	135,400	170,100
Rent per sq ft (including retail)		£76	£62	£67
Rent reviews settled
Number		7	17	21
GPE share of rent p.a.		£2.3 million	£6.1 million	£7.9 million
Area (sq ft)		47,300	108,000	140,100
Rent per sq ft (including retail)		£52	£71	£62

Note: Includes joint ventures at share

 

Since 30 September 2018, our leasing momentum has continued:

 

·           We have completed 6 new leases generating £1.6 million (our share: £1.6 million) of annual rent (22,200 sq ft), with market lettings in line with March 2018 ERVs; and

·           a further 30,100 sq ft of space is currently under offer which would deliver approximately £2.7 million p.a. in rent (our share: £2.6 million), with market lettings 6.9% above March 2018 ERVs.

 

Everything else being equal, should we complete all of these transactions, the vacancy rate would fall to 2.9%.

Development management

 

As we have continued to sell mature, long-dated assets, the proportion of the portfolio in the development programme has continued to grow and now represents 53% of the portfolio, providing significant development opportunities today and for the future. Since the start of the financial year, we have successfully completed one scheme and have continued to make good progress on our committed schemes. Currently we have three committed schemes on site, set to deliver 412,000 sq ft of high-quality space, all near Crossrail stations, which are expected to generate a profit on cost of 16.7%. Beyond this, the team is busy preparing the further 11 schemes with prospective deliveries into the early 2020s and beyond.

 

One development profitably completed

At 160 Old Street, EC1, owned in our Great Ropemaker Partnership, we completed the 161,700 sq ft of office, retail and restaurant space in late April, delivering a profit on cost of 19.6%. Following the lettings to Turner Broadcasting, Pusher and Bosch, the building is now 87% let on a blended average remaining lease term of 13.3 years with only two office floors remaining.

 

Three committed schemes all to benefit from Crossrail

In May, we obtained vacant possession at Oxford House, 76 Oxford Street, W1 and have commenced demolition of the building. During the period, we have successfully settled all of the neighbourly matters with adjoining owners and have appointed Lendlease as the main contractor. The new building will deliver 78,100 sq ft of new offices and 37,900 sq ft of retail space directly opposite the Dean Street entrance to the Tottenham Court Road Crossrail station and completion is targeted for Q3 2021, with an expected profit on cost of 17.9%. Early occupier interest for the retail element of the scheme is good, with formal marketing commencing in the new year.

 

At Hanover Square, W1, we have now taken back control of the entire site as Crossrail have completed their preparatory works. During October, to enable the development, we completed the purchase of the land under existing agreements that sits directly above the eastern entrance of the Bond Street Crossrail. The scheme will deliver 221,300 sq ft in total, comprising 167,200 sq ft of offices, 41,900 sq ft of retail and restaurant space and 12,200 sq ft of residential apartments. Following the pre-let of 57,200 sq ft of offices in the over station office building to KKR in March, we have launched the marketing campaign for the Bond Street retail and early leasing interest is very encouraging. The project is expected to deliver a profit on cost of 15.8%.

 

At Cityside House, E1, having improved the design we inherited, we have now stripped out the building, commenced demolition and awarded the main construction contract. Our activities will transform the existing building into 74,700 sq ft of Grade A office and retail space. We are targeting a profit on costs of 15.1% with average office rents across the building of around £51.40 per sq ft, with delivery expected in Q4 2019 following the opening of the nearby Whitechapel Crossrail station.

 

At 30 September 2018, the three committed development properties required £206.1 million of capital expenditure to complete.

 

Substantial development pipeline

Our development pipeline includes a further 11 uncommitted projects (1.3 million sq ft). These schemes include a number of exciting projects, including New City Court, SE1 in the London Bridge Quarter, where we hope to materially increase the size of the existing 97,800 sq ft building to more than 370,000 sq ft and will be submitting a planning application early next year. At Mount Royal, W1, located at the western end of Oxford Street, we are drawing up early plans to redevelop this two-acre site into a retail-led development scheme. All but one of these buildings is income producing today, with an average lease length of 3.4 years, and they provide a substantial opportunity to add value stretching into the 2020s.

Valuation

 

Valuation is accompanied by graphics (see Appendix 2)

 

The valuation of the Group's properties was £2,595.7 million as at 30 September 2018, reflecting a valuation increase of 0.6% on a like-for-like basis since 31 March 2018. At 30 September 2018, the wholly-owned portfolio was valued at £2,066.6 million and the Group had three active joint ventures which owned properties valued at £529.1 million (our share) by CBRE.

 

The key drivers behind the Group's valuation movement for the six-month period were:

 

·           rental value increase - since the start of the financial year, rental values have increased by 0.7%, with office and retail rental values rising by 0.4% and 1.6% respectively. At 30 September 2018, the portfolio was 9.8% reversionary;

·           intensive portfolio management - during the period, 54 new leases, rent reviews and renewals were completed, securing £12.7 million (our share) of annual income which helped to support the valuation;

·           good progress across our development properties - the valuation of current committed development properties increased by 2.1% to £355.8 million; and

·           yield compression - equivalent yields decreased very marginally by 1 basis point over the period largely driven by our repositioning activities. At 30 September 2018, the portfolio true equivalent yield was 4.6%.

Including rent from pre-lets and leases currently in rent free periods, the adjusted initial yield of the investment portfolio at 30 September 2018 was 4.0%, unchanged from the start of the financial year.

 

Our West End investment portfolio produced the most robust performance by geographic sector over the period, increasing in value by 0.5% on a like-for-like basis, in part driven by our portfolio management activity as set out above. Our City, Midtown and Southbank properties increased by 0.1%. Our joint venture properties increased in value by 0.9% over the period while the wholly-owned portfolio increased by 0.5% on a like-for-like basis.

 

The Group delivered a total property return (TPR) for the six months to 30 September 2018 of 2.2% (2017: minus 2.4%), compared to the Central London IPD quarterly benchmark of 2.9%, and a capital return of 0.6% (versus 1.3% for IPD). This relative under-performance resulted from our higher than benchmark exposure to investment properties with shorter lease lengths, where valuations were less resilient given the potential leasing risk. These properties form our development pipeline and active portfolio management opportunities where income is necessarily shorter to enable us to unlock the future longer-term value upside.

Our financial results

 

Our financial results are accompanied by graphics, see Appendix 3, and details on our approach to risk are set out in Appendix 1

 

We calculate adjusted net assets and earnings per share in accordance with the Best Practice Recommendations issued by the European Public Real Estate Association (EPRA). The recommendations are designed to make the financial statements of public real estate companies clearer and more comparable across Europe enhancing the transparency and coherence of the sector. We consider these standard metrics to be the most appropriate method of reporting the value and performance of the business and a reconciliation to the IFRS numbers is included in note 8 to the accounts.

 

EPRA NAV growth of 0.5%

EPRA net assets per share (NAV) at 30 September 2018 was 849 pence per share, an increase of 0.5% over the last six months, largely due to the 0.6% like-for-like increase in value of the property portfolio. The main drivers of the 4 pence per share increase in NAV from 31 March 2018 were:

 

·           the increase of 6 pence per share arising from the revaluation of the property portfolio. Of this amount, development properties increased NAV by around 3 pence;

·           EPRA earnings for the period of 9 pence per share enhanced NAV;

·           the final dividend of 7 pence per share reduced NAV;

·           tax, predominantly associated with property sales, reduced NAV by 3 pence per share; and

·           other movements reduced NAV by 1 pence per share.

 

EPRA NAV growth of 0.5%, combined with the payment of last year's final dividend of 7.3 pence per share, delivered a total accounting return for the six months to 30 September 2018 of 1.3%.

 

At 30 September 2018, the Group's net assets were £2,381.4 million, up from £2,366.9 million at 31 March 2018, with the increase largely attributable to the revaluation of the property portfolio and net earnings for the period. EPRA triple net assets per share (NNNAV) was 847 pence at 30 September 2018 compared to 842 pence at 31 March 2018 (up 0.6%). At the period end, the difference between NAV and NNNAV was the net impact of the mark to market of debt of 2 pence per share, mainly arising from the Group's 2029 debenture (coupon of 5.63%) and deferred tax. There was a £1.5 million decrease in deferred tax liabilities during the period.

 

EPRA earnings given net sales activity

EPRA earnings were £25.3 million, 19.9% lower than for the same period last year, predominantly due to reduced rental income as a result of property sales and securing vacant possession of buildings ahead of redevelopment.

 

Rental income from wholly-owned properties was £40.0 million, down £4.7 million or 10.5% on last year, principally as a result of property sales during the period, the sale of 30 Broadwick Street, W1 in the prior year and securing vacant possession at Oxford House, W1 ahead of development. Joint venture fees were £2.5 million, up £1.4 million on last year due to higher levels of transaction activity in the joint ventures, including the commencement of the Turner lease at 160 Old Street, EC1. Taken together, rental income from wholly-owned properties and joint venture fees totalled £42.5 million, down 7.2% on the prior period. Adjusting for acquisitions, disposals and transfers to and from the development programme, like-for-like rental income (including from joint venture properties) increased 1.7% on the prior period.

 

Property expenses increased by £2.4 million to £6.1 million, principally due to increased costs associated with our leasing initiatives and empty rates returning to more normalised levels as the benefits of prior year rates rebates were not repeated in the current period. Administration costs were £12.8 million, an increase of £0.9 million, primarily as a result of higher marketing costs associated with our development activities, including the opening of our new marketing suite at Kent House, W1.

 

EPRA profits from joint ventures (excluding fair value movements) were £2.5 million, up from £1.0 million last year predominantly due to reduced finance costs as a result of the repayment of joint venture balances with the proceeds of property sales (including 240 Blackfriars Road, SE1).

 

Gross interest paid on our debt facilities was £6.3 million, down £2.7 million on the prior period. The reduction in interest paid was due to the prepayment of 85% of the Group's £142.9 million 5.63% debenture in the latter part of the prior year. We capitalised interest of £1.9 million (2017: £4.5 million), a £2.6 million reduction reflecting our reduced wholly-owned development exposure when compared to the prior period. As a result, the Group had underlying net finance charge (including interest receivable on joint ventures balances) of £0.7 million (2017: £0.7 million income).

 

Revaluation gains together with increased underlying earnings resulted in an accounting profit after tax of £33.7 million (2017: £25.3 million). The basic earnings per share for the period was 12.0 pence, compared to 7.7 pence for 2017. The diluted earnings per share for the period was 11.1 pence, compared to 5.7 pence per share for 2017. Diluted EPRA earnings per share was 9.0 pence (2017: 9.6 pence), a reduction of 6.3%, and cash earnings per share was up 15.3% at 8.3 pence (2017: 7.2 pence).

 

Results of joint ventures

The Group's net investment in joint ventures was £484.4 million, an increase from £423.7 million at 31 March 2018, due to a 0.9% like-for-like increase in value of the property portfolio and an increase in partner loan contributions to fund the Hanover Square land buy back and development expenditure. Our share of joint venture net rental income was £6.9 million, down £1.7 million on last year as a result of the sale of 240 Blackfriars Road, SE1 last year, offset by positive asset management activity. The underlying joint venture profits are stated after charging £2.5 million of GPE management fees (2017: £1.1 million).

 

Overall, our three active joint ventures represent an important proportion of the Group's business. At 30 September 2018, joint ventures represented 20.4% of the portfolio valuation, 20.3% of net assets and 18.9% of rent roll (31 March 2018: 18.1%, 17.9% and 13.6% respectively).

 

Robust financial position with continued active balance sheet management

In June, we drew down £100.0 million of new unsecured US private placement notes. The notes were placed with seven US institutional investors and mature in 10, 12 and 15 years, with a weighted average fixed rate coupon of 2.8%.

 

In September, the Group's £150.0 million convertible bond matured. Bonds with a face value of £136.9 million were repaid on maturity at par and £13.1 million of bonds converted. The Group opted to pay a cash amount in respect of the converted bonds rather than issue new shares. The quantum of the cash payment was based on GPE's share price between 7 September and 4 October. As a result, the final amount payable was £12.6 million, which was paid in early October, with the £0.5 million discount on maturity recognised in the income statement for the period.

 

At September 2018, Group consolidated net debt was £116.3 million, up from £(5.2) million net cash at 31 March 2018 (30 September 2017: £502.8 million). The increase was due to the payment of £306.0 million in respect of the Group's B share scheme and development capital expenditure of £48.1 million in the period more than offsetting receipts from property sales. Group gearing increased to 4.9% at 30 September 2018 (31 March 2018: 0%) due to higher levels of on-balance sheet debt more than offsetting the increase in the portfolio value. Including the non-recourse debt in the joint ventures, total net debt was £149.6 million (31 March 2018: £67.5 million) equivalent to a loan to property value of 5.8% (31 March 2018: 2.4%). The proportion of the Group's total net debt represented by our share of joint venture net debt was 22.3% at 30 September 2018. At 30 September 2018, the Group, including our share of joint ventures, had cash and undrawn committed credit facilities of £682 million.

 

Pro forma for the receipt of the sales proceeds of 55 Wells Street, W1, which was sold in October 2018 and the payment of the remaining £12.6 million in respect of the convertible bond, the Group's loan to property value is 3.9%.

 

The Group's weighted average cost of debt, including fees and joint venture debt, for the period was 2.8%, 50 basis points lower than at 31 March 2018 due to the partial prepayment of the Group's debenture as mentioned above. The weighted average interest rate (excluding fees) at the period end was 2.7% up from 2.1% at 31 March 2018, as a result of drawing down our new private placement notes and redemption of the 1.0% coupon convertible bond. At 30 September 2018, 72% of the Group's total drawn debt (including non-recourse joint venture debt) was provided on an unsecured basis (31 March 2018: 89% pro forma) and 88% was from non-bank sources (31 March 2018: 90%).

 

At 30 September 2018, 100% of the Group's total drawn debt (including non-recourse joint ventures) was at fixed or hedged rates (31 March 2018: 100%). Due to our low levels of debt and the treatment of capitalised interest under our Group covenants, our net interest cover ratio was 67 times (31 March 2018: n/a). Our weighted average drawn debt maturity was 6.9 years at 30 September 2018 (31 March 2018: 3.9 years).

 

Since the period end, the Group signed a £450 million unsecured revolving credit facility ("RCF") at a headline margin of 92.5 basis points over LIBOR with a group of six existing relationship banks. The facility has an initial five-year term which may be extended to a maximum of seven years at our request, subject to bank consent. This facility includes our standard unsecured financial covenants and is an amendment and extension of the Group's £450 million RCF signed in October 2014 which had a headline margin of 105 basis points and was due to mature in October 2021.

 

Maintaining balance sheet discipline; share buyback of up to £200 million

We have already completed £329 million of net sales so far this financial year, crystallising profits from properties where we have delivered our business plans and reducing our LTV to less than 6%, with more than £200 million of cash on deposit yielding a very low return.

 

As a result, we currently intend to return up to £200 million of equity which is surplus to our present needs to shareholders over the next 12 months through a share buyback. The proposed on-market share buyback programme reflects our ongoing commitment to capital allocation and balance sheet discipline, whilst also ensuring that we retain our significant financial flexibility to deliver our development programme and fund potential acquisition opportunities which may emerge given the ongoing economic and political uncertainty.

 

Adjusting for this proposed return of capital, pro forma LTV would rise to 11.8% (or 18.4% when including existing development capex commitments), although we expect to continue to be a net seller for the rest of the financial year.

 

Over the coming months, we expect to review regularly the size and timing of the buyback, including potentially ceasing the programme, as the future direction of the UK economy becomes clearer and should the scale and speed of our property sales and acquisitions evolve from our expected path.

 

A further announcement containing more detailed information regarding the share buyback will be released before the start of any dealing under the share buyback programme.

 

99.7% rent collection and robust tenant base

The quarterly cash collection performance has continued to be very strong throughout 2018. We secured 99.7% of rent due within seven working days following the September quarter day, compared with 99.9% and 99.0% at March and June respectively earlier this year. Tenants on monthly payment terms represent around 5.6% of our rent roll (30 September 2017: 3.1%). We had one tenant delinquency in the first half of the six month period (0.1% of rent roll) and we remain vigilant, regularly monitoring the financial position of our tenants. In addition, we have further protection from any tenant defaults with £23.6 million of rent deposits and bank guarantees, representing around 24% of rent roll.

 

Taxation

The tax charge in the income statement for the half year was £6.7 million (2017: £2.5 million credit) and the effective tax rate on EPRA earnings was 0% (2017: 0%). The tax charge for the period results from property sales which fall outside our REIT ring-fence and the maturity of the convertible bond.

 

In general, as a REIT, the Group is broadly exempt from corporation tax in respect of its rental profits and chargeable gains relating to its property rental business but is otherwise subject to corporation tax. In particular, the Group is subject to corporation tax in respect of (i) any profits arising from trading properties (including the sale of the residential units at Rathbone Square, W1) and (ii) any gains arising on the sale of investment properties in respect of which a major redevelopment has completed within the preceding three years (including 78/92 Great Portland Street, W1 and 55 Wells Street, W1).

 

Dividends

The Board has declared an interim ordinary dividend of 4.3 pence per share (2017: 4.0 pence) which will be paid on 2 January 2019. All of this dividend will be a REIT Property Income Distribution (PID) in respect of the Group's tax-exempt property rental business.
 

Condensed group income statement

For the six months ended 30 September 2018

Year to 31 March  2018 Audited £m			Notes		Six months to 30 September 2018 Unaudited £m		Six months to 30 September 2017 Unaudited £m
386.5		Total revenue	2		50.8		65.4
92.0		Net rental income	3		40.0		44.7
5.2		Joint venture fee income	11		2.5		1.1
97.2		Rental and joint venture fee income			42.5		45.8
(11.3)		Property expenses	4		(6.1)		(3.7)
85.9		Net rental and related income			36.4		42.1
(24.1)		Administrative expenses			(12.8)		(11.9)
14.2		Development management revenue			0.1		12.6
(14.6)		Development management costs			(0.2)		(12.9)
(0.4)		Development management losses			(0.1)		(0.3)
262.3		Trading property revenue			1.9		-
(250.7)		Trading property cost of sales			(10.2)		(0.1)
11.6		(Loss)/profit on sale of trading property			(8.3)		(0.1)
73.0		Operating profit before surplus on property and results of joint ventures			15.2		29.8
35.5		Surplus from investment property	9		17.7		16.9
41.2		Share of results of joint ventures	11		6.8		11.2
149.7		Operating profit			39.7		57.9
9.8		Finance income	5		3.7		5.2
(11.2)		Finance costs	6		(4.4)		(4.5)
(36.6)		Premium paid on cancellation of private placement notes			-		(36.6)
(38.1)		Premium paid on cancellation of debenture stock			-		-
8.5		Fair value movement on convertible bond	14		1.4		6.2
(5.4)		Fair value movement on derivatives			-		(5.4)
76.7		Profit before tax			40.4		22.8
(6.4)		Tax	7		(6.7)		2.5
70.3		Profit for the period			33.7		25.3
All results are derived from continuing operations in the United Kingdom and are attributable to ordinary equity holders.
21.5p		Basic earnings per share	8		12.0p		7.7p
18.2p		Diluted earnings per share	8		11.1p		5.7p
20.4p		EPRA EPS	8		9.0p		9.6p

    

 

 

Condensed group statement of comprehensive income

         For the six months ended 30 September 2018

Year ended 31 March 2018 Audited £m			Six months to 30 September 2018 Unaudited £m	Six months     to 30    September 2017 Unaudited £m
70.3		Profit for the period	33.7	25.3
		Items that will not be reclassified subsequently to profit and loss:
6.1		Actuarial gain on defined benefit scheme	0.9	1.1
(0.1)		Deferred tax on actuarial gain on defined benefit scheme	(0.2)	-
76.3		Total comprehensive income for the period	34.4	26.4

 

Condensed group balance sheet

At 30 September 2018

 

As at 31 March 2018 Audited £m			Notes	As at 30 September 2018 Unaudited £m	As at 30 September 2017 Unaudited £m
		Non-current assets
2,305.2		Investment property	9	2,088.5	2,448.6
423.7		Investment in joint ventures	11	484.4	508.0
4.6		Plant and equipment		4.3	4.9
0.5		Pension asset		1.7	-
-		Deferred tax	7	-	4.5
2,734.0				2,578.9	2,966.0
		Current assets
19.5		Trading property	10	17.7	262.2
15.1		Trade and other receivables	12	16.2	91.0
-		Corporation tax		-	0.6
351.4		Cash and cash equivalents		179.6	13.8
386.0				213.5	367.6
3,120.0		Total assets		2,792.4	3,333.6
		Current liabilities
(363.3)		Trade and other payables	13	(65.5)	(121.7)
(150.9)		Interest-bearing loans and borrowings	14	-	(153.2)
(0.1)		Corporation tax		(8.5)	-
(514.3)				(74.0)	(274.9)
		Non-current liabilities
(196.2)		Interest-bearing loans and borrowings	14	(295.9)	(378.4)
(40.8)		Obligations under finance leases	16	(40.8)	(40.7)
(1.8)		Deferred tax	7	(0.3)	-
-		Pension liability		-	(4.8)
(238.8)				(337.0)	(423.9)
(753.1)		Total liabilities		(411.0)	(698.8)
2,366.9		Net assets		2,381.4	2,634.8
		Equity
43.0		Share capital	15	43.0	43.0
46.0		Share premium account		46.0	352.0
322.4		Capital redemption reserve		322.4	16.4
1,957.9		Retained earnings		1,972.4	2,227.0
(2.4)		Investment in own shares	17	(2.4)	(3.6)
2,366.9		Total equity		2,381.4	2,634.8
840p		Net assets per share	8	845p	806p
845p		EPRA NAV	8	849p	813p

 

 

Condensed group statement of cash flows

For the six months ended 30 September 2018             

 

Year to 31 March 2018 Audited £m			Notes	Six months to 30 September 2018 Unaudited £m	(Restated) Six months to 30 September 2017 Unaudited £m
		Operating activities
149.7		Operating profit		39.7	57.9
(78.9)		Adjustments for non-cash items	18	(22.8)	(29.6)
-		Deposits received on forward sale of residential units		-	0.5
232.2		Decrease/(increase) in trading property		1.3	(12.5)
11.5		(Increase)/decrease in receivables		(1.6)	(5.8)
(54.9)		(Decrease)/increase in payables		(9.7)	5.3
259.6		Cash generated by operations		6.9	15.8
(18.4)		Interest paid		(5.0)	(8.4)
-		Interest received		0.5	-
(1.6)		Tax received/(paid)		-	0.4
239.6		Cash inflow from operating activities		2.4	7.8
		Investing activities
21.1		Distributions from joint ventures		6.5	8.4
(30.7)		Funds to joint ventures		(25.0)	(15.1)
130.3		Funds from joint ventures		-	-
(128.7)		Purchase and development of property		(30.9)	(107.7)
(0.4)		Purchase of plant and equipment		(0.1)	(0.2)
487.1		Sale of properties		270.1	243.0
(12.9)		Investment in joint ventures		(32.1)	(4.1)
465.8		Cash inflow from investing activities		188.5	124.3
		Financing activities
(109.0)		Revolving credit facility repaid		-	(47.0)
174.1		Issue of private placement notes		99.6	174.1
(127.7)		Redemption of private placement notes		-	(127.7)
-		Repayment of convertible bond		(136.9)	-
(36.3)		Premium paid on redemption of private placement notes		-	(36.6)
23.1		Termination of cross currency swaps		-	23.1
(121.1)		Redemption of debenture loan stock		-	-
(38.9)		Premium paid on redemption of debenture loan stock		-	-
-		Amounts paid in respect of B share scheme		(306.0)	-
(143.7)		Equity dividends paid		(19.4)	(129.7)
(379.5)		Cash outflow from financing activities		(362.7)	(143.8)
325.9		Net (decrease)/increase in cash and cash equivalents		(171.8)	(11.7)
25.5		Cash and cash equivalents at 1 April		351.4	25.5
351.4		Cash and cash equivalents at balance sheet date		179.6	13.8

 

Comparative re-presented: see note 22.