TIDMFCRE 
 
To:                   RNS 
 
Date:               28 September 2018 
 
From:              F&C UK Real Estate Investments Limited 
 
  * Portfolio ungeared total return* of 11.7 per cent for the year 
 
  * NAV total return* of 13.6 per cent for the year 
 
  * Dividend of 5.0 pence per share for the year, giving a yield* of 5.0 per 
    cent on the year-end share price 
 
  * Dividend cover* increased to 95.7 per cent for the year from 94.4 per cent 
 
* See Alternative Performance Measures 
 
Chairman's Statement 
 
The Group's net asset value ('NAV') total return* for the year was 13.6 per 
cent with a NAV per share as at 30 June 2018 of 108.5 pence, up from 100.1 
pence per share at the prior year-end. 
 
Despite the strong underlying performance, the share price reflects continued 
market uncertainty. The share price total return* for the year was -1.9 per 
cent with the shares trading at 99.8 pence per share at the year-end, a 
discount* of 8.0 per cent to the NAV. It is disappointing that the share price 
has fallen but it is not believed that this is a reflection of the underlying 
portfolio when compared against the peer group. 
 
Property Market 
 
The UK commercial property market delivered a total return of 9.4 per cent as 
measured by the Investment Property Databank ('IPD') UK Quarterly Index for all 
assets in the year to 30 June 2018. Performance was positive throughout the 
year, although the latter part of the year saw some moderation in total 
returns. Capital values recorded 4.7 per cent annual growth and the annual 
income return was 4.5 per cent. As in the previous year, performance was driven 
by Industrial and Distribution property and by Alternative assets, which 
included student accommodation, healthcare and hotels. Compared with a year 
earlier, most parts of the market recorded an improved performance, with 
Industrials pulling further ahead, but Retail did encounter headwinds, and 
shopping centres delivered a negative total return. 
 
In the year to 30 June 2018, open market rental value growth at the 
all-property level was 1.7 per cent, led by a 7.3 per cent increase for South 
East Industrials, but the structural weakness of regional Retail persisted and 
rental growth for this segment remained negative. Yields edged slightly lower 
over the year, helped by stronger investment demand. 
 
Portfolio 
 
The Group's property portfolio produced an ungeared return* of 11.7 per cent 
over the year to 30 June 2018, outperforming the IPD Quarterly Index by 210bps. 
Performance was driven by a combination of capital growth of 6.1 per cent and 
an above market income return of 5.3 per cent. Continuing the main theme from 
the last reporting period, positive sentiment for the Industrial sector led to 
the portfolio's Industrial and Distribution assets again being the key 
contributors to Company performance. Encouragingly, performance of the 
portfolio was more consistently broad based than in previous periods with the 
Company's Retail and Office assets outperforming their benchmark peers at the 
sector level, although the South-East Retail assets struggled on a relative 
basis. Retail Warehousing was a particular bright spot although the Manager 
continues to monitor this sub-sector closely, with significant time being 
devoted to the management of the assets in light of specific tenant risk. 
 
The portfolio continues to deliver an above market income yield, with the void 
rate reducing to 4.6 per cent following the successful completion of asset 
management initiatives. There has been minimal impact upon the portfolio from 
Company Voluntary Arrangements ('CVA's') and administrations widely reported in 
the Retail market place as at 30 June 2018, however post period there will be 
some impact from the CVA of Homebase, recently approved by creditors. As 
detailed in the Manager's Review, plans are already in place to mitigate any 
potential negative impact and to realise opportunity where appropriate. Average 
unexpired lease length has fallen over the period to approximately 6 years on a 
weighted basis. 
 
The Company's strategy continues to be the retention of an overweight position 
to Industrial and Warehouse property with the Company's Retail portfolio under 
continual review given the difficulties currently being experienced by this 
sector. There was a further sale from the High Street portfolio of 100a Princes 
Street, Edinburgh and also an Office building at The Clock Tower, Brookwood. 
The Company's sole purchase was an Industrial asset in Basingstoke. 
 
Despite the Company's shares trading at a premium to NAV for a proportion of 
the year the Board has maintained a cautious approach to raising new equity. 
This policy is complemented by the Manager's measured approach to the purchase 
of property in what is a highly competitive marketplace. Therefore, the primary 
focus has been on the disposal of non-core and secondary assets and the active 
management of retained assets. 
 
Cash Resources 
 
The Group had GBP15.0 million of cash available and an undrawn facility of GBP7 
million at 30 June 2018 and acquisition opportunities are constantly under 
review. There is no undue pressure to invest with the near-term focus being to 
concentrate available capital on worthwhile, cost effective asset management 
initiatives within the standing portfolio. Opportunistic sales may also be 
considered, with disposals in the reporting year offering a valuable aggregate 
premium to valuations. 
 
Borrowings 
 
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, GBP13 
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 26.2 per cent of 
investment properties at 30 June 2018. 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. 
 
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 28 September 
2018. This gives a total dividend for the year ended 30 June 2018 of 5.0 pence 
per share, a yield* of 5.0 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 95.7 per cent, compared to 94.4 
per cent for the previous year.   There was exceptional income received of GBP4.4 
million relating to a surrender premium received from a tenant and when 
adjusted for this, dividend cover was 132.0 per cent. 
 
Responsible Property Investment 
 
The Company has continued to take measures to strengthen its approach to 
responsible property investment. An outline of the main milestones reached and 
further actions is included in the Manager's Review. 
 
Change of Company Name 
 
In 2014 the Company's investment manager, F&C Investment Business Limited, was 
acquired by BMO ('Bank of Montreal'). BMO has recently announced its intention 
to transition all remaining F&C branded products and funds to BMO later in the 
year. Its savings plans, through which many of our shareholders invest, will 
also align to the BMO brand. The Board is therefore recommending that the 
Company changes its name from F&C UK Real Estate Investments Limited to BMO 
Real Estate Investments Limited and is seeking shareholder approval at the 
Annual General Meeting.  If approved, it is anticipated that this renaming will 
take effect early in 2019. 
 
Outlook 
 
The outlook continues to be dominated by the political and economic 
uncertainties surrounding Brexit, and this is likely to become even more 
pronounced as the March 2019 deadline approaches. Economic growth has been 
positive, but modest, and consensus forecasts have been revised lower. The Bank 
of England raised interest rates after the end of this reporting period, and 
further gradual increases are anticipated. However, the property yield premium 
remains attractive against the risk-free rate. 
 
The difficulties affecting the Retail sector are an area of concern, as is 
pricing in some areas of the market. We believe that in an environment of low 
growth and of market uncertainty, investors will prioritise income protection 
and the security of a long-term contracted income stream. We expect property to 
continue to deliver positive total returns, underpinned by the income return. 
 
Whilst remaining cautious in these uncertain times, we believe that the 
Company's balanced portfolio offers relatively attractive defensive 
characteristics, a strong income return, combined with some value enhancement 
opportunities. 
 
Vikram Lall 
Chairman 
 
                                         * See Alternative Performance Measures 
 
Manager's Review 
 
Property Highlights over the year 
 
  * Outperformance of the MSCI IPD Quarterly Index (the benchmark) of 210 bps 
    over the year to June 2018 driven by a relatively high weighting to 
    Industrials. The portfolio has now outperformed the index over 1, 3, 5, 10 
    and 14 years since inception. 
 
  * Outperformance in both Capital and Income, with an income return* of 5.3 
    per cent over the period. 
 
  * Selective sales strategy has delivered a positive contribution to returns. 
 
  * Acquisition of further Industrial exposure in the South East in the form of 
    Unit K60 Lister Road, Basingstoke, let to Bunzl, for GBP9.56 million. 
 
  * Low void rate of 4.6 per cent well below the IPD Quarterly Index rate of 
    7.2 per cent. 
 
Property Market 
 
The UK commercial property market delivered a total return of 9.4 per cent in 
the year to 30 June 2018 as measured by the Investment Property Databank 
("IPD") all Quarterly and Monthly Funds Index ('IPD Quarterly Index'). 
Performance was driven by an annual income return of 4.5 per cent, with capital 
values rising by 4.7 per cent. 
 
The market recorded consistently positive total returns at the all-property 
level throughout the year but with a slight deceleration in pace in the second 
half of the reporting period. The income return reduced from 4.7 per cent a 
year earlier, reflecting higher capital values, with capital growth 
consistently positive during the reporting period. 
 
The UK economy has continued to see modest positive GDP growth. Inflation 
remains above target, in part reflecting the lagged effect of the depreciation 
of sterling and higher oil prices. Despite an improving labour market, wage 
growth remains modest. The Bank of England raised its official rate in November 
2017 and again after the end of the reporting period. Gilt yields edged up 
marginally in the reporting year, but with ten-year yields at 1.38 per cent, 
they remain at very low levels by historic standards. The Brexit negotiations 
and the consequent economic and political ramifications remain a major concern 
for investors with progress at the time of writing seemingly having stalled. 
The growth of protectionism globally and concern about tariff wars has been a 
further factor affecting sentiment though it has not to this point fed through 
in to pricing. 
 
Against this backdrop, property investment activity has been resilient, helped 
by strong investment flows from overseas and by purchases from local 
authorities taking advantage of low borrowing costs. Institutions were net 
investors in property taking the year as a whole, while the open-ended Retail 
funds saw net inflows resume following the outflows experienced in the 
aftermath of the vote to leave the European Union in June 2016. The year to 
June 2018 saw more than GBP64 billion invested in property versus GBP52 billion in 
the previous year. The increase was most marked for non-London Offices, 
Industrials and Alternatives but investment in town centre Retail moved out of 
favour. Central London was resilient with some very large transactions 
concluding towards the period end. The banks have remained restrained in their 
new lending to commercial property, both for standing investments and 
development. 
 
There has been sustained depth of demand in the market, with investors 
generally favouring core product benefitting from long-term secure income. 
Initial yields compressed further, to 4.5 per cent at the end of the reporting 
period, compared with 4.8 per cent a year earlier.  The hardening of yields was 
seen across most parts of the market but was most marked for provincial Offices 
and Industrials. 
 
Performance by segment broadly maintained the pattern seen after the 
referendum.  Industrial and distribution property delivered significant returns 
of 20.4 per cent driven by both yield compression and rental growth, which were 
prevalent in London, particularly for multi let terraces inside the M25. The 
logistics and distribution market, as distinct from certain manufacturing and 
production supply chains is seen as being more resilient to Brexit related 
risks and for the right stock, a beneficiary of both technological change and a 
structural change in retailing. Offices recorded a 7.9 per cent total return. 
Rest of UK Offices and City Offices out-performed South East Offices and West 
End Offices but all segments under-performed the all-property average. Risks 
undoubtedly remain, however to date the central London Office market continues 
to defy dour post referendum predictions with take up close to the 15-year 
average and vacancy rates stable, despite a recent slow-down in the pace of 
rental growth. While serviced Office occupiers are a larger proportion of take 
up than was historically the case, the occupier base remains broad. There has 
been an uptick in South-East availability, though regional Office markets 
showed solid leasing activity over the period, buoyed by a number of large 
corporate and government acquisitions and grade A availability falling. 
 
The Retail segment has had a difficult year, buffeted by significant and much 
documented structural headwinds, and marked by Company Voluntary Arrangements 
("CVAs"), administrations and store portfolio rationalisation, particularly in 
the second half of the period. Total returns were 4.5 per cent and all the IPD 
Retail segments under-performed the all-property average while total returns 
for shopping centres were negative. Sentiment towards the sector, alongside the 
continued appetite for Industrials, has had the effect of reversing the 
traditional yield hierarchy, with Industrials (5.4 per cent) now offering lower 
equivalent yields than both Offices (5.7 per cent) and Retail (5.5 per cent) at 
the standing investment level. Despite relatively robust consumer spending, 
rental growth has now remained weak over a prolonged period, save for London 
and the South East, a disconnection with trend. Similarly, low vacancy rates 
within the Retail Warehouse sector have not been enough to generate meaningful 
rental growth. Alternatives, including healthcare, hotels and hospitality and 
student accommodation, out-performed the all-property average and are now a 
growing part of the IPD data set, reflecting the weight of capital pursuing the 
sector and delivering a 9.9 per cent total return. 
 
Open market rental growth was 1.7 per cent at the all-property level, 
representing a slight deceleration from the pace seen in the previous reporting 
period. Rental growth eased for Retail and Offices but improved for Industrials 
and Alternatives. 
 
The property market has stabilised following the EU referendum result but there 
is polarisation both by sector and within sectors, and considerable uncertainty 
remains with both investors and occupiers displaying caution. The yield premium 
over gilts remains attractive and an all-property annual income return of 4.5 
per cent on relatively long-term contracted income may continue to look 
appealing when compared against other asset classes. 
 
Portfolio 
 
Total Portfolio Performance 
 
                                                      June 2018      June 2017 
 
No of properties                                             42             43 
 
Valuation (GBP'000)                                       353,625        335,350 
 
Average Lot Size (GBP'm)                                      8.4            7.8 
 
Net Initial Yield                                         4.74%          5.36% 
 
                                                      Portfolio      Benchmark 
                                                            (%)            (%) 
 
Portfolio Capital Return*                                   6.1            4.7 
 
Portfolio Income Return*                                    5.3            4.5 
 
Portfolio Total Return*                                    11.7            9.4 
 
Source: BMO REP Property Management Limited, MSCI Inc 
 
The Company's property portfolio produced an ungeared total return* of 11.7 per 
cent over the year to June 2018 versus the IPD Quarterly Index of 9.4 per cent, 
outperformance of 210 basis points. Performance was driven by both an above 
market income return* and above market capital growth of 5.3 per cent and 6.1 
per cent respectively. The portfolio has delivered an annualised ungeared total 
return* of 8.4 per cent per annum over three years and 11.3 per cent over five 
years. The portfolio has outperformed the IPD quarterly Index over one, three, 
five, ten and fourteen years since inception. 
 
The market remains competitive for quality assets, driving yields to historic 
lows. Despite cash availability at the Company level, the Manager continues to 
be selective in deployment. One asset was acquired over the year, a single let 
Industrial asset located in Basingstoke, for GBP9.56 million, a yield of 5.2 per 
cent. 
 
Whilst the portfolio has not required any wholesale repositioning, the priority 
has been to continue the success of the recent sales programme. Six assets have 
been disposed of over the previous two years to address the non-core tail of 
legacy, predominantly Retail assets, selling into a well bid investment market 
at a net premium to valuation. Two further assets were sold over the reporting 
period. The high street Retail asset at 100a Princes Street, Edinburgh was 
disposed of to crystallise the recent asset management plan and pursue a 
continued down weighting to the subsector. There was also the disposal of an 
Office asset known as The Clock Tower, Brookwood. The sale was completed in 
advance of the lease expiry, where we considered there to be not 
inconsequential re-letting risk, to a special purchaser at a significant 
premium to valuation. 
 
The portfolio's above market income yield of 5.3 per cent, low void rate of 4.6 
per cent (reduced further since the end of the reporting period by completion 
of additional asset management initiatives), and a weighted average unexpired 
lease term of approximately 6 years remain the bedrock of the portfolio 
identity. The strategic decision to maintain a comparatively high exposure to 
the South East by geography and the Industrial and Logistics market by sector 
have been key factors in portfolio performance. As in the previous period, 
portfolio turnover and the burden of associated transaction costs were 
relatively low, as were the non-recoverable costs linked to below benchmark 
property voids. 
 
Retail 
 
Retail Portfolio Performance 
 
                                                    June 2018      June 2017 
 
No of properties                                           23             24 
 
Valuation (GBP'000)                                     134,775        139,840 
 
Net Initial Yield                                       5.01%          5.54% 
 
                                                    Portfolio      Benchmark 
                                                          (%)            (%) 
 
Retails Capital Return*                                   1.8           -0.4 
 
Retails Income Return*                                    5.2            5.0 
 
Retails Total Return*                                     7.1            4.5 
 
Source: BMO REP Property Management Limited, MSCI Inc 
 
The Retail portfolio outperformed the IPD Index over the year delivering 7.1 
per cent. Performance was driven by a particularly strong showing from the 
Retail Warehouse assets which delivered 9.8 per cent. A further factor in the 
relative outperformance against IPD was the lack of any shopping centres within 
the portfolio. 
 
Some headwinds remain for the sector with rental values falling and a series of 
structural developments continuing to negatively impact sentiment. 
Strategically, the Company's direction of travel has been clear, with disposals 
from the High Street portfolio leaving the Company better placed structurally 
to tackle the challenges from reduced store portfolios and prospects for 
falling rents in off prime, over-shopped or marginalised locations. 
Opportunistic sales are likely to continue; however, a higher proportion of the 
portfolio's high street assets are now located amongst the primer towns in the 
more established shopping locations which continue to benefit from more 
defendable tenant demand. 
 
The portfolio itself is subject to some tenant specific considerations, in the 
form of Homebase, which requires further attention. Following on from 
Wesfarmers sale of the business earlier this year to restructuring specialists 
Hilco, the directors of Homebase have now received approval from creditors to 
place the business into a CVA. Given recent sales performance and a number of 
well publicised management and operational issues this is not entirely 
surprising and had been anticipated for some time. Under these proposals none 
of the Company's assets are earmarked for closure, however there will be some 
disruption to near term income. Longer term, business plans are in place to 
address potential consequences at the three Retail Warehouse assets affected 
and the Manager remains confident in successfully negotiating a satisfactory 
outcome. 
 
Offices 
 
Offices Portfolio Performance 
 
                                                    June 2018      June 2017 
 
No of properties                                           10             11 
 
Valuation (GBP'000)                                      89,200         89,545 
 
Net Initial Yield                                       4.93%          5.76% 
 
                                                    Portfolio      Benchmark 
                                                          (%)            (%) 
 
Offices Capital Return*                                   5.0            3.9 
 
Offices Income Return*                                    5.9            3.9 
 
Offices Total Return*                                    11.2            7.9 
 
Source: BMO REP Property Management Limited, MSCI Inc 
 
Office assets outperformed the IPD Index over the year returning 11.2 per cent. 
Pleasingly given underperformance in previous periods, Offices made a valuable 
contribution to portfolio returns over the period and this was broadly spread, 
with all subsectors in which the Company has representation, West End, South 
East Offices and Rest of UK Offices, delivering in excess of IPD. 
 
Stand out assets were Edinburgh Park, where the removal of the tenant break to 
HSBC delivered notable capital uplift, and The Clock Tower, Brookwood, where an 
opportunistic sale in advance of lease expiry was conducted to a special 
purchaser in excess of valuation.  Furthermore, the Company's largest asset at 
Berkeley Street, W1, delivered 11.6 per cent over the year, ahead of both the 
market as a whole and the West End Offices sub sector. This was attributable to 
continued positive investor sentiment and encouraging leasing activity. The low 
yielding nature of this asset does leave its prospects more muted in the short 
term given a moderation of rental growth expectations. Nevertheless, the 
multi-let, mixed use nature of the property continues to offer opportunity for 
active management through the cycle, particularly on the retail element which 
has yet to be fully realised on timing grounds. The portfolio retains a 
weighting of c.10 per cent of assets to central London. 
 
Vacancy remains at both Standard Hill, Nottingham and 14 Berkeley Street, 
London but at the time of writing terms are agreed to let all 28,000 sq ft at 
Nottingham and the 1,350 sq ft 5th floor suite at Berkeley Street. Completion 
of these initiatives would make a meaningful impact upon portfolio income. 
 
Industrial and Logistics 
 
Industrial & Logistics Portfolio Performance 
 
                                                    June 2018      June 2017 
 
No of properties                                            9              8 
 
Valuation (GBP'000)                                     129,650        105,965 
 
Net Initial Yield                                       4.33%          4.76% 
 
                                                    Portfolio      Benchmark 
                                                          (%)            (%) 
 
Industrials Capital Return*                              11.9           15.1 
 
Industrials Income Return*                                5.0            4.6 
 
Industrials Total Return*                                17.3           20.4 
 
Source: BMO REP Property Management Limited, MSCI Inc 
 
The Industrial and logistics properties returned 17.3 per cent during the year, 
which lagged the IPD index. However, the portfolio's overweight position 
continued to deliver meaningful contribution to the outperformance. This is the 
fifth year in a row that industrial holdings have led the portfolio's returns, 
being exclusively located in the supply constrained South East where tenant 
demand remains strong, and competition for land alongside a restrictive 
planning regime and a relatively inelastic supply response continues to drive 
rents. The fact that the Company's sole purchase over the year hails from both 
this sector and geography shows a continued commitment to this space, however 
we remain wary of the compressing of yields for all Industrial assets, with 
stock selection, as ever, key. The Manager continues to focus on mid box 
clusters as the basis for the portfolio exposure, located in the key 
distribution locations and infrastructure hubs with both the site and the 
accommodation built for purpose but flexible enough to allow for long term 
ownership. 
 
The portfolio has limited exposure to the multi-let Greater London terraces 
which we observe have been a major driver of market performance for the sector, 
with London Industrials delivering 26.7 per cent over the year. Key 
contributions to performance from the Industrial sector came from the two 
multi-let assets at Eastleigh where rental growth in the open market was 
combined with successful asset management to crystallise income growth. Further 
returns came from Echo Park, Banbury, reflecting the strength of sentiment 
towards South East logistics, and Lakeside Industrial Estate, Colnbrook where 
both leasing success and investor appetite for south east multi-lets located 
close to infrastructure and population centres delivered capital value growth. 
 
Much focus remains on unlocking the growth potential from the Industrial 
portfolio. Despite traditionally elastic supply, there is suggestion that even 
in light of rising construction starts, Industrial developers are struggling to 
keep up with active tenant demand. Even allowing for an improvement in supply 
pipeline, much of this promise relates to the 'last mile' conundrum for 
delivery and distribution businesses. For these occupier's location is king, 
particularly the proximity to market or end user. Weightings towards key urban 
centres, particularly London and the South East should continue to deliver 
attractive risk adjusted returns for the portfolio. 
 
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 applicable to the loan with Canada Life Investments is 
at the all-in rate of 3.36 per cent per annum and the rate 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 26.2 per cent at 30 June 2018. 
 
Outlook 
 
Despite headwinds for the Retail portfolio in particular, and a period likely 
to be characterised by mid to low single digit returns, the Manager believes 
that the portfolio is well placed to deliver solid relative performance, led by 
exposure to desirable areas of the market, the completion of selected asset 
management initiatives and a dependable income return. Given the level of 
competition for core, defensive assets, the objective remains to approach both 
acquisitions and disposals on an opportunistic basis, but to continue to 
prioritise exiting the diminishing tail of smaller non-core assets that are 
less likely to offer attractive risk adjusted contributions to the Company 
objective. Plenty of value-add opportunities exist amongst the Company's held 
assets which may well prove a more appropriate use of the Company's cash 
resources at this time than new purchases, with the associated drag of 
acquisition costs. 
 
Brexit and its economic and political repercussions will inevitably be a major 
factor influencing investors for several years. 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 product and prioritise the longevity of a secure income stream. The other 
major factor is the likely path of interest rates. The Bank of England has 
indicated that long term central bank interest rates may be lower than in the 
past and while some further rate increases are anticipated by the market, this 
may act to reduce upward pressure on property yields as rates rise, though a 
weakening of rental growth may justify a softening of capital values for 
selected sub markets.  Despite marginally higher yields in UK core markets than 
comparable European counterparts, the scope for further yield compression to 
drive performance looks to be limited. We would therefore continue to 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 2018    30 June 2017 
 
                                                         GBP'000           GBP'000 
 
Revenue 
 
Rental income                                           19,134          19,191 
 
Other income                                             4,375               - 
 
Total revenue                                           23,509          19,191 
 
Gains on investment properties 
 
Gains on sale of investment properties realised          1,568             781 
 
Unrealised gains on revaluation of investment           14,851           2,008 
properties 
 
                                                        39,928          21,980 
 
Expenditure 
 
Investment management fee                              (2,156)         (2,013) 
 
Other expenses                                         (1,619)         (1,966) 
 
Total expenditure                                      (3,775)         (3,979) 
 
Net operating profit before finance costs and 
taxation                                                36,153          18,001 
 
Net finance costs 
 
Interest receivable                                          2               4 
 
Finance costs                                          (3,550)         (3,598) 
 
                                                       (3,548)         (3,594) 
 
Net profit from ordinary activities before              32,605          14,407 
taxation 
 
Taxation on profit on ordinary activities                (295)           (306) 
 
Profit for the year                                     32,310          14,101 
 
Basic and diluted earnings per share                     13.4p            5.9p 
 
 
All items in the above statement derive from continuing operations. 
 
All of the profit for the year is attributable to the owners of the Company. 
 
F&C UK Real Estate Investments Limited 
 
                          Consolidated Balance Sheet 
 
                                                           30 June 2018    30 June 2017 
                                                                  GBP'000           GBP'000 
 
 
Non-current assets 
 
Investment properties                                           349,268         330,834 
 
Trade and other receivables                                       3,692           3,894 
 
                                                                352,960         334,728 
 
Current assets 
 
Trade and other receivables                                       1,282           1,291 
 
Cash and cash equivalents                                        15,037          16,565 
 
                                                                 16,319          17,856 
 
Total assets                                                    369,279         352,584 
 
Non-current liabilities 
 
Interest-bearing bank loans                                   (102,299)       (105,061) 
 
Trade and other payables                                          (291)           (352) 
 
                                                              (102,590)       (105,413) 
 
Current liabilities 
 
Trade and other payables                                        (5,279)         (6,023) 
 
Tax payable                                                       (294)           (306) 
 
                                                                (5,573)         (6,329) 
 
Total liabilities                                             (108,163)       (111,742) 
 
Net assets                                                      261,116         240,842 
 
Represented by: 
 
Share capital                                                     2,407           2,407 
 
Special distributable reserve                                   177,161         177,161 
 
Capital reserve                                                  77,693          61,274 
 
Revenue reserve                                                   3,855               - 
 
Equity shareholders' funds                                      261,116         240,842 
 
Net asset value per share                                        108.5p          100.1p 
 
F&C UK Real Estate Investments Limited 
 
Consolidated Statement of Changes in Equity 
For the year ended 30 June 2018 
 
 
                                     Special 
                         Share Distributable  Capital  Revenue 
                       Capital       Reserve  Reserve  Reserve    Total 
                         GBP'000         GBP'000    GBP'000    GBP'000    GBP'000 
 
 
At 1 July 2017           2,407       177,161   61,274        -  240,842 
 
 
Profit for the year          -             -        -   32,310   32,310 
 
Total comprehensive          -             -        -   32,310   32,310 
income for the year 
 
Dividends paid               -             -        - (12,036) (12,036) 
 
Transfer in respect of       -             -   16,419 (16,419)        - 
gains on investment 
properties 
 
 
At 30 June 2018          2,407       177,161   77,693    3,855  261,116 
 
For the year ended 30 June 2017 
 
 
                                     Special 
                         Share Distributable  Capital  Revenue 
                       Capital       Reserve  Reserve  Reserve    Total 
                         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 
 
F&C UK Real Estate Investments Limited 
 
                     Consolidated Statement of Cash Flows 
 
 
                                                             Year ended      Year ended 
                                                           30 June 2018    30 June 2017 
 
                                                                  GBP'000           GBP'000 
 
Cash flows from operating activities 
 
Net profit for the year before taxation                          32,605          14,407 
 
Adjustments for: 
 
     Gains on sale of investment properties realised            (1,568)           (781) 
 
     Unrealised gains on revaluation of investment             (14,851)         (2,008) 
properties 
 
     Decrease in operating trade and other receivables              211           1,829 
 
     Decrease in operating trade and other payables               (805)           (497) 
 
     Interest received                                              (2)             (4) 
 
     Finance costs                                                3,550           3,598 
 
                                                                 19,140          16,544 
 
     Taxation paid                                                (306)           (284) 
 
Net cash inflow from operating activities                        18,834          16,260 
 
Cash flows from investing activities 
 
Purchase of investment properties                              (10,190)           (450) 
 
Capital expenditure                                             (1,067)         (1,257) 
 
Sale of investment properties                                     9,242           7,460 
 
Interest received                                                     2               4 
 
Net cash (outflow)/inflow from investing activities             (2,013)           5,757 
 
Cash flows from financing activities 
 
Shares issued (net of costs)                                          -           1,985 
 
Dividends paid                                                 (12,036)        (11,986) 
 
Bank loan interest paid                                         (3,313)         (3,382) 
 
Bank loan repaid, net of costs - Barclays Loan                  (3,000)         (4,000) 
 
Net cash outflow from financing activities                     (18,349)        (17,383) 
 
Net (decrease)/ increase in cash and cash equivalents           (1,528)           4,634 
 
Opening cash and cash equivalents                                16,565          11,931 
 
Closing cash and cash equivalents                                15,037          16,565 
 
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 structuring and compliance - 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. Breaching Guernsey 
    solvency test requirements or loan covenants could lead to a loss of 
    shareholders' confidence and financial loss for shareholders. 
  * 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. 
 
The principal risks encountered during the year, how they are mitigated and 
actions taken to address these are set out in the table below. 
 
Principal Risk            Mitigation                Actions taken in the year 
 
Valuers have difficulty   Professional external     Valuing properties was 
in valuing the property   valuers are appointed to  challenging in the 
assets due to lack of     value the portfolio on a  aftermath of the Brexit 
market evidence or market quarterly basis. There is vote in June 2016. There 
uncertainty. Error in the regular liaison with the  has been more 
calculation/ application  valuers regarding all     transactional based 
of the Company Net Asset  elements of the           market evidence this year 
Value ('NAV') leads to a  portfolio. There is       which the valuers have 
material misstatement.    attendance by one or more used to assist them in 
Risk unchanged throughout Directors at the          producing the quarterly 
the year under review.    valuation meetings and    valuations. There was 
                          the Auditors attend the   attendance by one or more 
                          year end valuation        Directors at the 
                          meeting.                  valuation meetings 
                                                    throughout the year. 
 
Unfavourable markets,     The underlying investment The Board review the 
poor stock selection,     strategy, performance,    Manager's performance at 
inappropriate asset       gearing and income        quarterly Board Meetings 
allocation and            forecasts are reviewed    against key performance 
under-performance against with the Investment       indicators and is 
benchmark and/or peer     Manager at each Board     satisfied that the 
group.                    Meeting. The Company's    Manager's long-term 
This risk may be          portfolio is well         performance is in line 
exacerbated by gearing    diversified and of a high with expectations. 
levels.                   quality. Gearing is kept 
Risk unchanged throughout at modest levels. 
the year under review. 
 
The retail market has     The Manager provides      The portfolio was lightly 
witnessed a number of     regular information on    impacted as at 30 June 
company voluntary         the expected level of     2018. Post year-end 
arrangements, profit      rental income that will   Homebase, a tenant in 
warning announcements and be generated from the     three of the portfolio's 
administrations in recent underlying properties.    properties, placed the 
months. There is an       The Portfolio is well     business into a CVA. 
increased risk of tenant  diversified by geography   Business plans are in 
defaults in this sector   and sector and the        place to address 
which could put the level exposure to individual    potential consequences on 
of dividend cover at      tenants is monitored and  the assets affected and 
risk.                     managed to ensure there   the Manager remains 
Risk increased in the     is no over exposure.      confident in successfully 
year under review.                                  negotiating a 
                                                    satisfactory outcome. 
 
Viability Assessment and Statement 
 
The Board conducted this review over a 5 year time horizon, a period thought to 
be appropriate for a commercial property Investment Company with a long-term 
investment outlook; borrowings secured over an extended period and a portfolio 
with a weighted average unexpired lease length of 5.9 years. The assessment has 
been undertaken taking into account the principal risks and uncertainties faced 
by the Group which could threaten its objective, strategy, future performance, 
liquidity and solvency. 
 
The major risks identified as relevant to the viability assessment were those 
relating to a downturn in the UK commercial property market and its resultant 
effect on the valuation of the investment portfolio, the level of rental income 
being received and the effect that this would have on cash resources and 
financial covenants. The Board took into account the illiquid nature of the 
Company's portfolio, the existence of the long-term borrowing facilities, the 
effects of any significant future falls in investment values and income 
receipts on the ability to repay and re-negotiate borrowings, maintain dividend 
payments and retain investors. These matters were assessed over an initial 
period to September 2023, and the Directors will continue to assess viability 
over five year rolling periods, taking account of foreseeable severe but 
plausible scenarios. 
 
In the ordinary course of business, the Board reviews a detailed financial 
model on a quarterly basis, incorporating market consensus forecast returns, 
projected out to the maturity of its principal loan of GBP90 million which is due 
to mature in 2026.  This model uses prudent assumptions and factors in any 
potential capital commitments. For the purpose of assessing the viability of 
the Group, the model has been adjusted to look at the next five years and is 
stress tested with projected returns comparable to the commercial property 
market crash experienced between 2007 and 2009. The model projects a worst case 
scenario of an equivalent fall in capital and income values over the next two 
years, followed by three years of zero growth. The model demonstrated that even 
under these extreme circumstances the Company remains viable. 
 
Based on their assessment, and in the context of the Group's business model, 
strategy and operational arrangements set out above, the Directors have a 
reasonable expectation that the Group will be able to continue in operation and 
meet its liabilities as they fall due over the 5 year period to September 2023. 
 
 
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 2018 or 30 June 2017 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 2018 is GBP664,000 (2017: GBP502,000). 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 2018 the 
provision was GBP40,000 (2017: GBP136,000). Of this amount GBPnil was subsequently 
written off and GBP8,000 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 
 
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; and 
 
  * the Strategic Report and the Directors' 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; and 
 
  * the financial statements and Directors' Report includes details of related 
    party transactions; and 
 
In the opinion of the Directors: 
 
  * 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. 
 
On behalf of the Board 
 
V Lall 
Chairman 
27 September 2018 
 
F&C UK Real Estate Investments Limited 
 
                Notes to the Consolidated Financial Statements 
                        for the year ended 30 June 2018 
 
1.         The audited results of the Group which were approved by the Board on 
27 September 2018 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 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 2018. 
 
2.         The fourth interim dividend of 1.25p will be paid on 28 September 
2018 to shareholders on the register on 14 September 2018. The ex-dividend date 
was 13 September 2018. 
 
3.         There were 240,705,539 Ordinary Shares in issue at 30 June 2018. The 
earnings per Ordinary Share are based on the net profit for the year of GBP 
32,310,000 and on 240,705,539 Ordinary Shares, being the weighted average 
number of shares in issue during the year. 
 
4.         These are not full statutory accounts. The full audited accounts for 
the year ended 30 June 2018 will be sent to shareholders in September 2018, 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 
 
5.         The Annual General Meeting will be held on 21 November 2018. 
 
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 and non-recurring other income) cover the 
dividend paid. 
 
A reconciliation of dividend cover is shown below: 
 
                                                              30 June     30 June 
                                                                 2018        2017 
 
 
                                                                GBP'000       GBP'000 
 
Profit for the year                                            32,310      14,101 
 
Less:                Realised gains                           (1,568)       (781) 
 
                     Unrealised gains                        (14,851)     (2,008) 
 
                     Other income                             (4,375)           - 
 
Profit before investment gains and losses                      11,516      11,312 
 
Dividends                                                      12,036      11,986 
 
Dividend Cover percentage                                       95.7%       94.4% 
 
 
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. 
 
                                                              30 June     30 June 
                                                                 2018        2017 
 
 
                                                                GBP'000       GBP'000 
 
Total expenditure                                               3,775       3,979 
 
Less non-recurring costs                                        (793)     (1,126) 
 
Total  (a)                                                      2,982       2,853 
 
Average net assets           (b)                              251,751     234,917 
 
Ongoing charges (c=a/b)  (c)                                     1.2%        1.2% 
 
 
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: 0207 628 8000 
 
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: 01481 745001 
 
 
 
 
END 
 

(END) Dow Jones Newswires

September 28, 2018 02:00 ET (06:00 GMT)

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