(TRV) Treveria PLC

Chairman's statement

At the time of our full year results announcement in April 2011, I explained that following the corporate restructuring that took place within the Group during 2010, this year would be focused on actively managing our property portfolio through refurbishments, new lettings and sales, as well as the restructuring of our debt facilities. I am pleased to report good progress in all these areas.

Results for the six-month period ended 30 June 2011 (all comparatives from prior year have been adjusted to exclude Silo C)

Gross rental income for the period was €48.4 million compared to €50.5 million for the comparative period in 2010 and €50.0 million for the second half of 2010. The decrease of €2.1 million (vs H1 2010) is mainly as a result of two properties now vacant which are undergoing major refurbishment programmes and which are due to be completed in 2012. The impact of a property sale also contributed €0.6 million to this reduction.

Net rental income for the period was €37.2 million (H1 2010: €41.5 million). Irrecoverable service charge expenditure represented 7.1% of gross rents compared with 5.5% for the comparable period in 2010 and 8.7% for the second half year 2010. 

Administrative expenses decreased to €5.5 million for the period (H1 2010: €7.0 million). Having achieved initial successes in reducing legal and professional fees by internalising various functions, we will continue to work to decrease further the administrative costs.

The operating profit for the period was €32.0 million (H1 2010: €35.9 million).

Net finance cost for the first half of 2011 increased slightly to €30.2 million (H1 2010: €29.8 million) due to the effect of the higher interest margin in Silo F/K. The movement in the fair value of derivative instruments was impacted by the effluxion of time and changes in market interest rates. In the first half of 2011 this produced a credit of €10.0 million compared with a cost of €3.1 million for the same period in 2010.

The profit before tax for the period was €11.8 million (H1 2010: profit of €3.1 million) and the adjusted profit after tax was €1.1 million (H1 2010: €4.3 million; H2 2010: €1.3 million). Adjusted profit after tax is defined in note 8 to the accounts.

Basic and adjusted EPS for the period were 1.91c and 0.18c, respectively (H1 2010: 0.42c and 0.71c, respectively). Adjusted EPS is defined in note 8 to the accounts.

The total cash balance held by Treveria plc and its subsidiaries was €73.7 million (H2 2010: €79.4 million). In the reporting period the Group invested €1.9 million in acquisitions and €2.3 million in other capital expenditure improvements.

Markets

German GDP in 2011 is still expected to grow by ca. 2% p.a. and German retail sales to grow by 1.5% p.a. While the investment market in Germany for commercial real estate increased overall by 28% to €11.1bn in H1 2011, the investment market for retail properties grew by 58% in that same period. Transaction volume in H1 2011 in retail properties was €6.24 billion, compared to €7.9 billion for the whole of 2010. The investors, mainly asset managers and open ended funds focused very much on core assets with long leases and larger-sized properties, which meant that over 70% of the properties changing hands were shopping centres or big box stores . There is still demand for high street assets and they comprised more than 25% of the value of the transactions. Whilst in H1 2010, 50% of transactions were portfolio deals, in H1 2011 there were more than 70% single asset transactions. In H1 2011 over 50% of the investors were international buyers.

(Source: CBRE MarketView Germany Retail Investment H1 2011)

Investment markets are expected to stay dynamic in H2 2011 with the focus being on high quality buildings and long leases and with yields decreasing.  It is apparent that investors are now becoming more interested in both properties where value can be added, as well as those in secondary cities. The potential impact of the Euro and sovereign debt crisis is hard to assess and the real estate markets could be affected.

Refurbishments and new lettings

In the first six months of 2011 we continued with our refurbishment programme across a number of properties, including assets in Dortmund and Berlin, and commenced new refurbishments in Fürth, Saarbrücken, Uelzen and Kempten.  We finished the first tranche of the programme for Marl and Dortmund and completed the programmes in Bayreuth and Remscheid. In total, during the reporting period we invested a total of €2.3 million in capital expenditure in improving our properties. This is part of the wider programme to spend between €15 million and €20 million on capital expenditure, as announced in last year's chairman's statement, although some of this will now be deferred to 2012.

For the first time since 2008 I am pleased to be able to report an increase in our annualised rent roll.  Although this only amounted to €0.6 million or 0.6% per annum, it is a positive reversal of previous trends. New lettings were achieved generating annual rents of €6.9 million and this is a 17% increase on what was achieved in the first half of 2010. As a result of our efforts in these asset management activities, the vacancy ratio in our portfolio was reduced from 14.7% at the end of 2010 to 13.9% at 30 June 2011. As a consequence of having to defer the timing of part of our expenditure programme to 2012, we do not anticipate reaching our target of 11% vacancy ratio until after the end of the current financial year.

Sales

Two property sales were notarised during the reporting period with a gross consideration of €12.4 million. The first of these, which belonged to Silo J and therefore free of any mortgage or charge, completed during the period for a consideration of €10.75 million.  The other, which was held in Silo E, completed in July 2011 with the bank agreeing to let the Group retain the proceeds.  As a result, these sales generated free cash of €11.4 million for the Group.

The Group acquired the freehold interest in two properties for €1.9 million where it previously held only a leasehold interest. Apart from this, the Group did not acquire, or enter into any other new contract to purchase further properties in the reporting period. 

Valuation and net asset value

For the purpose of each set of published financial statements in the past, the Board has engaged the services of an outside independent professional valuer to value the Group's property portfolio. This can be a costly exercise. Over the six-month period ended 30 June 2011, the Board of Directors is of the view that the values of retail property in Germany have not seen a significant fluctuation. In view of this, we decided that the expense of having an outside professional valuation was not warranted. Instead, a valuation of the Group's property portfolio was carried out by our staff under the direction of the Board. We will instruct an outside independent valuer to perform a full valuation of the Group's property portfolio as at 31 December 2011 (as in previous years) and this will be used for the purposes of the annual consolidated financial statements. The Directors of the Group valued the portfolio at €1.37 billion. This takes into account the additions and disposals and represents no change on a like-for-like basis from the 31 December 2010 valuation carried out by DTZ Debenham Tie Leung Limited at €1.39 billion.  The adjusted net asset value per share of the Group was 54.2c compared with 54.0c as at 31 December 2010.

Restructuring of debt facilities

Work in this area is a continuing activity and much effort has been concentrated on dealing with the banks involved as all the facilities require renewal or repayment during this year or next.  I am pleased to report that we have made advances in this area and our major achievements so far this year are the agreements achieved in Silos D and E.  Further details concerning the loans are set out below:

Silo D (Deutsche Bank/Citigroup; loan €217 million; securitised):

The lenders on this loan, which was due to expire on 20 July 2011, have transferred it into two separate securitisations. The servicer of these securitisations (Deutsche Bank) granted a 12 month extension with unchanged interest margins of 85bps. The limitation of only a one year extension is a result of a restriction in the CMBS documentation which permits an extension of only 12 months at a time. Interest on the loan is now 100% floating linked to 3-months Euribor with a one year cap at 3% p.a. Although the silo remains cash trapped, the Group is allowed to use such cash to draw down asset management fees, other operational costs and to invest in property refurbishments.

Silo E (ABN Amro; loan €424 million; securitised):

This loan expired on 15 July 2011. We entered into an Amendment and Standstill Agreement expiring on 30 September 2011 with Hatfield Philips, the loan servicer. An agreement in principle has been reached to extend the loan and further details will be announced once the documents are signed. The silo is currently in cash trap although we are allowed to pay our asset management fees and capital expenditure.

Silo F/K (Eurohypo; loan €428 million; sole lender):

The final maturity of this loan is 25 July 2012. The waiver on the LTV covenant, which expired at the end of April 2011, has been extended to 30 September 2011. We continue to pursue various options with regard to this facility, including an early refinancing with third party debt and possible mezzanine structures. The silo remains cash trapped.

Silo G (JP Morgan; loan €40 million; syndicated loan):

This silo is not cash trapped and is performing in accordance with the loan agreement with the lender. The loan matures on 19 November 2012.

Silo J (properties free of any mortgage or charge):

Following the sale of the Gelsenkirchen property, the largest asset in this silo, during the period, there remain seven properties with a value of €4.3 million.

Operations

Critical to our success in de-leveraging the silos is our ability to sell selective assets. Therefore, in 2011 we increased the number of our internal staff in this department and instructed five separate agents who are specialists in their relevant regions. We expect the result of these steps to come to fruition in the second half of 2011.

The total number of staff at 30 June 2011 was 46. This compares to 45 at the end of 2010.

RETT

As described in the 2010 Annual Report, we submitted the RETT relief request to the German tax authorities in January 2011. The regional RETT tax offices transferred the responsibility for dealing with this to a central office in Berlin. Our advisers have held a number of constructive meetings with this office, however the resolution and timing of the relief request is still difficult to assess. Therefore, for the time being the provision of €1 million and the contingent liability of €32.0 million relating to this remain unchanged.

Strategy and outlook

We hope in future to continue to establish strategic business partnerships in different fields of our business activities. In addition to the existing arrangements with agents we are currently engaged in two joint venture projects responsible for refurbishing assets, two partnerships to undertake letting activities as well as one related to technical real estate services.

At the same time, we continue to look for efficiencies in our operational structure. We are in the process of disposing of or liquidating those legal entities no longer required, which will result in a reduction in our administrative costs. We are engaged in the task of streamlining the record keeping and accounting functions throughout the Group with more administrative functions becoming centralised in Germany.

De-leveraging will continue to be the key to the success of Treveria. This will be mainly achieved through active asset management including capital expenditure, contracting long leases and selling the "refurbished" assets. Any surplus cash arising from these steps will be wholly or partly re-invested into our other suitable property assets. With these actions we hope to reduce the loan-to-value ratio of the portfolio to around 65% in 2014.

Finally, I am pleased to report that we have invited Nicholas Cournoyer, a partner in Montpelier Investment Management, one of our largest shareholders, to rejoin the Board and he has accepted with immediate effect. Montpelier is a significant manager of funds and Nick, who knows the Group thoroughly, brings a wealth of experience in dealing with debt related issues. Together with my colleagues on the Board I look forward to working with Nick and taking the Group forward in its endeavours.

Rolf Elgeti

Non-Executive Chairman

26 September 2011

AIM rule 17 Disclosure:

Nicholas Cournoyer, aged 53, is a Partner of Montpelier Investment Management which currently holds 21.36% of the Group's issued share capital.

Nicholas Cournoyer is, or has been, a director of the following companies in the last five years: