Hot on property

So will Brixton be a Real Estate Investment Trust (REIT) next
January, and what will the likely costs be?

We probably will become a REIT next January, subject to seeing the final form of
the regulations which are due out at the end of this month. In terms of the cost
of a REIT, based on the June 2006 valuations, the costs would be about £38m. In
return for that, we would be exempt from corporation tax, including tax on our
capital gains, from our property rental income business.

What difference and opportunities will REIT status bring?

Well, I think REIT will attract new investment into the sector, both from
institutions and from retail investors. It will be interesting to see if
institutions decide to sell some of their direct property holdings in exchange
for cash or shares, or a combination of both, into REITs, because one of the key
benefits of that is that REITs will be tax transparent, but they will also
produce geared returns compared with holding property directly within
institutions where returns are earned on an un-geared basis.

Do you think your sector focus will benefit you?

That’s one of the key questions going forward in a UK REIT environment. If you
look at the example of the US, the top 15 out of 16 REITs are all apart from
one, sector specialists, who have proven themselves to outperform the
multi-sector companies. But that’s in the US. We’ll have to see what the
position is in the UK.

In terms of the 90% payout requirement, what will this mean for your
dividend going forward?

Well, our dividend policy has always been to maintain a progressive dividend
with increases each year, based on the level of post-tax investment profit. In a
REIT environment, we would expect to pay a proportion of the tax saving on our
investment profit going forward. I think the key point to note about a UK REIT
is that we strongly believe that dividends should be paid out of income and not
out of capital.

The comparables for these interims look a bit mixed, largely because
of the disposals. Can you take us through the key numbers?

When you sell nearly 25% of the portfolio, it’s bound to have an impact. On a
positive note, the disposals have reduced our debt and, therefore, our gearing.

Our gearing at the half year was 26% compared with 65% at the end of 2005.The
effect of this is to give us considerable firepower for acquisitions and, since
the disposals were announced, we’ve reinvested £130m of the proceeds already.
The second positive effect of disposals is on the P&L. Our income cover has
increased from 1.8 times to 2.1 times, given the reduction in the level of our
interest charge.

What about the underlying performance?

On an underlying basis, the performance was good. The investment profit,
which incidentally is a key measure of profitability in the REIT environment,
was up by 5.2% to £24.4m.

On a like-for-like basis, the increase from our lettings, rent reviews and
renewal activities generated £3m worth of income. In terms of the interest
charged to our profit and loss account, the average rate fell from 6.6% in the
first half of 2005 to 5.7% in the first half of 2006.

Related reading