Merchant Securities tackles demerger fallout

You’ve announced strong results, net asset value up 18%. What’s
driven that performance?

Yes, we did have strong results. If you look at the underlying performance of
the property in the investment division that’s behind those results, the
property division grew 22% and that’s really off the back of the outstanding
revaluation surpluses on the investment portfolio.

The investment division contributed 7%. That was, to an extent, held back by
the provisions that we had to book at the half year but what’s interesting, in
relation to the investment division, is that it has actually grown by 20% in the

second half of the year.

And how are your returns compared to the investment property

Our total property portfolio returns are 25.9% compared to 20.7% for the IPD
benchmark. So something like 20% out-performance there.

We believe that’s a reflection of the key attributes of our portfolio, which
is that we are in the right sector ­ offices ­ we’re in the right location ­ the
West End ­ and we’ve got a significant development pipeline, which also allows
us to create value.

But rental income has fallen. Can you explain why that is?

That is just a reflection of where we are in the cycle. We’ve sold quite a
lot of property in the year and the fall in rental income is really attributed
almost entirely to that.

At the end of the year our rent-roll was £54m. What’s interesting, though, is
if you look what happens as the current schemes that are being built come
on-stream, and the one scheme that’s recently refurbished is let up, you’ll be
able to see that adds about £11m to the rental roll over the next three years or
so. So that takes us from mid-£50m to mid-£60m in terms of rent roll.

What will the demerger of Leo Capital do to your gearing?

The demerger of Leo will increase the property gearing to just over 70%.
That’s high by reference to London Merchant Securities’ corporate levels in the
past, but not high for the property sector.

The other interesting thing to bear in mind is that, looked at on a
loan-to-value basis, our borrowings are still less than 40% of the total value
of the properties.

And how do you intend to fund the development pipeline?

The development pipeline of schemes that are currently being built is
entirely funded from the new bank facility that we’ve put in place. That
facility also gives us the headroom to go out and make new acquisitions.

The remainder of the development pipeline ­ because it has a significant
residential element, which will be disposed of and sold for cash ­ is largely

Are you happy with the shape of your balance sheet?

We’re very happy with the shape of the balance sheet. We are more highly
geared, but we believe that’s appropriate and it will give our equity investors
greater exposure to the upside, which we still think is to come, from rental
growth in the locations that we’re in and from the value that we create from the
development pipeline.

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