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Urban Exposure plc (UEX)
10 September 2019
Urban Exposure plc
Interim Results for the six months ended 30 June 2019
Urban Exposure Plc ("the Company") and its subsidiaries (together "the Group" or "Urban Exposure" or "we"), a specialist residential development financier and asset manager, today announces its interim results for the six months ended 30 June 2019 ("the Period").
New committed loans:
£54.3m (H1 2018: £0.3m, FY 2018: £524.5m)
Projected aggregate income (the Group share, on loan book over life of loans):
£1.0m (H1 2018: £0.0m, FY 2018: £26.9m)
Weighted Average LTGDV:
66% (H1 2018: n/a, FY 2018: 67%)
WA IRR (unlevered):
11% (H1 2018: n/a, FY 2018: 10%)
WA Money Multiple (annualised and unlevered):
1.14x (H1 2018: n/a, FY 2018: 1.15x)
Basic loss per share: (0.16)p
Basic profit per share adjusted for exceptional costs: 0.003p
Net tangible asset value1: 135.2m
Net tangible asset value per share: 85p
Cash and cash equivalents per share: 29p
Loans receivable per share: 53p
Calculated as Net Asset Value of £147.7m less Intangible Assets of £12.5m
Randeesh Sandhu, Chief Executive Officer, commented:
"In line with our strategy, we continue to focus on the 'ramp up' of our AUM and loan book and have invested significantly in our team to support this phase.
While current market sentiment remains subdued, the underlying demand for development finance has continued unabated and we have a strong progressed loan pipeline of over £1 billion. As the business enters into the traditionally busier second half of its calendar year, we therefore remain confident of meeting market expectations."
This announcement is released by Urban Exposure Plc and contains information that qualified or may have qualified as inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 ("MAR"). For the purposes of MAR and Article 2 of Commission Implementing Regulation (EU) 2016/1055, this announcement is made by Randeesh Sandhu, Chief Executive Officer of Urban Exposure Plc.
Notes to Editors
Urban Exposure Plc (Aim: UEX) is a specialist real estate financier and asset manager. The Group services highly experienced borrowers building real estate assets across the UK, whilst managing funds on behalf of institutional investors looking for exposure to this sector. For additional information, please visit Urban Exposure PLC's website at www.urbanexposureplc.com and on twitter @UrbanExposureuk, LinkedIn: www.linkedin.com/company/urban-exposure/ and Facebook: www.facebook.com/UrbanExposureUK/
Chief Executive's Review
Since the Group listed on AIM I have focussed on ensuring that the business has the right platform in place to achieve its potential and deliver good returns for our shareholders. The most important aspect of delivering long term shareholder value is to ensure that we have the best quality loan book and funding structures, which together provide the Group with the best risk adjusted returns in the market. I am pleased with the performance of both these aspects to date as well as the opportunities for growth going forward.
Overall revenue of £5.3m is predominantly derived from fair value gains on loans deployed on balance sheet. Our goal is to use our balance sheet as efficiently as possible while also providing us with capacity to execute loans quickly, before these are subsequently transferred into our asset management business. To date asset management income has been modest but as we grow our AUM, and more loans are deployed, this higher quality stream of earnings should generate a greater proportion of our revenue.
Total operating costs, excluding exceptional items, of £5.3m in H1 2019 (H1 2018: £1.0m) reflect the increased investment in the business that we detailed in our 2018 preliminary announcement. There will be an increase in run rate costs in the second half of the year as we make the necessary investment needed to capitalise on the opportunities presented to us. We remain comfortable with our full year cost guidance of £12.5m.
The Group achieved a small profit before exceptional items at H1 2019 (H1 2018: loss of £1.0m). Exceptional items of £(0.3)m were in relation to the costs of a proposed retail bond that was due to be issued at the start of August. The retail bond was one part of our asset management strategy to raise discretionary capital. Due to adverse market conditions at the time of the issue we decided not to go ahead with the bond. Although we have incurred costs associated with this, we now have FCA approval and a published prospectus that would allow us to re-enter the market very quickly when conditions are more favourable.
New Committed Loans and Pipeline
The nature of our business, the size of the loans we manage, and our unrelenting focus on credit quality inevitably means that there will be some variability in the amount of new committed loans we complete during the year. The real estate development finance industry is also seasonal with a greater weighting to deals being completed in the last quarter of the year (in the last two months of 2018, we executed £291.1m of loans).
As a result of these factors the Group completed £54.3m of new committed loans at H1 2019 (H1 2018: £0.3m) and further loans of £43.2m as at 9 September 2019. This £54.3m of new committed loans will translate into £4.4m of projected aggregate income (of which the share for the Group is £1.0m) which will eventually be recognised in earnings over the life of the loans. In total, funding of £564.9 million has been committed (£648.0 million including legacy loans) over 17 loans since our IPO in May 2018, as at the end of H1 2019.
The Group set a target of £700-£900m of loans this year and despite the slow start I expect the business to be within this range by the end of the year. The business has a very strong pipeline of £1,013.1m of loans, of which £666.3m are currently in the advanced stages of legal due diligence where heads of terms have been signed and the Group has exclusivity (the remaining pipeline balance represents deals where heads of terms have been issued) . The process of legal due diligence is important as at this point the borrower is committing legal expenses to ensure the loan is eligible for completion. Historically we have converted a high proportion of these loans.
Loan Credit Quality
The credit quality of the loans we underwrite is fundamental to our business model and our reputation as a leading real estate development finance provider. We employ robust credit guidelines, rigorous deal appraisal and stringent policies and procedures to mitigate market risk in our lending and operations. Our overall approach to risk management ensures that we are well diversified across projects and geographical locations so that we mitigate concentration risk.
This approach is reflected in one of our main KPIs, the weighted average loan to gross development value (WA LTGDV), which was 66% at H1 2019 (FY 2018: 67%). This is conservative and below our stated guidelines of a maximum WALTGDV of 75%. However, this KPI does not fully reflect the underlying level of security against the Group's loans, due to the stringent pre-sale requirements the Group negotiates as part of any loan agreement. These requirements state that typically a borrower must have at least 20% of the development units pre-sold (with a 10% exchange deposit) before the borrower can draw down the loan. As the development progresses, we will set sales targets so that pre-sales, which are backed by deposits, add extra security to the loan.
Of the £564.9m of committed loans underwritten to date our borrowers have managed to achieve pre-sales of £181.0m. These pre-sales effectively de-risk a significant portion of our loan book, which, in practice, effectively reduces the WA LTGDV. Taking these pre-sales into account therefore provides an effective WA LTGDV of 45%, which is a more accurate reflection of the quality of the loan book.
It is within this context the Group's WA IRR of 11% (FY 2018: 10%) and WA Money Multiple of 1.14x (FY 2018: 1.15x) should be viewed together, demonstrating the extremely attractive risk adjusted returns we can provide to our shareholders and investors. This is due to the stringent quality of our credit processes and our selective approach to new committed loans.
We are currently in advanced discussions with capital providers as well as extending existing facilities and joint venture partnerships. As at 9 September 2019 we have c. £500m of capital in legal due diligence which we expect to complete by the end of the year.
The key for the Group, as always, is not just the quantum of capital raised, but the quality. Due to structural and technical factors, not all capital is suited to development finance; hence why we place so much emphasis on the form of the capital we raise as well as the terms.
UK Housing Market
Our view remains that despite the uncertainties associated with the UK's exit from the European Union the medium-term outlook for the UK property industry remains positive. There continues to be a fundamental supply and demand gap within the residential property market, and real earnings growth coupled with mortgage affordability and availability both underpin future demand.
In line with our strategy, we continue to focus on the 'ramp up' of our AUM and loan book and have invested significantly in our team to support this phase.
While current market sentiment remains subdued, the underlying demand for development finance has continued unabated and we have a strong progressed loan pipeline of over £1 billion. As the business enters into the traditionally busier second half of its calendar year, we therefore remain confident of meeting market expectations.
The nature of development finance means that there will be a delay in the recognition of earnings as it takes time for development loans to be drawn down to meet the needs of the borrower. As a result, it will take two to three years before the Income Statement hits 'run rate'. Despite this the business reported a small profit before exceptional items at the half year.
The headline financial results for the six-month period ended 30 June 2019 and the comparatives for the period from incorporation on 10 April 2018 to 30 June 2018 are presented below:
Revenue was £5.3m at H1 2019 with £5.0m relating to fair value income from loan receivables on balance sheet. The remaining income of £0.3m is split between revenue earned from asset management £0.2m and revenue earned on legacy contract assets of £0.1m. As loans draw down, particularly within the KKR partnership, the revenue from asset management should become a greater proportion of income in future years.
At our 2018 preliminary results we set out the recognition profile of PAI for 2018 of £26.9m. We initially expected that PAI would be recognised in the income statement on the following basis: 2018: 12%, 2019: 25%, 2020: 25%, 2021: 25%, 2022: 13%. The recognition profile for the 2018 PAI is now expected to be as follows: 2018: 12%, 2019: 35%, 2020: 25%, 2021: 20%, 2022: 8%. There has been an acceleration in the recognition profile of 2018 PAI as loans have drawn down quicker than expected. The expected recognition profile for 2019 remains in line with our initial guidance, which is: 2019: 5%, 2020: 20%, 2021: 30%, 2022: 20%, 2023: 25%.
In line with the Group's strategy the business has invested significantly in its operations so that it has the capabilities to meet the growing demand for real estate development finance over the medium term. At H1 2019 total operating costs excluding exceptional items were £5.3m (H1 2018: £1.0m) of which £3.6m represented staff costs and share based payments. As a percentage of the total committed loan book (including contract assets) this is 0.82%, which is below our stated target of 1% (FY 2019: 0.81%). At 2018 full year results the Group provided guidance of £12.5m of operating costs, which remains the expectation.
Exceptional items of £(0.3)m relate to costs incurred in relation to the postponed retail bond.
Earnings per share
The adjusted basic profit per share for the period is 0.003p. The basic loss per share (after exceptional items) is (0.16)p and the diluted loss per share is (0.16)p, based on a weighted average number of shares of 158,494,130.
In accordance with our dividend policy:
During the Period our investment in the partnership with Kohlberg Kravis Roberts increased to £4.4m from £1.9m at FY 2018. This represents Urban Exposure's 9.1% share of £48.4m total invested by the partners to fund loan drawdowns.
The fair value of loans as at H1 2019 was £83.6m. These are held on the balance sheet with the intention of being transferred to third party management structures, thereby growing asset management revenues and freeing up capital to deploy into new committed loans.
Operating cash flows before movement in working capital of £(4.8)m reflects the loss for the period after adjustment for non-cash items. The change in working capital reflects the reduction in the loan receivable balance offset by the investment in the KKR partnership. Other notable cash movements include the payment of the interim and final dividend for 2018 of 2.5p equating to £4.0m.
INDEPENDENT REVIEW REPORT TO URBAN EXPOSURE PLC
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 which comprises the unaudited consolidated statement of comprehensive income, the unaudited consolidated statement of financial position, the unaudited consolidated statement of changes in equity, the unaudited consolidated cash flow statement and the related notes.
We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
The interim report, including the financial information contained therein, is the responsibility of and has been approved by the directors. The directors are responsible for preparing the interim report in accordance with the rules of the London Stock Exchange for companies trading securities on AIM which require that the half-yearly report be presented and prepared in a form consistent with that which will be adopted in the Company's annual accounts having regard to the accounting standards applicable to such annual accounts.
As disclosed in note 1, the annual financial statements of the Group will be prepared in accordance with International Financial Reporting Standards ('IFRS') as adopted by the European Union. The condensed financial statements included in this interim report have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting' as adopted by the European Union.
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
Scope of review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ''Review of Interim Financial Information Performed by the Independent Auditor of the Entity'', issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2019 is not prepared, in all material respects, in accordance with International Accounting Standards 34, as adopted by the European Union, and the rules of the London Stock Exchange for companies trading securities on AIM.
Use of our report
Our report has been prepared in accordance with the terms of our engagement to assist the Company in meeting the requirements of the rules of the London Stock Exchange for companies trading securities on AIM and for no other purpose. No person is entitled to rely on this report unless such a person is a person entitled to rely upon this report by virtue of and for the purpose of our terms of engagement or has been expressly authorised to do so by our prior written consent. Save as above, we do not accept responsibility for this report to any other person or for any other purpose and we hereby expressly disclaim any and all such liability.
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE SIX MONTHS TO 30 JUNE 2019
The comparatives are for the period from incorporation 10 April 2018 to 30 June 2018 and for the period from incorporation on 10 April 2018 to 31 December 2018.
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2019
These Financial Statements were approved and authorised for issue by the Board of Directors on 9 September 2019 and were signed on its behalf by:
Chief Executive Officer
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX-MONTH PERIOD TO 30 JUNE 2019
CONSOLIDATED CASH FLOW STATEMENT FOR THE SIX-MONTH PERIOD TO 30 JUNE 2019
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX-MONTH PERIOD TO 30 JUNE 2019
The registered office of the Company is 6 Duke Street St. James's, London SW1Y 6BN. The Group's principal activity is the underwriting and management of loans to UK residential developers.
Period of account
The Consolidated Financial Statements of the Group are in respect of the reporting Period ("the Period") from 1 January 2019 to 30 June 2019. The comparatives are for the period from incorporation at 10 April 2018 to 30 June 2018 and for the period from incorporation 10 April 2018 to 31 December 2018.
Basis of preparation
The interim condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Group's financial statements for the period ended 31 December 2018, which were prepared in accordance with International Financial Reporting Standards adopted by the International Accounting Standards Board ("IASB") and interpretations issued by the International Financial Reporting Committee ("IFRIC") of the IASB (together "IFRS") as adopted by the European Union.
The information relating to the six months ended 30 June 2019 and the comparative information for the period from incorporation at 10 April 2018 to 30 June 2018 is unaudited and does not constitute statutory financial statements within the meaning of section 434 of the Companies Act 2006. The Group's statutory financial statements to 31 December 2018 are audited and have been delivered to the Register of Companies. The report of the auditor was unqualified and did not draw attention to any matters by way of emphasis or contain a statement under section 498(2) or (3) of the Companies Act 2006.
Significant accounting policies
The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's financial statements for the period to 31 December 2018.
The Group is exposed through its operations to the following financial risks:
In common with other businesses, the Group is exposed to risks that arise from its use of financial instruments. This note describes the Group's objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these Financial Statements.
The Group's overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise the effect on the Group's financial performance. Risk management is carried out by the Board of Directors. It identifies, evaluates and mitigates financial risks. The Board provides written policies for credit risk and liquidity risk.
The principal financial instruments used by the Group, from which financial instrument risk arises, are as follows:
Financial instruments not measured at fair value include cash and cash equivalents, trade and other receivables, and trade and other payables. The carrying value of the trade assets and other receivables has been amortised to estimated net recoverable value where there are circumstances indicating that the full value will not be recovered. There was no impairment recognised in respect of contract assets as there has been no change in the expected cash flows. Due to the short-term nature of cash and cash equivalents and trade and other payables, the Directors consider that their carrying value approximates to their fair value.
The fair value hierarchy of financial instruments measured at fair value is provided below:
(v) Financial instruments measured at fair value
The valuation techniques and significant unobservable inputs used in determining the fair value measurement at Level 2 and Level 3 financial instruments, as well as the inter-relationship between key unobservable inputs and fair value are set out in the table below.
The following table shows the sensitivity of fair values Grouped in Level 3 to changes in interest rates, for a selection of the largest financial assets. It is assumed that interest rates are changed by 1% whilst all other variables were held constant.
The reconciliation of the opening and closing fair value balance of Level 3 financial instruments is provided below:
The Group income for the Period was derived as follows:
The Group operating loss for the Period is stated after charging:
The Group's operating costs are stated after charging:
The following costs were identified as exceptional items during the Period:
In June 2019, costs of £312,000 relating to a cancelled proposed bond issue were expensed as a one-off non-recurring cost.
Urban Exposure Plc's Ordinary Shares were admitted to trading on AIM on 9 May 2018. Costs of £613,000 related to the IPO and were expensed as a one-off non-recurring cost.
For the period ended 31 December 2018, legal and professional costs of £256,000 were incurred in setting up the syndication agreement with KKR. The set-up costs are an exceptional one-off cost in defining the arrangement between the parties and are considered exceptional in size.
Basic earnings/loss per share (EPS) has been calculated based on the loss for the Period as shown in the Consolidated Statement of Comprehensive Income divided by the weighted average number of Ordinary Shares in issue.
Diluted EPS has been calculated based on the loss for the Period as shown in the Consolidated Statement of Comprehensive Income divided by the weighted average number of Ordinary Shares. Although 2,783,333 (June 2018 - 3,150,000 and December 2018 - 3,150,000) share options were in issue, as these would have an anti-dilutive effect they have not been included in the calculation of 'Weighted average number of shares for diluted earnings per share'. In the future, when a profit is generated, these will have a dilutive impact.
The Board approved an interim dividend of 0.83p per share on 28 December 2018 which was paid 21 January 2019. This was recognised as a liability at 31 December 2018.
A final dividend of 1.67p per share was proposed as payable to all shareholders on the Register of Members on 12 April 2019, approved at the Annual General Meeting of 2 May 2019 and paid 7 May 2019.
An interim dividend of £1.67 per share (£2,647,000) was proposed and approved by the Board on 9 September 2019. The interim dividend is payable to all shareholders on the Register of Members on 27 September 2019 and will be paid on 18 October 2019.
The Group acquired the goodwill and the brand on acquisition of the business of Urban Exposure Investment Management LLP on the 9 May 2018 as detailed in the note 27 of the Annual Report for period ended 31 December 2018.
During the measurement period following the acquisition, following a review of the tax basis for the contract assets acquired, information was obtained which has resulted in an adjustment of £255,000 to the provisional amounts recognised, with a corresponding increase in goodwill. Accordingly, the comparative information for the period ended 30 June 2018 and 31 December 2018 has been revised as shown in this note.
Brands are amortised on a straight-line basis over their useful economic lives, currently estimated at 10 years.
The Group entered into a partnership agreement with Kohlberg Kravis Roberts (KKR) in which the Group has a 9.1% interest. The purpose of the agreement is to make loans to real estate developers in the United Kingdom for the development of residential and mix use properties. Under this agreement, KKR will invest up to £150m and Urban Exposure Plc will invest up to £15m in assets under management, with each party contributing as directed under the partnership agreement as and when required. The Group invested £4.5m to date (June 2018 £Nil as before agreement, December 2018 £1.9m).
The investments are classified as a trade investment and accordingly, they are financial assets measured at FVTPL. See note 2 for further disclosures.
All the cash and cash equivalents are held in Sterling.
The Directors consider that the carrying amount of cash and cash equivalents approximates to their fair values.
Share capital for the Period has been issued as follows:
The movement in the number of shares issued during the Period is shown as below:
There was no movement in the number of shares issued in the six-month period ended 30 June 2019.
The details of the movement in the number of shares in issue to the 31 December 2018 are shown in the last audited financial statements.
At 31 May 2018, a resolution was passed authorising, conditional on admission, the amount standing to the credit of the share premium account of the Company (less any issue expenses set off against the share premium account) to be cancelled and the amount of the share premium account so cancelled to be credited to retained earnings.
An application was made to the High Court to cancel the share premium account and judgement was obtained by Order of the High Court of Justice, Chancery Division, to approve the application and the share premium of £156,578,000 was cancelled and credited to retained earnings.
The SH19 form was submitted to Companies House with a copy of the Court Order on 24 July 2018.
During the Period the Group companies entered into the following transactions with related parties which are not members of the Group:
Payroll costs and other operating costs were paid on behalf of Urban Exposure Group and re-charged at cost by the above related companies.
There were loan balances outstanding from the Directors at the Period end of £nil (June 2018 £40,000, December 2018 £6,000).
Dividends of £73,000 and £147,000 were paid to the Directors and key managers of Urban Exposure Plc in respect of the interim dividend and final dividend for the period ended 31 December 2018 in January 2019 and May 2019 respectively.
In addition, the following investments were acquired from related parties:
On the 2 May 2018, Urban Exposure Plc acquired £100 Ordinary Shares in Urban Exposure Holdings Limited from Mr. R. Sandhu, a company director, for a consideration of £100.
On the 9 May 2018, Urban Exposure Amco Limited issued 7,848,700 £1 shares to acquire the business assets of Urban Exposure Investment Management LLP in a share exchange with the members.
On the 9 May 2018, Urban Exposure Plc acquired contract assets of £7,151,300 from Urban Exposure Holding Company (Jersey) Limited in exchange for 7,151,300 shares issued at a value of £1 each.
The Group has £220.8m (June 2018 £nil, December 2018 £324.3m) of undrawn committed loan capital payable over the next four years. These commitments will be significantly reduced as and when they are syndicated to other lenders, or as and when the Group enter into co-lending arrangements with institutional investors.
The Group has entered into a partnership agreement with KKR with a commitment of up to £15.0 million and has made payments of £4.5m (June 2018 prior to agreement, December 2018 £1.9m) under this agreement during the Period. This leaves an outstanding financial commitment relating to the agreement of £10.5m (June 2018 prior to agreement, December 2018 £13.1m).
The Group had no significant post balance sheet events requiring adjustment or disclosure.
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