REG-UK Comm Prop REIT Ltd: Net Asset Value at 30 June 2019

UK Commercial Property REITAnnouncement

01/08/2019 07:05

1 August 2019

UK Commercial Property REIT Limited (“UKCM” or “the Company”)

LEI: 213800JN4FQ1A9G8EU25 

Net Asset Value at 30 June 2019

Active asset management and positive leasing momentum delivering rental growth

UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM), announces its
unaudited quarterly Net Asset Value (“NAV”) as at 30 June 2019. The
Company owns a diversified portfolio of high quality income producing UK
commercial property and is advised by Aberdeen Standard Investments^.

Net Asset Value

·      NAV per share of 93.2p (31 March 2019: 93.9p), resulting in a NAV
total return of 0.2% for the quarter with continued low net gearing of 16.2%*.

·     Like-for-like portfolio capital value decreased by -0.2% with
overall capital performance net of capital expenditure investment of -0.6%.
This compares to a -0.7% fall in the MSCI IPD monthly index over the period.
The portfolio is now valued at £1.459 billion (31 March 2019: £1.462
billion).

·     The Company’s strategically overweight position to Industrials,
constituting 48% of its portfolio, combined with successful asset management
activity in the portfolio, generated positive capital returns in the period,
which were offset by a decline in values predominantly in the Company’s
retail holdings.  

Asset management and leasing momentum underpinning performance

£2.96 million per annum of new headline rent secured across 12 lettings/lease
renewals during the period, reflecting a combined 13% uplift on previous rent
and 5% ahead of Estimated Rental Value (“ERV”), including:

·      Lease renewal with Veerstyle Limited at The Cargo Centre,
Newton’s Court, Dartford, for a 10 year lease at a rent of £575,237 per
annum, up 31% on the previous passing rent of £440,000 per annum and in line
with ERV.
 

·     A lease renewal with Hertfordshire County Council in Apsley One,
Hemel Hempstead, where a new 10 year reversionary lease was entered into at an
improved rent of £825,000 per annum, up 36% from the previous rent of
£607,068 per annum and 19% ahead of ERV. 

·      Completion of a new 20 year index-linked lease with Aldi at Great
Lodge Retail Park, Tunbridge Wells, for a 27,000 square feet (“sq.ft.”)
unit formerly sub-let by B&Q to Toys R Us.  UKCM successfully negotiated a
part-surrender of the space from B&Q obtaining a surrender premium of £1.1
million. Aldi has signed a new 20 year lease at a rent of £500,000 per annum
and incorporating five yearly upward only rent reviews compounded yearly to
RPI indexation with a collar and cap of 1% and 3%. B&Q continues to occupy
80,400 sq. ft. on a lease with nine years remaining under the existing rental
terms.  In contrast to the wider retail warehouse market, this activity
delivered a capital value increase.

·     Continued asset management progress at St George’s Retail Park,
Leicester, with the completion of the new 15 year lease with fixed rental
increases to Home Bargains at an annual rent of £200,000 following
refurbishment work.  In addition, a new 10 year lease to Costa Coffee for a
new bespoke ‘pod’ unit was completed at a rent of £58,240 per annum. 
Both lettings were in line with ERV.

An additional  £193,400 of annual rental income, 13% ahead of ERV at the
time, secured from three rent reviews, including one agreed with Trans Global
Freight Management Ltd at Dolphin Trading Estate, Sunbury at a new rent of
£704,000 per annum, 38% ahead of the previous passing rent. 

Portfolio occupancy remained relatively constant at 92% with over half of the
remaining vacancy in well located industrial assets.

Following this successful asset management activity the passing rent of the
portfolio at 30 June 2019 was £66.5 million with an ERV of £81.5 million,
demonstrating the reversionary nature of the portfolio. In addition, over the
last 12 months, 99% of the Company’s rent roll continues to be collected
within 21 days.

Strong Balance Sheet with significant resources

·      Prudent net gearing of 16.2%* (gross gearing of 17.7%**) remains
one of the lowest in the quoted REIT sector

·      £90 million of unutilised revolving credit facility still
available for investment

*Net gearing - Gross borrowing less cash divided by total assets (excluding
cash) less current liabilities

**Gross gearing - Gross borrowings divided by total assets less current
liabilities

Andrew Wilson, Chair of UKCM, commented:  “During the second quarter, our
continued approach to actively managing our diverse portfolio of assets has
delivered a resilient capital performance that continues to outperform the
wider property sector. The portfolio remains well let with a number of new
long-term lettings underpinning the sustainability of the Group’s income.
This coupled with our strong balance sheet means the business is well
positioned going forward.”

Will Fulton, Lead Manager of UKCM at Aberdeen Standard Investments, said: 
“We have made excellent progress on the asset management initiatives we
identified at the start of the year, across all sectors, which has secured
income and resulted in continued high occupancy. Just less than half of the
portfolio is now weighted towards the industrial sector, of which almost 60%
is in the south east, and our recent Midlands acquisitions in this space
continue to perform well. As well as actively managing the portfolio we
continue to watch the market for investment opportunities in line with the
Group’s investment strategy.”

Breakdown of NAV movement

Set out below is a breakdown of the change to the unaudited net asset value
per share calculated under International Financial Reporting Standards
("IFRS") over the period from 1 April 2019 to 30 June 2019:

 UK Commercial Property REIT Limited                      Per Share (p)   Attributable Assets (£m)                                                                                                                              Comment                                                                                                                               
 Net assets as at 31 March 2019                               93.9               1,220.1                                                                                                                                                                                                                                                                              
 Unrealised decrease in valuation of property portfolio       -0.5                 -6.4            Predominantly like for like decrease of 0.2% in property portfolio.                                                                                                                                                                                                
 Capital expenditure during the period                        -0.2                 -1.8            Principally relates to the final development payment at the Maldron Hotel, Newcastle, which is now income producing and ongoing pre-let asset management initiatives at St. George's Retail Park, Leicester, Portsmouth Motor Park and 9 Colmore Row, Birmingham.  
 Income earned for the period                                 1.4                  18.4            Equates to dividend cover of 95% in the period including the £1.1m surrender premium referred to above. Significant resources remain available for investment.                                                                                                     
 Expenses for the period                                      -0.5                 -7.0            
 Dividend paid on 31 May 2019                                 -0.9                -12.0            
 Net assets as at 30 June 2019                                93.2               1,211.3                                                                                                                                                                                                                                                                              

The EPRA NAV per share is 93.2p (31 March 2019: 93.9p) with EPRA earnings per
share for the quarter being 0.88p (31 March 2019: 0.82p).

Sector analysis

                                     Portfolio Value as at 30 Jun 2019 (£m)  Exposure as at 30 Jun 2019 (%)  Like for Like Capital Value Shift (excl sales, purchases & CAPEX)   Capital Value Shift (including sales & purchases) (£m)  
                                                                                                                                            (%)                                 
 Valuation as at 31 Mar 19                                                                                                                                                                              1,462.3                          
                                                                                                                                                                                                                                         
 Industrial                                          700.8                                48.1                                              0.9                                                           6.1                            
 South East                                                                               29.9                                              1.4                                                           5.8                            
 Rest of UK                                                                               18.2                                              0.1                                                           0.3                            
                                                                                                                                                                                                                                         
 Retail                                              366.3                                25.1                                              -2.5                                                          -9.3                           
 High St – South East                                                                      2.3                                              -5.3                                                          -1.9                           
 High St- Rest of UK                                                                       3.0                                              -2.8                                                          -1.2                           
 Shopping Centres                                                                          2.5                                             -10.5                                                          -4.3                           
 Retail Warehouse                                                                         17.3                                              -0.7                                                          -1.9                           
                                                                                                                                                                                                                                         
 Offices                                             234.0                                16.0                                              0.9                                                           2.1                            
 City                                                                                      2.6                                              1.1                                                           0.4                            
 West End                                                                                  2.0                                              0.0                                                           0.0                            
 South East                                                                                4.9                                              1.2                                                           0.9                            
 Rest of UK                                                                                6.5                                              0.9                                                           0.8                            
                                                                                                                                                                                                                                         
 Alternatives                                        157.6                                10.8                                              -1.5                                                          -2.5                           
                                                                                                                                                                                                                                         
 External valuation at 30 Jun 2019                  1,458.7                               100.0                                             -0.2                                                        1,458.7                          

Net Asset Value analysis as at 30 June 2019 (unaudited)

                                                 £m    % of net assets  
 Industrial                                    700.8         57.9       
 Retail                                        366.3         30.2       
 Offices                                       234.0         19.3       
 Alternatives                                  157.6         13.0       
 Total Property Portfolio                     1,458.7       120.4       
 Adjustment for lease incentives               -18.0         -1.5       
 Fair value of Property Portfolio             1,440.7       118.9       
 Cash                                           26.9         2.2        
 Other Assets                                   24.7         2.0        
 Total Assets                                 1,492.3       123.1       
 Current liabilities                           -23.7         -1.9       
 Non-current liabilities (bank loans & swap)   -257.3       -21.2       
 Total Net Assets                             1,211.3       100.0       

The NAV per share is based on the external valuation of the Company’s direct
property portfolio. It includes all current period income and is calculated
after the deduction of all dividends paid prior to 30 June 2019.

The NAV per share at 30 June 2019 is based on 1,299,412,465 shares of 25p
each, being the total number of shares in issue at that time.

Investment Manager’s Market Commentary

Although UK GDP recorded robust growth in Q1, inventory building was key to
this, as companies stockpiled resources ahead of the anticipated disruption to
supply chains caused by a potential “cliff edge” withdrawal from the EU at
the end of March. The eventual six-month extension to the Article 50 process
averted this and leading indicators suggest economic growth has slowed in Q2
as that inventory building unwinds. As long as questions remain around the
Brexit process, we expect business investment to remain subdued.

In spite of a relatively tight labour market, accommodative monetary policy
and high corporate profit margins, inflation remains stubbornly low. Although
the Bank of England has given hawkish signals, we expect interest rates to
remain lower for longer if they are to support the backdrop of decelerating
growth, particularly until greater clarity on the UK’s future relationship
with the EU emerges. Indeed, we have taken very modest tightening cycles in
the UK and the Eurozone out of our forecasts entirely, with the US Federal
Reserve expected to cut interest rates twice this year and monetary policy
easing also expected in most major economies. Low inflation globally, slowing
growth and trade war uncertainty, on top of those more UK-specific risks, are
pointing towards a longer period of ultra-low interest rates.

According to MSCI, UK real estate capital values are now falling but continued
to deliver a positive total return of 1.1% for the first six months of 2019.
While retail returns have been negative as expected, and have borne the brunt
of the capital decline, growth in the industrial sector has moderated after a
period of record capital value gains but remains positive, resulting in a 2.9%
total return within MSCI’s index over the six month period.

The second quarter has seen a fall in transaction activity to levels last seen
in 2012. Overseas investors have been net sellers of the UK office market with
Chinese capital controls now appearing to have a significant effect on global
real estate markets. Although New York has perhaps borne the brunt of Chinese
disinvestment, London is not immune, and there are indications that other
global investors are displaying more caution towards London too, which could
see London office pricing soften in the second half of the year. The retail
sector has a very shallow pool of buyers tending to be opportunistic in nature
with a large amount of stock being quietly marketed. The lack of demand in the
occupier market and uncertainty about where rental values will settle mean
investors are, in many retail sub-sectors, demanding discounts to valuation. 
The share price discount to net asset value for listed stocks with a high
retail weighting provides an indication of sentiment towards this sector.

Take-up in the office sector remains robust and central London take-up has
recovered, following a muted period around the EU referendum, and is now back
close to the high watermark set in 2015. However, this is largely driven by
flexible office providers; traditional take-up has been broadly flat-lining
since early 2016. The now roughly 20% of take-up accounted for by flexible
office providers does not actually absorb supply, as it must all be re-let
into the market and, importantly, at higher densities of occupation.

Regionally, office headline rents are steadily rising in the big six office
markets, boosted by the trend towards consolidation among some of the largest
corporate occupiers, as well as the public sector’s shift towards large
regional hubs. Vacancy rates have been steadily falling in these markets since
2017, with high net absorption pushing rents on and virtually no new
construction in the last two years. While supply has tightened, the economic
backdrop is expected to affect demand going forward and, therefore, rents. A
similar dynamic has been playing out in the South East office markets,
although vacancy has not fallen as dramatically and some of the smaller
markets, especially those with limited new stock, have seen demand gravitate
towards those markets with critical mass and good infrastructure, such as
Reading.

A wave of company voluntary arrangements (CVAs) in retail has put downward
pressure on rental values in the sector, and on risk premia requirements, and
so also on certain valuations.

Industrial demand, however, remains especially high in London and the South
East, while logistics has had another strong start to the year with a number
of significant lettings of speculatively developed space in core markets.

Investment Outlook

The UK economy continues to be affected by political and macroeconomic
uncertainty which looks likely to persist in the near term, holding back
growth. Our investment manager has revised its GDP growth expectations
downwards to 1.4% in both 2019 and 2020 in its base case, although downside
risks exist and leading indicators have weakened in recent months.

Occupier markets are, overall, holding up relatively well with office demand
being supported by the rapid expansion of flexible office providers and, in
the regions, by corporate and public sector consolidation. The polarisation of
retail is an ongoing trend and weaker locations are under increasing pressure,
however, the twin engines of urbanisation and the rise of e-commerce continue
to propel the industrial sector.

Whilst the investment market has slowed this year, and with political
uncertainty causing many to adopt a cautious approach to investment, there
remains considerable capital with potential for deployment attracted to UK
real estate’s income yield and, retail sector aside, good occupational
fundamentals.

The information contained within this announcement is deemed by the Company to
constitute inside information as stipulated under the Market Abuse Regulations
(EU) No. 596/2014). Upon the publication of this announcement via Regulatory
Information Service this inside information is now considered to be in the
public domain.

Details of the Company may also be found on the Company’s website which can
be found at: www.ukcpreit.com

For further information please contact:

Will Fulton / Graeme McDonald, Aberdeen Standard Investments

Tel: 0131 245 2799 / 0131 245 3151

Edward Gibson-Watt / Oliver Kenyon, J.P. Morgan Cazenove

Tel: 020 7742 4000

Richard Sunderland / Claire Turvey / Eve Kirmatzis, FTI Consulting

Tel: 020 3727 1000

The above information is unaudited and has been calculated by Aberdeen
Standard Investments^.
 

^Aberdeen Standard Investments is a brand of the investment businesses of
Aberdeen Asset Management and Standard Life Investments. The Company is
managed and advised by Aberdeen Standard Fund Managers Limited (the
Company’s appointed AIFM).



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