REG-UK Comm Prop REIT Ltd: Net Asset Value(s)
14/02/2019 07:05
14 February 2019
UK Commercial Property REIT Limited (“UKCM” or “the Company”)
LEI: 213800JN4FQ1A9G8EU25
Net Asset Value at 31 December 2018 and proposed extension of investment
policy
UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM), announces its
unaudited quarterly Net Asset Value (“NAV”) as at 31 December 2018. The
Company owns a diversified portfolio of high quality income producing UK
commercial property and is advised by Aberdeen Standard Investments
(“ASI”)^.
NAV
* A NAV total return of 4.5% for 2018 with a NAV per share of 93.3p at 31
December 2018 (30 September 2018: 94.3p); a total return of -0.1% for the
final quarter with continued low net gearing of 14.6%*.
* Like-for-like portfolio capital value increased by 0.2% to £1.45 billion
(30 Sep 2018: £1.45 billion). Overall capital performance net of capital
expenditure investment was -0.8% (which includes the transaction costs and
stamp duty associated with the Company’s December 2018 purchase of an £85.4
million portfolio of distribution warehouses, described below).This compares
to the –0.1% in the Company’s MSCI IPD benchmark over the period.
* The overweight position to the Industrial sector and the Company’s prime
office portfolio continued to produce strong positive capital returns offset
by a decline in values across the Company’s retail holdings.
Strong balance sheet providing flexibility
* £50 million currently available for investment through an unutilised
revolving credit facility
* Low net gearing of 14.6%* (gross gearing of 17.1%**) remaining one of the
lowest in the Company’s peer group and the quoted REIT sector.
* The Company is at an advanced stage of negotiation with its lenders to both
extend the maturity and increase the quantum of debt available by £50 million
in order to take advantage of investment opportunities.
*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
Delivering on strategy of producing sustainable income streams
The Company continues its strategy of recycling capital into good quality
assets in favoured sectors, which are earnings accretive and offer growth
potential, as follows:
* Acquisition of a portfolio of five strategically located distribution
warehouses across the Midlands for a headline price of £85.4 million, based
upon an attractive topped-up net initial yield of 5.5%. The portfolio, which
is 100% let to a diverse range of high quality tenants such as TJX UK (TK
Maxx), Clipper Logistics and Bestway Pharmacy Ltd, has an average weighted
unexpired lease term of 7.3 years and offers opportunities to enhance income
through asset management initiatives. With this transaction UKCM’s exposure
to the strongly performing industrial sector has risen to 46%, spread between
approximately 28% South East and London urban industrial / logistics assets
and 18% regionally strategic assets.
* Having completed a number of asset management initiatives UKCM sold its 15
Great Marlborough Street, London office asset for £73.2 million, ahead of the
prior period valuation.
* £23.5 million sale of a high street retail asset let to H&M and Barclays
Bank in Exeter reflecting a net initial yield of 4.75%.
Asset management and leasing momentum underpinning performance
* Completion of two new 25 year leases to Snows Business Holdings Ltd at Motor
Park, Portsmouth, incorporating annual RPI increases of between 1.00% and
3.25%, at a total annual rent of £440,000. Combined with a new 20 year
lease signed with Harwoods in Q3 2018, the average weighted unexpired lease
term for this asset has increased from 5.5 years to 12.8 years, with a
significant proportion of its income now benefitting from RPI inflation-linked
rent reviews.
* Good asset management progress at St George’s Retail Park, Leicester,
securing four national tenants at a cumulative annual rent of £420,000 and an
average weighted unexpired lease term of 10.25 years, comprising:
* New lettings to Dreams Ltd and Card Factory in line with ERV.
* Ahead of Wickes’ lease expiry in January 2019 and associated anticipated
vacation of a 25,000 sq ft unit, the Company exchanged an agreement for lease
with Home Bargains at ERV on a 15 year term with fixed rental uplifts,
commencing on completion of refurbishment works in April 2019. * The
development and 10 year lease of a new Costa Coffee unit completing at the end
of February 2019, providing the park with an appropriate food and beverage
offer to increase shopper dwell time.
* Newton’s Court, Dartford - Unit one in this industrial estate let to
Millmoll Group Holdings Ltd on a 10 year lease with a tenant only break option
in year five at a rent of £240,578 per annum, 8.5% ahead of the ERV at the
time and two ten year lease renewals with Wilhelmsen Ship Services Ltd and
Baxi Heating UK Limited for a new combined rent of £244,779 per annum, 3%
ahead of ERV.
* Eldon House, UKCM’s only City of London office was fully let by the year
end following lettings to Proclinical Ltd, MLM Building Control Ltd and
Civilised Bank securing rents 5-10% ahead of ERV at the time.
* Lease renewal agreed 47% ahead of the previous passing rent and 15% ahead of
ERV at the time, at Dolphin Trading Estate in Sunbury with Lubkowski Saunders
& Associates Ltd for 10 years with a break at five, securing a new rent of
£510,763 per annum.
* Occupancy increased from 91% to 93% during the quarter with over half of the
remaining vacancy in high quality, well located industrial assets offering
strong leasing prospects. The largest of these is the Company’s recently
refurbished 377,000 sq ft prime, cross-docked distribution warehouse at Magna
Park, Lutterworth in the centre of the Midlands’ logistics “Golden
Triangle”.
* Following the investment and asset management activity described above the
gross rent of the portfolio as at 31 December was £69.0 million per annum.
Expanded Investment Policy
* The Company will shortly announce the publication of a circular to convene
an extraordinary general meeting which includes proposals to amend the
Company’s investment policy. This is to provide the Investment Manager with
the flexibility to invest across the spectrum of commercial property including
alternative property assets such as healthcare, student housing, hotels, car
parks, pubs, petroleum and automotive and the commercially-managed private
rental residential sector.
Andrew Wilson, Chairman of UKCM, commented: “2018 has been a significant
year of progression for UKCM that has seen REIT conversion and also further
positive momentum behind the repositioning of the portfolio. Strategic
acquisitions and disposals have continued this year, recycling capital into
high quality holdings that deliver sustainable long term rental income.
Additionally, successful asset management initiatives extracting latent rental
and capital values together with operational results underpin the performance
of the business. Although of course there is more work to be done, we are
pleased with the results that have been delivered this year and, with a
proposal to expand our potential investment universe across a wider range of
asset types and new debt facilities, we look forward to being able to continue
on this path in 2019.”
Will Fulton, Lead Manager of UKCM at Aberdeen Standard Investments, said:
“Over the year we have had significant asset management success,
particularly in leasing space where we have created value and improved the
Company’s ability to produce high quality income streams, often exceeding
ERVs, and increasing the proportion of index linked rents whilst extending
lease terms. We have also continued to make strategic sales, recycling
capital into assets which we believe offer better opportunities to grow value
and income.
Looking forward we believe it is important to ‘move with the times’ in
maintaining a well-diversified portfolio of UK commercial real estate to meet
our objective; since the Company’s inception in 2006 the real estate
landscape has changed with many sectors, previously in their infancy, having
matured and become mainstream, commonly referred to as Alternative sectors by
the industry. The growth in these additional sectors can largely be
attributed to the favourable structural changes driving them including
demographic, urbanisation, technology trends, the stability of income returns
and diversification benefits they can provide. We believe that the ability to
selectively add them to the Company's portfolio is an important additional
weapon in our armoury to potentially enhance future returns.”
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 30 September to 31 December 2018
UK Commercial Property REIT Limited Per Share (p) Attributable Assets (£m) Comment
Net assets as at 30 September 2018 94.3 1,225.3
Unrealised increase in valuation of property portfolio 0.1 1.4 Predominantly like for like increase of 0.2% in property portfolio.
Gain on Sale 0.1 1.2 Gain on sales at High Street, Exeter and Great Marlborough Street, London
Capital expenditure during the period -1.1 -14.7 Principally relates to acquisition costs associated with acquisition of distribution warehouse portfolio, the development of Maldron Hotel, Newcastle, refurbishment of XDock 377 at Lutterworth and ongoing pre-let asset management initiatives at St. George's Retail Park, Leicester and Ventura Park, Radlett.
Income earned for the period 1.4 18.0 Equates to dividend cover of 82% in the calendar year with significant resources still available for income-accretive investment.
Expenses for the period -0.6 -6.7
Dividend paid on 31 November 2018 -0.9 -12.0
Interest rate swaps mark to market revaluation 0.0 0.1 No material movement in the quarter
Net assets as at 31 December 2018 93.3 1,212.6
The EPRA NAV per share (excluding swap liability) is 93.4p (30 September 2018:
94.4p) with EPRA earnings per share for the quarter being 0.86p (30 September
2018: 0.75p).
Sector analysis
Portfolio Value as at 31 Dec 2018 (£m) Exposure as at 31 Dec 2018 (%) Like for Like Capital Value Shift (excl sales, purchases and capex) Capital Value Shift (including sales & purchases) (£m)
(%)
Valuation as of 30 Sep 2018 1,452.5
Industrial 670.5 46.4 3.1 102.9
South East 28.3 3.3 13.1
Rest of UK 18.1 2.6 89.8
Retail 384.9 26.7 -5.1 -43.0
High St – South East 2.7 -1.9 -0.7
High St- Rest of UK 3.0 -1.6 -23.0
Shopping Centres 3.0 -4.7 -2.1
Retail Warehouse 18.0 -6.2 -17.2
Offices 231.9 16.0 2.0 -68.7
City 2.6 11.9 4.0
West End 2.0 0.0 -73.2
South East 4.9 0.0 0.0
Rest of UK 6.5 0.5 0.5
Leisure/Other 157.9 10.9 0.9 1.5
External valuation at 31 Dec 2018 1,445.2 100.0 0.2 1,445.2
Net Asset Value analysis as at 31 December 2018 (unaudited)
£m % of net assets
Industrial 670.5 55.3
Retail 384.9 31.7
Offices 231.9 19.1
Leisure/Other 157.9 13.0
Total Property Portfolio 1,445.2 119.1
Adjustment for lease incentives -14.3 -1.2
Fair value of Property Portfolio 1,430.9 117.9
Cash 43.5 3.6
Other Assets 22.0 1.8
Total Assets 1,496.4 123.3
Current liabilities -34.2 -2.7
Non-current liabilities (bank loans & swap) -249.6 -20.6
Total Net Assets 1,212.6 100.0
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 31 December 2018. It does
not include provision for any unpaid dividends relating to periods prior to 31
December 2018, i.e. the proposed dividend for the period to 31 December 2018.
The NAV per share at 31 December 2018 is based on 1,299,412,465 shares of 25p
each, being the total number of shares in issue at that time.
Economic and Property Market Review
UK economic growth has been fairly uneven this year. After a weak,
weather-affected start to the year, third quarter growth was well above trend
at 0.6%. However, this appears to be a temporary spike rather than a decisive
strengthening of the economy, with indicators in the fourth quarter turning
down sharply.
The ongoing uncertainty surrounding Brexit negotiations appears to be
restraining business investment and household spending. With trend growth
estimated to be lower, the output gap largely closed, and a relatively weak
global backdrop, it is hard to see a substantial acceleration in economic
growth.
Occupational markets continue to behave quite differently across sectors, with
structural forces being the key drivers. The familiar pattern of falling
retail rents, modest upticks in office rents and robust growth in industrials
is little changed. The risk of more serious declines in the retail sector is
affecting investor sentiment.
The industrial sector continues to be the stand-out performer in the UK real
estate market. Although MSCI IPD data suggests that rental growth is beginning
to moderate, with vacancy rates remaining exceptionally low and interest in
available space healthy, the necessary drivers are still in place to support
further rental growth for the sector.
The structural challenges facing the retail sector are now beginning to be
reflected in MSCI IPD data with the majority of retail experiencing declining
rental values. With few retailers expanding, aside from the value operators,
this rental trend is expected to continue through 2019.
‘All Property’ capital values experienced a small decline in Q4 2018,
according to the MSCI IPD Monthly Index, with declines in retail offsetting
growth in the industrial sector. It is our observation that towards the end of
the year the investor pool reduced and became more selective and, whilst not
all investment activity during the final quarter has been recorded as yet, the
number of deals is down on the recent quarterly average. Despite this, total
investment volumes in 2018 reached £61 billion, only £5 billion less than
2017 and substantially more than the 2016 total of £52 billion.
The listed sector has seen discounts to NAVs widen over the quarter, which in
part reflects the wider equity market sell-off experienced over the fourth
quarter, but it is also a function of slowing NAV growth rates in the second
half of this year. The hierarchy of preferred sectors remains largely
unchanged with industrials and income-focussed real estate stocks remaining
the top picks, and wide discounts for the major retail specialists.
Market Outlook
Uncertainty around the near-term political outlook makes it difficult to
predict an economic outcome with strong conviction. In the property market
this uncertainty is reducing liquidity and visibility of pricing in many areas
of the market. With the exception of highly sought after and expensive long
term income, those with capital to invest may be able to access good-quality
real estate at prices that are attractive in the long term. As ever, it is
vitally important to assess asset-level risk and income prospects to identify
such opportunities.
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 Standard Life Investments (Corporate Funds) Limited
(the Company’s appointed AIFM).
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