2 August
2018
UK Commercial Property REIT Limited
(“UKCP REIT” or “the Company”)
Net Asset Value at
30 June 2018
UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM),
announces its unaudited quarterly Net Asset Value (“NAV”) as at
30 June 2018. It owns a diversified
portfolio of high quality income producing UK commercial property
and is advised by Aberdeen Standard Investments (“ASI”)^.
Robust second quarter NAV
performance
- NAV per share up 1.2% to 94.5p (31 March
2018: 93.4p), resulting in a NAV total return of 2.2% in the
period with low net gearing of 11.9%**.
- Like-for-like portfolio capital value increased by 1.9% with
overall capital performance of 1.7% net of capital expenditure
investment, outperforming the 0.9% increase in the MSCI/IPD Monthly
index over the period. The portfolio is now valued at £1.416
billion.
Delivering on strategy
- Acquisition of The White Building, a fully refurbished,
multi-let office in Reading for around £51 million, based upon a
topped-up net initial yield of 5.75%. The asset, which
is 82% let to nine tenants, has a weighted average unexpired lease
term of five years to break and is expected to deliver an annual
rental income of around £3.0 million once fully let.
- Disposal of 1 Rivergate, an office building on Temple Quay in
Bristol city centre, to a pension
fund for a net price of £26.6 million allowing for a rental top up,
ahead of the 31 March valuation.
- Industrial assets now account for 37% of the portfolio and
delivered a capital return of 5.8% in the period.
Value Creation through asset
management
- Contract signed for a new 15 year lease with no breaks at the
largest vacant unit on Ventura Park, Radlett. The letting to an
existing global tenant on the site is at a rent of £1.34 million
per annum with five yearly inflation-linked and upwards only rent
reviews, subject to completion of landlord’s roof works, expected
November this year. This letting represents an increase of 39% on
the previous passing rent and is in-line with ERV. After the
completion of the lease 15.3% of the Company’s income will be in
leases that are inflation linked or have fixed uplifts.
- Completion of the pre-agreed new eight year lease with Ovo
Energy Ltd at 1 Rivergate, Bristol, for £1.7 million per annum
facilitating the sale of this investment ahead of valuation.
- In addition, £831,000 of annual rental income, 10% ahead
of estimated rental value (“ERV”), secured from three new leases /
lease renewals and two rent reviews, including:
- Rent review agreed with Ocado, Hatfield, the Company’s largest
single tenant, securing a rent of £3.03 million, 12% ahead of ERV
at the review date, an uplift of £322,000 per annum;
- Ten year lease renewal with Nomenca at Emerald Park,
Bristol at £76,000 per annum, 15%
ahead of the previous passing rent and 3% ahead of ERV.
- Occupancy increased to 93%* with half the remaining vacancy in
strong locations within the industrial sector, which has good
prospects to enhance future income and capital returns, further
increasing occupancy. Less than 20% of the vacancy is in the retail
sector.
Strong balance sheet providing
flexibility and attractive dividend yield
- Cash resources of £30 million (after allowing for dividend
commitment and projected capital expenditure on the portfolio) are
currently available for investment in addition to a further £50
million from the undrawn revolving credit facility.
- Low net gearing of 11.9%** (gross gearing of 16.9%**) remaining
one of the lowest in the Company’s peer group and the quoted REIT
sector.
- Dividend yield of 4.2%*, comparing favourably to the FTSE
All-Share Index (3.6%*) and FTSE All-Share REIT Index (3.9%*).
*30 June 2018
**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
Conversion to REIT
status completed
Following shareholder approval the Company converted to a REIT
on 1 July 2018 and changed its name
to UK Commercial Property REIT Limited. This conversion mitigates
the risk to the Company resulting from the base erosion and profit
shifting legislation due to be implemented in 2020 and the proposal
to charge capital gains tax on Guernsey companies who hold UK
commercial property.
Reduced Investment
Management Fees
The Board of UKCP REIT routinely assesses its fees against the
market. As a result of the latest benchmarking exercise, a reduced
management fee arrangement has been agreed with ASI^. As from
1 January 2019, the management fee
will be calculated as follows:
- 0.60% on gross assets up to £1.75billion
- 0.475% on gross assets over £1.75billion
This compares to the current management fee of 0.65% on gross
assets plus £100,000 administration fee. Based on the current
quarter end’s gross assets this equates to a fee decrease of
£839,000 per annum.
Andrew
Wilson, Chairman of UKCP REIT, commented:
"It has been another active period for UKCP REIT with the
Group’s portfolio continuing to perform well and the successful
conversion to a REIT taking effect at the start of July. In line
with our strategy, we have crystallised value for our shareholders
through the sale of 1 Rivergate in Bristol and recycled the capital into a high
quality office asset, which will add materially to the Group’s
income stream. We enter the second half of the year with a good
momentum and are well placed to continue to unlock value and grow
income across our diverse portfolio.”
Will
Fulton, Lead Manager of UKCP REIT at Standard Life
Investments, said:
“During the period we have successfully grown the group’s income
both through net investment into an asset with good potential for
income growth, while also delivering on our active asset management
strategy, letting up space across the portfolio and agreeing leases
at rents ahead of ERVs. The agreement of a new long lease at
Ventura Park was a significant achievement as we continue to
identify active asset management opportunities across our
portfolio, in particular across our industrial assets, to grow
future income and capital 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 1 April 2018 to 30 June
2018.
UK Commercial
Property REIT Limited |
Per Share (p) |
Attributable Assets (£m) |
Comment |
Net assets as at 1
April 2018 |
93.4 |
1,214.0 |
|
Unrealised increase in
valuation of property portfolio |
2.1 |
27.2 |
Predominantly like for
like increase of 1.9% in property portfolio. |
Gain on Sale |
0.1 |
1.2 |
Gain relating to the
sale of 1 Rivergate, Bristol |
Capital expenditure
during the period |
-0.7 |
-8.3 |
Principally relates
to costs associated with the development of Maldron Hotel,
Newcastle and purchase of the White Building, Reading plus ongoing
asset management initiative at St. George's Retail Park,
Leicester |
Income earned for the
period |
1.3 |
16.9 |
Year to
date dividend cover of 77.5% but income from White Building,
Reading, Newcastle development and Radlett letting yet to be
included |
Expenses for the
period |
-0.5 |
-8.1 |
Dividend paid on 31
May 2018 |
-0.9 |
-12.0 |
Interest rate swap
mark to market revaluation |
0.0 |
-0.2 |
No material movement
in the quarter |
Net assets as at 30
June 2018 before deferred tax movement |
94.8 |
1,230.7 |
|
Deferred tax |
-0.3 |
-3.3 |
Following REIT
conversion release of deferred tax asset previously set up to
reflect the Company's built up tax losses. |
Net assets as at 30
June 2018 |
94.5 |
1,227.4 |
|
The EPRA NAV per share (excluding swap liability) is 94.6p
(31 March 2018: 93.5p) with EPRA
earnings per share for the quarter (excluding deferred tax
movement) being 0.67p (31 March 2018:
0.75p).
Sector analysis
|
Portfolio Value as at 30 Jun 2018 (£m) |
Exposure as at 30 Jun 2018 (%) |
Like
for Like Capital Value Shift (excl sales, purchases &
CAPEX) |
Capital Value Shift (including sales &
purchases) (£m) |
|
(%) |
External valuation
as of 31 Mar 2018 |
|
|
|
1,364.0 |
|
|
|
|
|
Industrial |
526.5 |
37.2 |
5.8 |
28.9 |
South East |
|
27.0 |
6.2 |
22.3 |
Rest of UK |
|
10.2 |
4.8 |
6.6 |
|
|
|
|
|
Retail |
443.2 |
31.2 |
-2.4 |
-11.1 |
High St – South
East |
|
2.8 |
0.8 |
0.3 |
High St- Rest of
UK |
|
4.6 |
-1.9 |
-1.3 |
Shopping Centres |
|
3.7 |
-6.2 |
-3.5 |
Retail Warehouse |
|
20.1 |
-2.3 |
-6.6 |
|
|
|
|
|
Offices |
296.2 |
21.0 |
2.1 |
27.6 |
City |
|
2.4 |
4.4 |
1.4 |
West End |
|
7.0 |
2.2 |
2.2 |
South East |
|
5.0 |
0.0 |
47.6 |
Rest of UK |
|
6.6 |
1.7 |
-23.6 |
|
|
|
|
|
Leisure/Other |
150.5 |
10.6 |
1.6 |
7.0 |
|
|
|
|
|
External valuation
as of 30 Jun 2018 |
1,416.4 |
100.0 |
1.89 |
1,416.4 |
Net Asset Value analysis as at
30 June 2018 (unaudited)
|
£m |
% of
net assets |
Industrial |
526.5 |
42.9 |
Retail |
443.2 |
36.1 |
Offices |
296.2 |
24.1 |
Leisure/Other |
150.5 |
12.3 |
Total Property
Portfolio |
1,416.4 |
115.4 |
Adjustment for lease
incentives |
-12.8 |
-1.0 |
Fair value of
Property Portfolio |
1,403.6 |
114.4 |
Cash |
84.1 |
6.9 |
Other Assets |
19.5 |
1.6 |
Total
Assets |
1,507.2 |
122.9 |
Current
liabilities |
-29.9 |
-2.4 |
Non-current
liabilities (bank loans & swap) |
-249.9 |
-20.5 |
Total Net
Assets |
1,227.4 |
100.00 |
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 2018. It does not
include provision for any unpaid dividends relating to periods
prior to 30 June 2018, i.e. the
proposed dividend for the period to 30 June
2018.
The NAV per share at 30 June 2018
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
In contrast to the unusually warm and dry summer the UK has been
experiencing, the first quarter’s cold snap appears to have been
largely behind the weakness in the UK economy in Q1 rather than a
more fundamental slowing. Real income growth should start to
provide a modest tailwind to GDP growth during the course of this
year although business investment continues to be held back by
elevated uncertainty over the UK’s future Brexit “end state” and
trading relationship with the EU. Our base case is for a free-trade
agreement (FTA) with an all-UK customs union and some regulatory
devolution to Northern Ireland. At
the start of the year we forecast UK GDP of 1.4% for 2018 and 1.5%
for 2019 and our current forecast remains the same.
Looking at inflation, although it is expected the rise in oil
prices will push the energy component of CPI inflation higher, the
overall rate of inflation is expected to fall over the course of
the year. The Bank of England is
expected to increase interest base rates by 25bps in August, as the
bounce in data reassures the Bank the Q1 slowdown was largely
temporary, and then by further gradual increases in 2019 and 2020
continuing a period of relatively low rates into the medium
term.
Difficulties in the retail sector have dominated the headlines
over the last few months which are now being reflected in retail
rents shown by MSCI IPD to be falling. News that half-year profits
at John Lewis would be “close to zero” was further evidence of the
mounting challenges in the industry. At the opposite end of the
spectrum, industrial demand remains buoyant and in the
supply-starved South East this has pushed rents 7% higher over the
year to June, according to MSCI. Demand is broad-based, with the
continued expansion of trade counters and urban logistics uses a
feature, and supply is generally constrained. Regional industrial
rents rose by a more modest 2.3% over the period with some pockets
of more balanced supply and demand. London office rents remain broadly static with
take-up supported by flexible office providers who do not drive net
absorption. Take-up in the regional office markets has slowed
somewhat over the first half of 2018, although grade ‘A’ stock
levels are low in many markets, maintaining some rental
tension.
Investment volumes in Q2 suggest a higher total than Q1 although
there was a noticeable fall in the number of industrial
transactions, reflecting the dearth of stock as investors hold what
they have and continue to compete very strongly for assets that do
come to market. UK institutions were the major net investor on the
quarter, selling less real estate than any quarter since 2006.
Overseas investors were only marginal net investors but a number of
large transactions are expected to complete early in the third
quarter. The result of that competitive demand has been continued
strong capital growth in the industrial sector, 20.3% for the 12
months to June according to MSCI, and this growth is expected to
continue through the rest of 2018, though at a slower pace. Demand
for retail assets across the spectrum remained weak.
Activity in the listed sector broadly mirrors the trends being
seen in the direct market. Industrial stocks are trading at a
premium to NAV which is indicative of optimism for sustained
capital growth. London office
names are still trading at a discount to NAV, but a narrower one,
as the expectation has shifted from a market correction to one of
stagnation. Negative sentiment around growth prospects means retail
dominated REITs remain at discounts to NAV.
Investment
Outlook
Investor sentiment and activity continues to illustrate that the
hierarchy of sector preference remains largely unchanged. The
industrial sector remains the favoured sector call as investors
seek to take advantage of the structural shift towards online
retailing. The alternative sectors remain another sector call
favoured by many investors. Typically targeting these sectors for
their long, stable inflation-linked leases, alternative sectors
remain highly sought-after as we move into an environment of
predominantly income-led returns. However, the sub-sectors are
diverse and the risks associated with these sectors equally so.
Nevertheless investors are broadening their investment requirements
in the alternative space and rather than purely seeking defensive
long income, investors are more comfortable with operational risk
in alternatives and the associated diversification and sustainable
income benefits. Residential and student accommodation are already
firmly established in this regard. Our Investment Manager’s
five-year total return forecast for the property market is below
market consensus. They do not see inward yield shift contributing
positively to total returns going forward. Rather, returns will be
driven by income and, as such, a key focus will be appropriate
management of income risk at the asset and portfolio level. The
focus on income is reflected in their projected sub sector returns
which have become more divergent in the short term, with
industrials and income-focussed sectors, including the Private
Rented Sector, expected to be the strongest performing areas of the
market.
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,
Standard Life 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).