UK Comm Prop REIT Ltd Net Asset Value(s)
02 August 2018 - 4:00PM
UK Regulatory
TIDMUKCM
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 GBP1.416 billion.
Delivering on strategy
* Acquisition of The White Building, a fully refurbished, multi-let office in
Reading for around GBP51 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 GBP3.0 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 GBP26.6 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 GBP1.34 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 GBP1.7 million per annum facilitating the sale of
this investment ahead of valuation.
* In addition, GBP831,000 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 GBP3.03 million, 12% ahead of ERV at the review
date, an uplift of GBP322,000 per annum;
* Ten year lease renewal with Nomenca at Emerald Park, Bristol at GBP76,000 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 GBP30 million (after allowing for dividend commitment and
projected capital expenditure on the portfolio) are currently available for
investment in addition to a further GBP50 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 GBP1.75billion
* 0.475% on gross assets over GBP1.75billion
This compares to the current management fee of 0.65% on gross assets plus GBP
100,000 administration fee. Based on the current quarter end's gross assets
this equates to a fee decrease of GBP839,000 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 Per Share Attributable Comment
Limited (p) Assets (GBPm)
Net assets as at 1 April 93.4 1,214.0
2018
Unrealised increase in 2.1 27.2 Predominantly like for like
valuation of property increase of 1.9% in property
portfolio portfolio.
Gain on Sale 0.1 1.2 Gain relating to the sale of
1 Rivergate, Bristol
Capital expenditure during -0.7 -8.3 Principally relates to costs
the period 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,
Expenses for the period -0.5 -8.1 Newcastle development and
Radlett letting yet to be
included
Dividend paid on 31 May 2018 -0.9 -12.0
Interest rate swap mark to 0.0 -0.2 No material movement in the
market revaluation quarter
Net assets as at 30 June 94.8 1,230.7
2018 before deferred tax
movement
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 94.5 1,227.4
2018
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 Exposure as at 30 Like for Like Capital Value
Value as at 30 Jun 2018 (%) Capital Value Shift
Jun 2018 (GBPm) Shift (excl (including
sales, purchases sales &
& CAPEX) purchases)
(GBPm)
(%)
External valuation as 1,364.0
of 31 Mar 2018
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 1,416.4 100.0 1.89 1,416.4
of 30 Jun 2018
Net Asset Value analysis as at 30 June 2018 (unaudited)
GBPm % 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 1,416.4 115.4
Portfolio
Adjustment for lease -12.8 -1.0
incentives
Fair value of 1,403.6 114.4
Property Portfolio
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 -249.9 -20.5
liabilities (bank
loans & swap)
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).
END
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