19 Nov 2008 14:59
ISIS Property Trust 2 Limited
Interim Management Statement
For the Three-Month Period from 1 July 2008 to 30 September 2008
Investment Objective
The investment objective is to provide shareholders with an attractive level of income together with the potential for capital and income growth from investing in a diversified UK commercial property portfolio.
Performance Summary
| Total Return * | For the three month period ended 30 September 2008 |
| Net asset value per share | -8.6 |
| Ordinary share price | -1.9 |
| Portfolio total return per IPD | -3.8 |
| Investment Property Databank UK Monthly Property Index | -4.8 |
| FTSE All-Share Index | -12.2 |
| Capital Values - 3 months | As at 30 September 2008 | As at 30 June 2008 | % Change |
| Net asset value per share | 108.7p | 121.0p | -10.2 |
| Ordinary share price | 72.0p | 75.0p | -4.0 |
| FTSE All-Share Index | 2,483.67 | 2,855.7 | -13.0 |
| Discount to net asset value | 33.8% | 38.0% | |
| Net gearing # | 33.0% | 30.8% | |
Sources: F&C Investment Business Limited, Investment Property Databank ('IPD'), Datastream.
* - All total returns are based on net dividends re-invested
# - Net gearing: Bank debt (less net current assets) divided by total assets less current liabilities
Dividends
The fourth interim dividend for the year ended 30 June 2008 of 1.8 pence per share was paid on 26 September 2008. In the absence of unforeseen circumstances it is the intention of the Board to maintain quarterly dividends at this rate, giving a total dividend of 7.2 pence per share for the 2008/9 financial year.
Review for the Period
The last quarter has witnessed further pain for the UK commercial property sector, as the global economic crisis deepens. The bail-out of banks and other financial institutions, coupled with the probability of the economy going into recession before the end of the year is being felt throughout the sector.
Investment activity within the UK commercial property sector remains subdued, with institutional investors being net sellers for the past seven quarters. Some overseas and private buyers, who have little or no reliance on debt, are net buyers of property but at considerably reduced prices. In the main, however, buyers are holding off as there is a general consensus that the market will decline further before any improvement is seen.
The occupational market is becoming more challenging with consumer confidence affecting retail property both in and out of town. The financial crisis is having obvious effects on the office sector, particularly the City of London.
As a result of this increasingly difficult environment, the Company saw a further reduction in the value of its property portfolio. The value at 30 September was £181.4m, which was a fall of 5.3 per cent over the quarter. Together with an income return of 1.6 per cent, the total ungeared return for the portfolio was -3.8 per cent, which compared favourably with the Investment Property Databank Monthly Index ('IPD') return of -4.8 per cent for the same period.
A major fall in value occurred at Mercury House, Strathclyde Business Park, a modern office building let to Cable and Wireless and sub-let to Virgin Media Group for a further 10 years. The building was revalued at £12.05m, a reduction of £1.7m (12.4 per cent), reflecting apprehension over slowing rental growth in the sector and a shortening of the lease term. Nos 1-2 Lochside Way, Edinburgh Park, a modern office property on Scotland's premier business park, let to HSBC plc until 2014 was revalued at £11.31m, a fall of £1.36m (10.7 per cent). This reduction again was attributable to concerns over rental growth and shorter lease lengths in the current market.
During the quarter, one lease renewal and two rent reviews were agreed. The lease of the Caviar House at 48/49 St James Street, London SW1 was renewed with effect from December 2007 with an in increase in the passing rent from £228,000pa to £287,400pa, an uplift of 26 per cent. A rent review on the McDonalds unit at 34 The Parade, Leamington Spa was agreed at £90,500pa, with effect from 24 June 2007, an increase of 9.0 per cent. A rent review on 18a High Street, Wickford was agreed at £43,500pa with effect from 25 March 2008, an increase of 20.8 per cent.
Two of the Company's tenants have gone into administration. Yates Group Limited occupied a unit at 7/11 Bridge Street, Guildford paying a rent of £225,000pa. Select (Retail) Ltd occupied a retail unit at 67/79 King Street, South Shields paying a rent of £93,000pa. The current vacancy rate is 5.0 per cent of estimated rental value which compares with the latest IPD recorded average of 9.3 per cent. The average weighted unexpired lease length is 8.3 years.
The Company has borrowings of £60 million from Lloyds TSB Scotland plc, with net gearing at 33 per cent of total assets as at 30 September 2008. This is well within the loan to value covenant limit of 60 per cent of total assets. The current rate of interest is 5.655 per cent and is fixed with an interest rate swap until January 2017. The fair value of this swap as at 30 September 2008 was a liability of £512,000; subsequent interest rate cuts mean that an increased liability is likely to be recognised at the next quarter end.
Top Ten Holdings
| Property | Sector | 30/09/2008 % of portfolio |
| 48-49, St. James's Street, London, SW1 | Offices | 9.4% |
| Unit 3663, Echo Park, Banbury | Industrial | 8.9% |
| Units 1-8, Lakeside Road, Colnbrook | Industrial | 8.3% |
| Mercury House, 1 Dove Wynd, Strathclyde Business Park | Offices | 6.6% |
| 1-2 Lochside Way, Edinburgh Park, Edinburgh | Offices | 6.2% |
| Southampton International Park, Eastleigh | Industrial | 5.8% |
| 30/40, The Parade & 47/59A Warwick Street, Leamington Spa | Retail | 5.6% |
| Hemel Gateway, Boundary Way, Hemel Hempstead | Industrial | 5.1% |
| Clifton Moor Gate, York | Retail Warehouse | 4.5% |
| Swift House, Cosford Lane, Rugby | Industrial | 3.7% |
| Total | 64.1% |
Geographical Analysis
| Location | 30/09/2008 Percentage of Portfolio | 30/06/2008 Percentage of Portfolio | |
| South East | 46.3 | 45.5 | |
| West Midlands | 14.7 | 14.5 | |
| Scotland | 14.2 | 15.2 | |
| London - West End | 11.5 | 11.4 | |
| Yorkshire and Humberside | 4.5 | 4.6 | |
| East Midlands | 2.9 | 2.9 | |
| Eastern | 2.3 | 2.3 | |
| Rest of London | 1.6 | 1.6 | |
| South West | 0.7 | 0.7 | |
| North West | 0.7 | 0.6 | |
| North East | 0.6 | 0.7 | |
| Total | 100.0 | 100.0 |
Sector Analysis
| Sector | 30/09/2008 Percentage of Portfolio | 31/12/2007 Percentage of Portfolio | |
| Offices | 29.9 | 30.6 | |
| Retail | 30.7 | 30.6 | |
| Industrial | 34.9 | 34.2 | |
| Retail Warehouse | 4.5 | 4.6 | |
| Total | 100.0 | 100.0 |
The Board is not aware of any significant events or transactions which have occurred between 30 September 2008 and the date of publication of this statement which would have a material impact on the financial position of the Company , but recognises there is volatility in valuations in the current market conditions and in general, property values have continued to fall since September 2008.
Quarterly and Key Information
Further information regarding the Company, including performance since launch and the most recent annual and interim reports, can be found at the Company's website www.isispropertytrust2.com, or at www.fandc.com.
For further information please contact:
Ian McBryde/Scott Macrae
F&C Investment Business Limited
Tel: 0207 628 8000