2 Sep 2014 07:00
INVISTA EUROPEAN REAL ESTATE TRUST SICAF ("IERET" or the "Company")
ANNOUNCEMENT OF NAV AND INTERIM MANAGEMENT STATEMENT
FOR THE QUARTER ENDED 30 June 2014
02 September 2014
Net Asset Value
As at 30 June 2014, the Company's unaudited Net Asset Value calculated using International Financial Reporting Standards and adjusted to add back deferred tax was €0.185 (£0.148) per share, reflecting a decrease of €0.019 or 9.31% over the quarter and £0.021 or 12.43% in Sterling. The unaudited Net Asset Value, calculated under International Financial Reporting Standards, was €0.181 per share.
A breakdown of the unaudited Net Asset Value is set out below:
In € million | As at 30 June 2014 (€m) | As at 31 March 2014 (€m) | 3 month change | 3 month change (%) |
Direct property independent valuation | 296.70 | 299.70 | (3.00) | (1.00%) |
Valuation of assets sold/purchased/held for sale | 80.30 | 46.20 | 34.10 | 73.81% |
Like for like direct property | 216.40 | 253.50 | (37.10) | (14.64%) |
Net current assets1,5 | 81.10 | 48.20 | 32.90 | 68.26% |
Deferred assets | 5.30 | 0.00 | 5.30 | 100.00% |
Senior debt | (220.00) | (215.00) | (5.00) | 2.33% |
Senior debt secured against assets sold/purchased/held for sale | 0.0 | (35.4) | 35.4 | -100.00% |
Like for like senior debt | (220.0) | (179.60) | (35.10) | 19.54% |
Preference shares | (34.70) | (33.50) | (1.20) | 3.58% |
Net deferred tax liabilities4 | (1.00) | (1.00) | 0.00 | 0.00% |
Net Asset Value | 47.10 | 52.20 | (5.10) | (9.77%) |
Adjusted Net Asset Value1 | 48.1 | 53.1 | (5.0) | (9.42%) |
Adjusted Net Asset Value1 per Ordinary share € | 0.185 | 0.204 | (0.019) | (9.31%) |
Adjusted Net Asset Value* per Ordinary share fully diluted €1,2 | 0.185 | 0.204 | (0.019) | (9.31%) |
Net Asset Value per preference share €3 | 1.31 | 1.24 | 0.067 | 5.39% |
Number of Ordinary shares | 259,980,909 | 259,980,909 | 0 | 0.00% |
1 Net Asset Value adjusted to add back deferred tax (both current and non-current liabilities).
2 Assumes that the fully diluted number of ordinary shares is 259,980,909.
3 The NAV for preference shares is equal to the nominal value plus accrued interest divided by the total number of preference shares.
4 As at 30 June 2014, deferred tax liabilities of €17.1 million, based upon temporary differences at the time of initial recognition arising from transactions treated as asset acquisitions have not been recognised in accordance with IAS 12. The Group has deferred tax assets of €14.9 million which also have not been recognised.
5 Net current assets for March 2014 includes €6m exit fee due at exit of the Bank of Scotland Loan and which has been expensed for the life of the loan.
The unaudited Net Asset Value reflects a decrease in property valuation on a like-for-like basis by €3.0 million or €0.01 per share. The Sterling NAV was also adversely affected by a fluctuation in the exchange rate which reduced GBP NAV per share by £0.005 on a like for like basis.
The Company's unaudited Net Asset Value figure incorporates the independent property portfolio valuation as at 30 June 2014. The property portfolio will next be valued on 30 September 2014.
Figures converted into sterling assume a EUR per GBP exchange rate of 1.249 as at 30 June 2014.
Key management events over the quarter and post quarter end
· During the quarter the Company's existing debt facility with Bank of Scotland PLC (the "Loan") was refinanced with a new €220 million credit facility provided by Blackstone Real Estate Debt Strategies ("BREDS"), an affiliate of the Blackstone Group LP ("Blackstone").
· Portfolio valuation decreased by 1.06% over the quarter (1.0% on a like for like basis) to €296.7 million.
· Post quarter end the Alovera asset in Spain was sold for €12.2m, on par with the latest valuation. As the property was fully occupied, the vacancy rate increased from 15.47 at quarter end to 16.12% following the sale.
· Post quarter end the Company successfully refinanced the existing credit facility with €100 million of senior debt provided by Bank of America Merrill Lynch International Limited ("BAML") and €122 million of mezzanine debt provided by BREDS. The aggregate loan terms are unchanged for the Company, with an initial margin of 770bp over three month EURIBOR, with an agreed path for a potential reduction to 470bp (the "Step-Down").
Property Portfolio
As at 30 June 2014, the Company's property portfolio was valued at €296.7 million and comprised 31 assets located in five countries. The portfolio value decreased over the quarter by 1.06% or €4.05 million.
As at 30 June 2014, the Company's portfolio generated gross income of €27.5 million per annum, representing a gross income yield of 9.21% and a net income yield of 8.53%. The portfolio weighted average lease term to break is 3.8 years and 5.8 years to expiry. The portfolio void level by income as at 30 June 2014 remained stable over the quarter at 15.5%.
The portfolio's credit rating as measured by the Investment Property Databank's M-IRIS credit analysis system in June 2014 was 71 out of 100, which is classified in the "low-medium risk" band.
As at 30 June 2014 the portfolio composition was as follows:
Sector Weightings
Sector | %* |
Office | 33.1% |
Logistics | 48.2% |
Retail | 18.7% |
Total | 100.0% |
*Percentage of aggregate asset value as at 30 June 2014
Country Weightings
Country | %* |
France | 52.1% |
Germany | 36.4% |
Spain | 5.3% |
Netherlands | 4.0% |
Belgium | 2.2% |
Total | 100.0% |
*Percentage of aggregate asset value as at 30 June 2014
Top 10 Properties
Property Location | Sector | %* |
Heusenstamm, Frankfurt, Germany | Office | 15.2% |
Riesa, Germany | Retail | 11.9% |
Cergy, Paris, France | Office | 10.0% |
Grenoble, France | Office | 5.7% |
Miramas, France | Logistics | 5.2% |
Monteux, France | Logistics | 5.0% |
Marseille, France | Logistics | 4.8% |
Pocking, Germany | Retail | 4.6% |
Alovera, Spain | Logistics | 4.1% |
Montauban, France | Logistics | 3.8% |
Total | 70.3% |
*Percentage of aggregate asset value as at 30 June 2014
Top 10 Tenants
Tenant Name | %* |
Deutsche Telekom | 22.0%1 |
Valeo | 8.4% |
DHL | 5.3% |
Norbert Dentressangle | 5.3% |
Carrefour | 5.0% |
SDV Logistique | 3.7% |
Strauss | 4.0% |
Real SB-Warenhaus | 3.7% |
Euromaster | 3.2% |
Tech Data | 2.8% |
Total | 63.3% |
* Percentage of aggregate gross rent as at 30 June 2014
1 Given the current investment strategy, the UK Listing Rule restriction on limiting rental income from any one tenant to less than 20% is superseded.
Market Context
In an effort to stimulate growth in the Eurozone economy the European Central Bank (ECB) eased monetary policy in June by cutting the deposit rate for banks to -0.1% and the benchmark rate by 10bps to 0.15%. The cuts were made amid signs that the economic recovery may have stalled in Q2 with Eurozone GDP experiencing zero growth and private sector output surveys declining for the region's largest economies alongside weak domestic demand and heightened geopolitical risks weighing on business confidence. Stubbornly high unemployment of 11.6% for the Eurozone and high levels of prevailing public and private debt suggest domestic demand will remain broadly weak in the short term with the threat of deflation a real concern. A sustained period of low inflation (CPI of 0.5% recorded in June) would also present a significant challenge for public and private sector deleveraging given the impact this would have on real debt levels and real interest rates. The announcement by the parent group of Espirito de Banco regarding missed payments on commercial paper and the subsequent bailout of the bank provides a timely reminder that weakness in the European banking sector remains a threat to recovery.
Weaknesses in the French economy appear to have been reflected in take-up in the logistics market with H1 volumes of 1 million sqm recorded, down 16% on H1 2013 (CBRE). Agents report that businesses are increasingly adopting a wait-and-see approach to real estate decisions with enquiries for space starting to decline. Availability continues to increase for Grade B and C stock while diminishing levels of Grade A space has created a polarised market with downwards pressure on rental values for lower quality assets as landlords compete to retain or attract tenants. Activity in the German office markets was also down on the first six months of 2013 with the half year take-up comparison indicating a decline of 5%. In particular, the markets of Frankfurt and Dusseldorf experienced declines of approximately 18% while the markets of Munich, Hamburg and Berlin proved more resilient. Demand from occupiers remains predominantly focused on Grade A assets in the CBDs of major markets, however, anecdotal evidence suggests that demand has filtered out to B locations where asset specification is commensurate with modern occupier requirements.
Investment in European commercial real estate totalled €44.6 billion in Q2, an increase of 30% on Q2 2013 and 11% on Q1 2014. In particular, the Iberian markets continued to experience a strong recovery with investment turnover of €2.4bn in Q2 where Spanish transaction volumes increased by 139% and Portuguese 123% q/q. In the core European markets the UK experienced the highest Q2 turnover since 2007; significantly approximately 60% of investment was transacted on assets located outside of London reflecting the growing interest in higher yielding assets and markets (CBRE). This trend is also evident in Germany where interest has increased over recent months for assets located in good secondary locations in tier 1 cities as well as higher quality assets in tier 2 cities. Investment activity rebounded in France where €6.9 billion was completed in Q2, up 100% y/y with turnover benefiting from several large lot size deals.
With continued improvement in financing conditions predicted (particularly in the stronger core European markets) and relatively high investor confidence the number of portfolio transactions should also start to increase as investors try and deploy capital as efficiently as possible while establishing a presence in European markets in anticipation of a recovery in capital values.
Asset Management Results
Following the refinancing of the Company's indebtedness, asset management remains central to the Company's plan for improving asset liquidity as well as property incomes, assisting with the deleveraging of the portfolio and ultimately contributing to the effort to reach the Step Down interest rate margin. Post quarter end the Company successfully completed the sale of a logistics asset in Spain for proceeds that matched the latest independent valuation of the property. This enabled the Company to set aside €7 million of the sale proceeds in accordance with the Company's business plan to fund ongoing capital expenditure projects while the remaining proceeds were largely used to repay the Company's outstanding debt.
Vacancy levels have begun to stabilise following their recent downward trend, reaching 15.5% as at 30 June 2014, compared to 15.6% as at 31 March 2014. Over the quarter the Company re-geared 5.9% of existing income and has secured heads of terms for new lettings representing a further 5.8% of existing rental income.
Borrowings
As at 30 June 2014, the Company had drawn down a total of €220.0 million of senior debt in respect of its facility with BREDS. In addition, the Company had cash balances of €3.9 million (net of tenant deposits of €2.1 million and escrow accounts of €4.6 million) at that date, giving a net debt position of €216.1 million.
The Company's gross Loan to Value ("LTV") ratio as at 30 June 2014 was 74.16% and the net debt LTV was 72.83%.
Post quarter end the Company refinanced its indebtedness with €100 million of senior debt provided by Bank of America Merrill Lynch International Limited and €122 million of mezzanine debt provided by BREDS.
The initial blended cost of debt to the Company remains 770bp over three month EURIBOR, with a similar provision as existed in the earlier facility for the blended cost to be reduced to 470bp over three month EURIBOR once the mezzanine debt has been reduced to €35 million, subject to the overall LTV being below 70% (the "Step Down Event").
The proceeds of the agreed targeted asset disposals will be applied to the repayment of the mezzanine debt, with the blended cost of debt to the Company remaining at 770bp over three month EURIBOR until the Step Down Event has been achieved. The maturity and other terms of the facilities are similar to those applying to the original facility.
Outlook
At the beginning of 2014 the Company identified a portfolio of 14 assets as being ready for sale, chosen either on the basis of their prospective long term vacancy, in which case their disposal would improve the characteristics of the remaining portfolio; or because they have recently benefitted from asset management initiatives which have placed them in a strong position for sale; or because they will be ready for disposal following the fulfilment of some additional asset management objectives in the short term.
The Company has made encouraging progress with these targeted disposals, and the focus of the Company's strategy remains to complete the remaining transactions in its existing business plan. The implementation of the current disposal strategy will require careful cash management to balance the consequent loss of income from asset sales against planned expenditures. In order to make the requisite repayment of the mezzanine BREDS loan that will trigger the Step Down rate of interest, the Company has also identified a need for a further injection of capital over and above the anticipated proceeds from planned asset sales, reflecting the likelihood that, in some cases, the net proceeds of property sales will be lower than the most recent valuations.
It is the view of the Manager that the remaining portfolio of 18 assets, concentrated on France and Germany and valued at €206.8 million as at 30 June 2014, will provide a mixture of opportunities for improvement through continued asset management as well as retaining some of the most attractive properties in the portfolio.
For further information, please contact:
Internos Global Investors
Ludovic Bernard +44 20 7355 8800
Citco REIF Services (Luxembourg) SA
Jorrit Crompvoets +352 47 23 23 212
Hudson Sandler
Michael Sandler +44 20 7796 4133