3 Sep 2012 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 2012
3 September 2012
Net Asset Value
As at 30 June 2012, the Company's unaudited Net Asset Value calculated using International Financial Reporting Standards and adjusted to add back the change in fair value of the warrants and deferred tax was €0.415 (33.4p) per share, reflecting a decrease of €0.05 or 10.17% over the quarter and 5.0p or 13.25% in Sterling. The unaudited Net Asset Value, calculated under International Financial Reporting Standards, was €0.407 per share.
A breakdown of the unaudited Net Asset Value is set out below:
In € million | As at30 June 12 (€m) | As at31 March 12 (€m) | 3 month change (€m) | 3 month change (%) |
Property portfolio | ||||
Like for like direct property | 422.0 | 434.9 | (12.9) | (2.97%) |
Valuation of assets held for sale | 30.60 | 0 | 30.6 | - |
Independent valuation | 391.4 | 434.9 | (43.5) | (10.00%) |
Net current assets1 | 36.6 | 22.7 | 13.9 | 61.23% |
Market value of swaps/FX | (18.1) | (18.7) | 0.6 | (3.21%) |
Senior debt2 | (267.1) | (285.2) | 18.1 | (6.35%) |
Preference shares | (33.3) | (32.0) | (1.3) | 4.06% |
Market value of warrants | (0.8) | (0.7) | (0.1) | 14.29% |
Net deferred tax liabilities | (2.8) | (2.9) | 0.1 | (3.45%) |
Net Asset Value | 105.9 | 118.1 | (12.2) | (10.33%) |
Adjusted Net Asset Value3 | 107.8 | 120.1 | (12.3) | (10.24%) |
Adjusted Net Asset Value3 per ordinary share € | 0.415 | 0.462 | (0.047) | (10.17%) |
Adjusted Net Asset Value per ordinary share fully diluted (€) 3,4 | 0.409 | 0.450 | (0.041) | (9.11%) |
Net Asset Value per preferenceshare (€)5 | 1.24 | 1.23 | 0.01 | 0.81% |
Number of ordinary shares6 | 259,980,909 | 259,980,909 | 0 |
1 Net assets increased quarter on quarter due to reclassification of an asset held for sale and liabilities attributable to it.
2 Senior debt decreased quarter on quarter due to reclassification of liabilities attributable to the asset held for sale of which senior debt amounts to €18.1 million.
3 Net Asset Value adjusted to add back deferred tax (both current and non-current liabilities) and change in fair value of the warrants from book value.
4 Assumes all warrants are exercised at 29p per share and that the fully diluted number of ordinary shares is 289,086,083.
5 The NAV for preference shares is equal to the nominal value plus accrued interest divided by the total number of preference shares.
6 As at 30 June 2012, deferred tax liabilities of €25.2 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 €14.4 million which also have not been recognised.
The unaudited Net Asset Value incorporates a number of events and key factors during the quarter ended 30 June 2012 including:
·; The property valuation has decreased on a like-for-like basis by €12.9 million or €0.05 per share. This reflects the change in value of the existing portfolio, as there have been no property transactions in the quarter.
·; An increase of net current assets of €13.9 million, mainly due to classification of one property as an asset held-for-sale
·; A decrease of the total long term senior debt amount of €18.1 million [(and a corresponding increase in current liabilities)] due to the reclassification of the loan related to the above property as a liability attributable to the asset held-for-sale
The Company's unaudited Net Asset Value figure incorporates the independent property portfolio valuation as at 30 June 2012. The property portfolio will next be valued on 30 September 2012.
Figures converted into sterling assume a EUR per GBP exchange rate of 1.24148 as at 30 June 2012.
Key management events over the quarter and post quarter end
·; Re-geared leases with two major tenants occupying logistics accommodation in Spain and retail space in Germany, representing 5.7% of portfolio income for a fixed average lease term of 7.9 years.
·; Two assets in Germany are under exclusivity for total sale proceeds of over €40 million with an additional €50 million of assets in advance negotiations with potential purchasers.
·; Anchor tenant Mauktkauf who vacated retail site in Roth, Germany following a dispute on their lease terms has agreed a settlement payment that will provide sufficient cash for the Company to reposition the asset and attract new tenants.
·; Comprehensive review of costs continued, with over €150,000 per annum of initial savings achieved and a path identified for materially higher amounts by calendar year end, with all major administration and accounting services being put out to tender.
·; In order to conserve cash for asset management initiatives, the Company decided not to utilise €12.3 million of cash that would have been needed to reduce the senior loan facility to below 65% LTV ahead of the covenant test and interest rate setting on 25 July 2012. As a result, the Company has incurred an increase in loan margin of 25bps to 2.50%.
·; Smaller amounts of cash used to purchase 800,000 of Company's own preference shares at 95p in five separate trades at end of July 2012, retiring liabilities at an effective redemption yield of over 10%.
Property Portfolio
As at 30 June 2012, the Company's property portfolio was valued at €422.0 million and comprised 39 assets across six countries. Portfolio valuation decreased over the quarter on a like-for-like basis by 2.97% or €12.9 million as a result of market sentiment in the Eurozone and pressure on portfolio income from vacancy and approaching lease breaks.
As at 30 June 2012, the Company's portfolio generated gross income of €34.3 million per annum, representing a gross income yield of 8.12% and a net income yield of 7.37%. The portfolio weighted average lease term to break is 4.4 years and 5.7 years to expiry. The portfolio void level by income as at 30 June 2012 was 16.6%, however post quarter end portfolio vacancy by income increased to 20.6% following tenants vacating logistics sites in France and Czech Republic.
The portfolio's credit rating as measured by the Investment Property Databank's M-IRIS credit analysis system in July 2012 was 75 out of 100, which is classified in the "low risk band".
As at 30 June 2012 the portfolio composition was as follows:
Sector Weightings
Sector | %* |
Office | 32.1% |
Logistics | 50.1% |
Retail | 17.8% |
Total | 100.0% |
*Percentage of aggregate asset value as at 30 June 2012
Country Weightings
Country | %* |
France | 43.3% |
Germany | 43.0% |
Spain | 4.6% |
Netherlands | 3.5% |
Belgium | 3.8% |
Czech Republic | 1.8% |
Total | 100.0% |
*Percentage of aggregate asset value as at 30 June 2012
Top 10 Properties
Property Location | Sector | %* |
Heusenstamm, Frankfurt, Germany | Office | 14.2% |
Riesa, Germany | Retail | 9.9% |
Lutterberg, Germany | Logistics | 6.9% |
Cergy, Paris, France | Office | 6.7% |
Grenoble, France | Office | 4.0% |
Miramas, France | Logistics | 3.7% |
Monteux, France | Logistics | 3.7% |
Roth, Germany | Retail | 3.6% |
Marseille, France | Logistics | 3.4% |
Pocking, Germany | Retail | 3.4% |
Total | 59.5% |
*Percentage of aggregate asset value plus cash as at 30 June 2012
Top 10 Tenants
Tenant Name | %* |
Deutsche Telekom | 16.7% |
DHL | 10.9% |
Norbert Dentressangle | 8.4% |
Valeo | 6.3% |
Schenker Logistics | 5.1% |
Carrefour | 4.7% |
AVA Marktkauf | 3.5% |
SDV Logistique | 3.0% |
Tech Data | 2.9% |
Real SB-Warenhaus | 2.9% |
Total | 64.4% |
* Percentage of aggregate gross rent as at 30 June 2012
Market Context
The European economic outlook remains polarised between core northern countries and peripheral southern countries. However, the German economy is starting to feel the effects as demand for exports from fellow Eurozone members act as a drag on the manufacturing and export sectors. Unemployment in the Eurozone remains a significant problem having reached an historical high in June 2012 at 11.2%. However, there are considerable differences with German unemployment remaining on a downward trend and reaching a historical low of 5.4% as compared to 24.8% in Spain (Eurostat).
With an uncertain outlook, occupiers are adopting a cautious approach and this is reflected in falling demand for space, as take-up slowed in many markets over the first six months of 2012. Following a relatively robust level of take-up in H2 2011, demand in the French logistics market for H1 2012 was down 55% on the previous six months (BNP Paribas). With a weakened outlook for French manufacturing and export industries, it is likely that take-up for the full year will be weaker than 2011. The German office market has also experienced a decline in take-up with a fall of 10.5% year on year in the first six months of 2012 (Savills). Demand for prime German retail space appears to be holding up, with national and international retailers looking to benefit from the relatively robust, for the time being, level of domestic demand.
In the investment market, a total of €24bn was transacted in Q2, representing a slight fall of 2% on Q1 2012 and a decline of 6% on Q2 2011 (CBRE). The core markets of UK, Germany, France and the Nordics accounted for 87% of investment as investors continue to be risk-averse. The office sector increased its share of investment, accounting for 52% of investment with the retail sector experiencing lower levels of investment in recent quarters with 25% of investment as the availability of prime product remains low (CBRE).
Asset Management Results
In the face of challenging market conditions, the Company has been successful in securing and advancing on a number of important asset management initiatives. Over the quarter and post quarter end, the Company extended leases with existing tenants representing 5.7% of portfolio income for an average weighted fixed lease length of 7.9 years. These two lease re-gears were secured with top tenants occupying warehouse accommodation in Alovera, Spain and retail space in Riesa, Germany, securing asset level performance and maintaining quality tenant covenants. In addition, extending these leases will help alleviate downward pressure on portfolio income and rising portfolio vacancy. A further 11.3% of portfolio income has secured heads of terms with existing tenants to extend those leases by an average 4.6 years and an additional 8.1% of portfolio income is in advance negotiations with existing tenants.
As advised in previous Company reports, the high incidence of lease break/expires during 2012 has weakened portfolio income and increased vacancy levels. Post quarter end, vacancy by income rose to 20.6%, however the Company is actively managing its vacant properties and advancing negotiations on 64,773 sqm of vacant warehouse space (€2.6 million by ERV). If successful, securing these leases should help mitigate the current rise in vacancy and loss in rental income. In addition, the Company was in negotiation with one anchor tenant at the Company's shopping centre in Roth, Germany who vacated in March 2012 following a dispute over their contracted lease terms. Since the date of the last report, the Company has agreed a settlement with the tenant which will provide cash proceeds for the Company to utilise in repositioning the centre and attracting new tenants.
Given investor cautiousness and liquidity constraints, progress is slow in securing offers and executing disposals. Despite these challenges, the Company has progressed on a number of sales with exclusivity granted on two logistics assets in Germany representing over €40 million of potential sale proceeds. Execution of these disposals will be central in progressing the Company's realisation strategy and deleveraging the portfolio ahead of the refinancing event in December 2013. A further €50 million of assets are in advance discussions with potential purchasers.
Cost Reduction
The Company has been active in reviewing corporate cost reduction over the last few months. Since the change in investment manager and Company strategy, the Company has saved over €150,000 per annum so far through cost cutting in areas such as corporate structure, research, fund performance tracking and financial public relations. In addition, the Board has initiated a comprehensive appraisal of the corporate accounting and administrative services and is running a tender process with new and existing providers to negotiate terms that it believes would substantially reduce costs, as well as improving the quality of service.
Borrowings
As at 30 June 2012, the Company had drawn down a total of €286.7 million of senior debt in respect of its €359.3 million facility with the Bank of Scotland. In addition, the Company had cash balances of €24.3 million (excluding tenant deposits of €4.2 million and escrow accounts of €2.5 million) at that date, giving a net debt position of €262.4 million.
The Company's net Loan To Value ("LTV") ratio as at 30 June 2012 was therefore 62.2%, while the gross debt LTV, on which the bank covenants are tested and the margin determined, was 67.9%.
On 25 July, the interest rate on senior loan facility with Bank of Scotland was set and tested on the Company's LTV ratio based on the back dated 30 June 2012 valuation. Following to the decrease in value, the LTV level was above 65% on the 30 June 2012 valuation, and the applicable interest rate margin amounted to 2.50%.
All debt is fully hedged against changes in European interest rates until December 2013, giving a total interest cost of 6.70% per annum at current LTV levels.
Prior to 25 July, the Company decided not to over-amortise the senior loan to reduce the LTV below 65% and maintain a loan margin at 2.25% as this strategy would require a payment of €12.3 million of cash. The Company concluded such a repayment would limit corporate flexibility and weaken security in meeting the Company's working capital and capital expenditure obligations. As sales progress and net sales proceeds are anticipated, the Company will continue to review the use of cash and the best utilisation of sale proceeds.
The Company remains active in taking advantage of opportunities to manage the balance sheet. From 24 July 2012 to 31 July 2012, the Company purchased 800,000 of its own Preference Shares at an average price of £0.95.The purchase was an opportunity for the Company to acquire shares at an attractive discount to face value while limiting outstanding liabilities and reducing coupon payments. The preference shares purchased are being held in treasury.
Strategy
The Company is pursuing a structured realisation of its assets in line with the resolution approved by the Company's shareholders at the Extraordinary General Meeting ("EGM") on 14 October 2011, as an investment strategy under the Company's original investment policy. The manager is therefore intensively focused on the asset management that remains key in maximising income and so achieving both the protection/enhancement of property values and, hence, the targeted sales programme. At the same time as repositioning and selling assets, the manager and the Board are paying equal attention to the management of the Company's bank debt and capital structure, in order to ensure that it will have the time needed to achieve the best possible realisation of value for shareholders.
For further information, please contact:
Internos Real Investors
Ludovic Bernard +44 20 7355 8800
Citco REIF Services (Luxembourg) SA
Marta Kozinska +352 47 23 23 267
Hudson Sandler
Michael Sandler +44 20 7796 4133