18 Feb 2011 07:00
18 February 2011
INVISTA EUROPEAN REAL ESTATE TRUST SICAF
(the "Company"/ "Group")
ANNOUNCEMENT OF NAV AND INTERIM MANAGEMENT STATEMENT
FOR THE QUARTER ENDED 31 DECEMBER 2010
Commenting upon the Company's first quarter results, Tom Chandos, chairman, said:
"Following a review by the Board, the Company instituted last year an accelerated, proactive programme of disposals. As a result, three properties are currently under offer, for a consideration totalling more than €40 million. Although there can be no certainty at this stage that these transactions will be completed, the Board would see their completion as an encouraging first step in the new programme of sales.
"The Company intends to use the proceeds of its accelerated programme of property sales in the first instance to reduce borrowings and thereby achieve the lower margin applying to the Bank of Scotland facility once the LTV falls below 65%. As further transactions are completed, the Board will review the best use of excess sales proceeds in order to maximise shareholder value."
Net Asset Value
As at 31 December 2010, 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 €0.549 (47.0p) per share, reflecting an increase of €0.011 or 2.04% over the quarter and 0.07p or 1.51% in Sterling. The unaudited Net Asset Value, calculated under International Financial Reporting Standards, was €0.529 per share.
A breakdown of the unaudited Net Asset Value is set out below:
€ million | As at31 Dec 10 | As at30 Sep 10 | 3 month change | 3 month change (%) |
Property portfolio |
|
|
|
|
Independent valuation | 512.5 | 515.7 | -3.2 | -0.6% |
Valuation of assets sold4 | - | 0.4 | -0.4 |
|
Like for like direct property | 512.5 | 515.3 | -2.8 | -0.5% |
Net current assets | 33.6 | 27.2 | +6.4 | 23.5% |
Market value of swaps/FX | (26.4) | (30.5) | +4.1 | -13.4% |
Senior debt | (344.8) | (340.6) | -4.2 | -1.2% |
Preference shares | (30.4) | (30.1) | -0.3 | -1.0% |
Market value of warrants | (2.7) | (2.5) | -0.2 | 8.0% |
Net deferred tax liabilities | (4.3) | (4.2) | -0.1 | -2.4% |
Net Asset Value | 137.5 | 135.0 | +2.5 | 1.9% |
Adjusted Net Asset Value1 | 142.6 | 139.9 | +2.7 | 1.9% |
Adjusted Net Asset Value1 per ordinary share € | 0.549 | 0.538 | +0.011 | 2.0% |
Adjusted Net Asset Value per ordinary share fully diluted €1, 2 | 0.527 | 0.518 | +0.009 | 1.7% |
Net Asset Value per preferenceshare €3 | 1.17 | 1.20 | -0.03 | -2.5% |
Number of ordinary shares | 259,979,880 | 259,976,943 | 2,937 |
|
1 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
2 Assumes all warrants are exercised at 29p per share and that the fully diluted number of ordinary shares is 289,086,083
3 The NAV for preference shares is equal to the nominal value plus accrued interest divided by the total number of preference shares
4 Independent valuation by DTZ of property sold in Entraigues, France as at 30 September 2010
The unaudited Net Asset Value for the quarter ended 31 December incorporates a number of events and key factors including:
§ The property valuation decreased by €3.2 million or €0.01 per share. This is made up of an decrease in the value of the existing portfolio on a like for like basis of 0.5% in the quarter (equating to €2.8 million), and the sale of part of a warehouse in Entraigues, France previously valued at €0.4 million.
§ A reduction in the marked-to-market valuation of the Company's interest rate swaps of €4.1 million or €0.02 per share.
§ An increase in net current assets of €6.4 million or €0.02 per share. This is largely due to an increase in cash released from the investment in Girona in Spain following the debt drawdown in October 2010.
§ An increase in senior debt of €4.2 million or €0.02 per share following the drawdown of €5.0 million debt in respect of the Girona acquisition in October 2010, partly offset by a debt repayment of €0.8 million following sales and debt amortisation.
The Company's unaudited Net Asset Value figure incorporates the independent property portfolio valuation as at 31 December 2010. The property portfolio will next be valued on 31 March 2011.
Figures converted into sterling assume a EUR per STG exchange rate of 1.1671 as at 31 December 2010.
Property Portfolio
As at 31 December 2010, the Company's property portfolio was valued at €512.5 million and comprised 43 assets (€515.7 million: 30 September 2010). The portfolio value fell €2.8 million (or 0.54%) during the quarter largely due to continuing weakness in the occupational markets and downward pressure on rents. The Company sold part of a logistics property in Entraigues, France for €0.5 million during the quarter, which was 14.6% above the September 2010 valuation.
As at 31 December 2010, the Company's portfolio generated gross income of €42.7 million per annum, representing a Gross Income Yield ("GIY") of 8.33% and a Net Initial Yield ("NIY") of 7.69%. The portfolio void level decreased to 6.3% as at 31 December 2010 (8.4%: September 2010) due to new lettings on 17,690 sqm vacant space. As at 31 December 2010, the portfolio weighted average lease length to expiry was 6.17 years (4.14 years to first break).
The portfolio's credit rating as measured by the Investment Property Databank's M-IRIS credit analysis system on 31 December 2010 was marginally improved at 78 out of 100, which is classified as a "low risk band".
As at 31 December 2010 the portfolio composition was as follows:
Sector Weightings
Sector | %* |
Office | 27.8% |
Logistics | 55.6% |
Retail | 16.6% |
Total | 100.0% |
*Percentage of aggregate asset value as at 31 December 2010
Country Weightings
Country | %* |
France | 46.7% |
Germany | 39.0% |
Spain | 4.6% |
Netherlands | 3.5% |
Belgium | 3.0% |
Czech Republic | 1.9% |
Poland | 1.3% |
Total | 100.0% |
*Percentage of aggregate asset value as at 31 December 2010
Top 10 Properties
Property Location | Sector | %* |
Heusenstamm, Frankfurt, Germany | Office | 13.2% |
Riesa, Germany | Retail | 9.5% |
Lutterberg, Germany | Logistics | 5.4% |
Cergy, Paris, France | Office | 5.3% |
Trappes, Paris, France | Logistics | 3.7% |
Roth, Germany | Retail | 3.3% |
Grenoble, France | Office | 3.2% |
Madrid, Spain | Logistics | 3.1% |
Marseille, France | Logistics | 3.0% |
Monteux, France | Logistics | 3.0% |
Total |
| 52.7% |
*Percentage of aggregate asset value plus cash as at 31 December 2010
Top 10 Tenants
Tenant Name | %* |
Norbert Dentressangle | 15.5% |
Deutsche Telekom | 13.2% |
DHL | 8.6% |
Schenker Logistics | 4.1% |
Valeo | 3.8% |
Carrefour | 3.6% |
AVA Marktkauf | 2.9% |
Real SB-Warenhaus | 2.6% |
SDV Logistique | 2.5% |
Tech Data | 2.3% |
Total | 59.1% |
* Percentage of aggregate gross rent as at 31 December 2010
Market Context
Although we await official confirmation on the level of Eurozone GDP in Q4 2010, industrial production and retail sales data suggests that growth continued in Q4 2010 despite a slowdown in December. Inflation has accelerated in recent months reflecting sharply higher global commodity prices, and while it seems unlikely that Euro base rates will be raised in the short-term, recent commentary from the ECB indicates a strong preference to head off any build-up of inflation expectations. Market interest rates have continued their upward trend since Q3 2010, with 5-year Euro swap rates at 2.8% (source: Datastream, as at February 2011), recently reaching their highest level since late 2009. Economic growth prospects continued to diverge between northern European countries, including Germany and Scandinavia, and those in the south including Italy, Portugal and Spain and this is having an impact on property investment in those markets.
Property investment turnover increased in Q4 2010, led by France, Germany and Scandinavia where, due to the limited availability of debt, investors were generally focusing on prime properties. Over the year, turnover in Continental Europe reached €68.4bn, 51% higher than in 2009 (source: CB Richard Ellis European Investment Quarterly). Against this trend, however, the investment market remained weak in Spain, Italy and Benelux, reflecting different patterns in relative economic growth. According to CBRE, commercial property valuations continue to diverge in favour of France, Germany and Scandinavia where have been stable or slightly improved (source: CB Richard Ellis European Valuation Monitor, latest data available to end-Q3 2010).
Property leasing markets also benefited from a stronger end to the year; however the market continues to operate well below the levels seen in 2005-2007. Office take-up volumes increased in Q3 and Q4 2010, though with labour markets still weak and unemployment remaining above 10% across the Eurozone (source: Eurostat), tenants are still consolidating and reducing costs. Vacancy rates are therefore still at high levels as second-hand space is returned to the market. Similar trends have also been seen in the logistics market where, for example in France, the effect of a stabilisation in tenant demand and sharply lower volumes of new supply has largely been offset by the increased availability of older, second-hand space (source: BNP-Paribas Real Estate). Overall, these factors are expected to dampen rental growth over the next 12 months, except in prime sub-markets where supply is constrained.
Disposals
Following a review by the Board, the Company instituted last year an accelerated, proactive programme of disposals. As a result, three properties are currently under offer, for a consideration totalling more than €40 million. Although there can be no certainty at this stage that these transactions will be completed, the Board would see their completion as an encouraging first step in the new programme of sales. Particular focus is being given to the realisation of non-core assets.
In the past two years, against a background of exceptionally difficult market conditions, the Company has realised over €100 million from asset sales, representing over 15% of the property assets at the start of the period. Although the Continental European property market has not seen as sharp a recovery as has occurred in the UK, improvements in market sentiment should allow the new programme to be executed as quickly and effectively as possible.
Active Asset Management
Maximising rental revenue is essential to the performance of the portfolio and of the Company. In parallel with reducing debt and debt costs through sales, the focus continues to be on actively managing the portfolio through extending leases and letting vacant space. Over the last quarter, the Company completed two new lettings in France and one in Spain, letting up a total 17,690 sqm of vacant accommodation, generating an additional €1.1 million per annum of gross rent (included in the total portfolio income figure of €42.7 million stated above) as well as saving €312,000 pa on void costs. This activity has reduced portfolio vacancy to 6.3% from 8.4% and increased like for like portfolio gross annual income by 1.5% over the quarter to 31 December 2010.
In addition to these new lettings, the Company re-geared five leases with existing tenants representing 12.1% portfolio income, extending the fixed lease term by an average 4.2 years. As a result, the portfolio weighted average lease length to break improved from 3.86 years as at 30 September 2010 to 4.14 years as at 31 December 2010.
Finance
As at 31 December 2010, the Company had drawn down a total of €347.9 million of senior debt in respect of its €359.3 million facility with the Bank of Scotland and its €12.0 million facility with Credit Foncier. In addition, the Company had cash balances of €35.2 million (excluding tenant deposits of €4.6 million) at that date, giving a net debt position of €312.7 million.
The Company's gross Loan To Value ("LTV") ratio as at 31 December 2010 was 67.9% and the net debt LTV was 61.0%. As a result of the valuation decline this quarter the Company's gross LTV under the Finance Documents with the Bank of Scotland rose to 68.7% (30 September 2010: 67.9%) which remains substantially below the LTV covenant of 82.5% in 2011.
All debt is fully hedged against changes in European interest rates until December 2013, giving a total interest cost of 6.53% per annum at current LTV levels.
Strategy
The Company intends to use the proceeds of its accelerated programme of property sales in the first instance to reduce borrowings and thereby achieve the lower margin applying to the Bank of Scotland facility once the LTV falls below 65%. As further transactions are completed, the Board will review the best use of excess sales proceeds in order to maximise shareholder value.
The Board remains cautious about the ongoing difficult economic conditions and weak occupational markets and does not expect that recovery will be a straight line. This was clearly evidenced by this quarter's portfolio valuation decline despite strong letting activity. However, we will continue to make active progress in our steps towards achieving the strategic objectives of the Company and maintain our proactive and rigorous approach to asset management.
For further information, please contact:
Invista Real Estate Investment Management
Tony Smedley/Chris Ludlam +44 20 7153 9369
Financial Dynamics
Dido Laurimore/ Olivia Goodall +44 20 7831 3113