15 Aug 2014 13:08
The Local Shopping REIT plc
Interim Management Statement
The Local Shopping REIT plc. ("LSR" or the "Company"), a UK real estate investment trust focused on investments in local shopping assets, is pleased to provide the following update on trading for the four months to 31 July 2014.
Highlights
· Sale (completed shortly after the period end) of two of the Company's property owning subsidiaries in line with the Company's investment strategy
· Annualised rental income from the portfolio as at 31 July 2014 of £15.053 million net of head rent payments (gross: £15.177 million)
· Annualised rental income for the continuing portfolio £7.990 million net of head rent payments (gross: £8.060 million)
· 45 vacant units let since 31 March 2014 at a total rent of £498,853 per annum (continuing portfolio 26 units, total rent £291,150 per annum)
· 15 units in the continuing portfolio under offer as at 31 July 2014, at a combined rental of £149,660 per annum
· Rent reviews completed on 27 units, increasing rental income by £37,973 per annum (7.32% above passing rent and 10.9% above Market Rent), and 16 further leases renewed at a 5.75% premium to Market Rent
· Rent reviews within continuing portfolio completed on 14 units, increasing rental income by £21,978 per annum (6.97% at passing rent and 9.17% above Market Rent), and 9 further leases renewed at a premium above Market Rent of 4.90%
· Eight other individual properties sold, plus two flats, for £2.265 million, representing a premium of 15.92% to their 31 March 2014 valuation.
Steven Faber, LSR's Executive Director, said:
"The business has continued to perform well during an extended period of change in which considerable effort has necessarily been devoted to the sale of a major element of the Company's investment properties. During this time the management team has nevertheless continued to take a highly active role with our properties and tenants and it is pleasing that the portfolio performance continues to respond positively to this approach."
Portfolio Sale
Much of management activity during the period focused on the sale of two of the Company's property-owning subsidiaries, the completion of which we announced on 7 August. This transaction was in line with the revised investment policy adopted by shareholders in July 2013. The Company thus disposed of 235 properties with a net rental income of £7.07m. The cash consideration received at completion was £11.2m (which is subject to adjustment, upwards or downwards on agreement of completion accounts). However, the subsidiaries took with them aggregate liabilities (including third party fixed rate debt of £66.7m) resulting in an implied property sale price (subject to adjustment) of £79.3m. The valuation of the properties included in the sale at 31 March 2014 was £77.5m.
After adjusting for sales costs (debt breakage costs, impairments, vendor's insurance and marketing and agency fees) of an estimated £2.6m, we anticipate a loss of £0.8m.
The sales costs contain £0.75m of fixed rate debt breakage which are not included in the Company's Net Asset Value ("NAV") under International Financial Reporting Standards ("IFRS"). This amount compares favourably with the implicit liability of £5.7m at the time of sale.
The net proceeds of the sale will be applied to reduce the Company's indebtedness, which we anticipate will reduce the overall loan to value ratio from 75% to 58% (subject to the consideration adjustment mentioned above).
Asset Management
Market context
The general economy continues to provide mixed messages for the property sector. Whilst the overall unemployment rate has fallen to a level last seen in 2008 and the services sector continues to expand, rises in average wages continue to be limited across many sectors, with overall wages plus bonuses falling in the year to June 2014. Some commentators believe that this, together with limited investment by businesses in generating additional capacity, means that the Bank of England is unlikely to raise interest rates before the end of 2014.
Construction activity for 2014 has continues at a level circa 5% above the equivalent periods in 2013. Within this, house building continues apace with growth at a 10 year high. The Help to Buy scheme continues to support house price inflation, particularly below the Stamp Duty Land Tax threshold.
Retailers have generally shown considerable resilience in overcoming the severe weather conditions encountered across much of the country during the last winter. Figures from the Office for National Statistics show retail activity continuing to grow, with June sales up by 3.6% over June 2013. Sales for Q2 overall increased by 4.5% over the Q2 2013, the sixteenth quarter of continuous growth and the longest period of sustained growth since 2004. Given the continued squeeze on household incomes, much of the growth in retail spend may be based on consumer debt. The ONS noted that, although internet retail sales were 13.4% higher in June 2014 than the same month a year earlier, the rate of growth appeared to be tailing off with an increase of only 0.1% over the previous month.
As a result, inter alia, of these factors investor appetite for local retailing, particularly for convenience shopping, remains positive for areas anchored by stable economic activity, such as the South East. Some other regions, such as the North East, have yet to see meaningful growth in occupational demand, with traditional high streets and shopping centres remaining under pressure. In the Company's spheres of operation, generally away from High Street shopping zones, smaller local shops continue to perform robustly.
Portfolio Update
The annualised rental income from the portfolio at 31 July was £15.053 million, after netting off head rent payments (gross: £15.177 million). Of this, the annualised rental income for the continuing portfolio was £7.990 million net of head rent payments (gross: £8.060 million).
Continuing our policy of marketing our local retail units at affordable rents, we let 45 vacant units between 31 March and 31 July 2014 at a total rent of £498,853 per annum, a premium over Market Rent of 2.83%.
Rent reviews were completed on 27 units, increasing rental income by £37,973 per annum, representing an average rental uplift of 7.32% and a premium of 10.9% above Market Rent.
Of these, 14 units, with an aggregate rental increase of £21,978 per annum, were for properties within the continuing portfolio, representing an average rental uplift of above passing rent of 6.97% and a premium of 9.17% above Market Rent.
We also renewed 16 leases at rents in line with both the previous passing rent and Market Rent, of which 9 were within the continuing portfolio.
We continue our efforts to extract further value from our properties through planning consents for development and use changes, particularly of under-utilised upper parts. Since 31 March planning consent was obtained for use changes over five properties, including one for conversion from office to residential.
The overall portfolio void rate at 31 July was 12.56% of portfolio Market Rent (31 July 2013: 12.43%), equivalent to Market Rent of £2.051 million. Within this, the core commercial void rate comprised 11.36% attributable to commercial units (31 July 2013: 11.31%) and 1.21% attributable to residential units (31 July 2013: 1.16%). The void figure includes properties deliberately held back for asset management initiatives.
The void rate for the continuing portfolio at 31 July was 11.94%, equivalent to Market Rent of £1.041m, with 10.22% attributable to commercial units and 1.72% attributable to residential units.
We continue our policy of taking possession early where tenants are in financial difficulty and there are good prospects for letting the unit, which is to an extent reflected in the void rate figures.
Acquisitions and Sales
During the period eight properties were sold plus two residential flats sold on long leases for an aggregate of £2.655 million, a 15.92% premium to their 31 March 2014 valuation. At the period end contracts had been exchanged for the sale of a further property and ten other properties plus one flat were under offer for sale.
Financing
The Company's total net borrowings at 31 July were £131.73 million, having reduced during the period by £1.77 million as a result of amortisation as well as loan repayments following individual asset sales. The sale of the Company's NOS 2 Limited and NOS 3 Limited subsidiaries, shortly after the period end, removed the fixed rate debt finance facility provided by Indus (Eclipse 2007-1) plc, under which borrowings totalled £66.7m at the time of sale.
Following the sale of these subsidiaries, the entirety of the Company's borrowings, totalling £65.12 million, are provided through its two facilities with HSBC Bank Plc, which are fully drawn and expire in 2018. The 31 March property valuations for the continuing portfolio provide significant headroom in relation to our banking covenants, a position that has been strengthened by the cash received from the portfolio sale. We estimate that the Company's overall loan to value ratio has thus reduced from 75% at 31 July to 58% following the portfolio sale (subject to final adjustment of the cash consideration). The average interest rate of the Company's borrowings during the period was 6.00% and the projected interest rate to 30 September is 6.24%.
Outlook
Following the sale of two of its subsidiaries, the Company still holds 387 properties with 1,127 individual letting units across the United Kingdom generating rental income of £7.990 million net of head rent payments (gross: £8.060). Whilst we will continue to execute the investment strategy on behalf of shareholders, the signs of an improving environment for local retail, first evident in the early months of the year, have been maintained and we remain confident that the portfolio will continue to perform robustly in response to our hands-on active management approach.
-Ends-
For more information please contact:
The Local Shopping REIT plc Tel: 020 7355 8800
Steve Faber Director
Bill Heaney, Company Secretary