SLI.L Regulatory News (SLI)

31 January 2019

STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST LIMITED (LSE: SLI)

LEI: 549300HHFBWZRKC7RW84

Unaudited Net Asset Value as at 31 December 2018

Key Highlights

Solid Performance

Net asset value (“NAV”) per ordinary share was 91.0p (Sep 18 – 91.4p), a fall of 0.4%, resulting in a NAV total return, including dividends, of 0.9% for Q4 2018; The portfolio valuation (before CAPEX and transaction costs) increased by 0.7% on a like for like basis, whilst the IPD/MSCI Monthly Index dropped by 0.2% over the same period.

Investment and letting activity

Purchase of a multi let office on the Hagley Road in Birmingham for £23.75m, reflecting an initial yield of 7.6%. The building has an average lease length to earliest of break or expiry of 4.3 years with 30% of the income from the Government. Sale of the Company’s largest void unit, an industrial property in Oldham for £6.3m. The sale price was just under 13% above the valuation as at 30 June 2018. Letting of the Company’s largest vacancy, a logistics unit in Swadlincote. The 141,000sqft unit, which became vacant in July 2018, has been let at a rent of £813,000pa on a new five year lease subject to a lease break after the third year to a 3rd party logistics company. This represents a 21% increase on the previous passing rent.

Strong balance sheet with prudent gearing

Prudent LTV* of 24.4% at the quarter end, one of the lowest in the Company’s peer group and the wider REIT sector.

Attractive dividend yield

Dividend yield of 5.9% based on a quarterly dividend of 1.19p and the share price of 81.1p as at 31 December 2018 compares favourably to the yield on the FTSE All-Share REIT Index (4.7%) and the FTSE All-Share Index (4.5%) as at the same date.

*LTV calculated as Debt less cash divided by portfolio value

Net Asset Value (“NAV”)

The unaudited net asset value per ordinary share of Standard Life Investments Property Income Trust Limited (“SLIPIT”) at 31 December 2018 was 91.0p. The net asset value is calculated under International Financial Reporting Standards (“IFRS”).

The net asset value incorporates the external portfolio valuation by Knight Frank LLP at 31 December 2018.

Breakdown of NAV movement

Set out below is a breakdown of the change to the unaudited NAV calculated under IFRS over the period 1 October 2018 to 31 December 2018.

			Per Share (p)				Attributable Assets (£m)		Comment
Net assets as at 30 Sep 2018			91.4				371.0
Unrealised increase in valuation of property portfolio			0.6				2.5		Like for like increase in property portfolio of 0.7%
CAPEX & transaction costs in the quarter			-0.7				-2.8		Predominantly transaction costs at Hagley Road and capital expenditure on asset management initiative at Kirkgate, Epsom
Net income in the quarter after dividend			-0.1				-0.3		Continued strong income generation with dividend cover of 93% in the quarter.
Interest rate swaps mark to market revaluation			-0.1				-0.7		Increase in swap liabilities as a result of reduced expectations of a rise in interest rates.
Other movement in reserves			-0.1				-0.3		Movement in lease incentives in the quarter
Net assets as at 31 Dec 2018			91.0				369.4
	European Public Real Estate Association (“EPRA”)*			31 Dec 2018				30 Sep 2018
	EPRA Net Asset Value			£370.2m				£371.2m
	EPRA Net Asset Value per share			91.2p				91.5p

The Net Asset Value per share is calculated using 405,865,419 shares of 1p each being the number in issue on 31 December 2018.

* The EPRA net asset value measure is to highlight the fair value of net assets on an on-going, long-term basis. Assets and liabilities that are not expected to crystallise in normal circumstances, such as the fair value of financial derivatives, are therefore excluded.

Investment Manager Commentary

The final quarter of 2018 was significant for SLIPIT as we completed the purchase of the largest asset in the fund. 54 Hagley Road Birmingham is an edge of prime multi-let office that we believe has scope for strong rental growth over the next few years. This is due to a combination of local infrastructure improvements (a new tram stop is going to be built directly outside the building improving connectivity to the city centre), along with a large mixed use development further enhancing the immediate surroundings. The area has also seen a loss of office space due to residential conversion – thus reducing supply of competing space and making 54 Hagley Rd one of the best value for money offices in the area. The asset was acquired for £23.75m, reflecting a yield of 7.6%.

There was an increased level of negative press around the retail sector in December, although it appears that many valuations have been slow to react. Although the Company has limited exposure to the retail sector, those assets it does own all saw value declines greater than the IPD monthly index, but we feel it remains very important to reflect sentiment as well as direct transactional activity, and to mark to market. We are delighted that the two vacant retail units we have as a result of tenant failure are both under offer to new tenants.

The Company saw an increase in value of the portfolio of held assets as a result of the high exposure to industrial assets and of asset management lettings activity. The negative movement in the interest rate swap, costs of acquiring the new office in Birmingham, and capital expenditure on the refurbishment of several assets did however result in a small decline in the NAV.

Q4 also saw a significant reduction in void levels to 5.9% (Q3 2018 – 10.8%) with several large lettings, and the sale of a vacant industrial unit in Oldham. The two largest lettings (an industrial unit in Swadlincote and an office in Monck Street, London) secured rent of £1.2m pa. The Company now has 249 tenants, providing a diversified source of income, and an average unexpired term to earliest break of 6 years.

Market commentary

UK economic growth has been fairly uneven this year. After a weak, weather-affected start to the year, third quarter growth was well above trend at 0.6%. However, this appears to be a temporary spike rather than a decisive strengthening of the economy, with indicators in the fourth quarter turning down sharply. The ongoing uncertainty surrounding Brexit negotiations appears to be restraining business investment and household spending. With trend growth estimated to be lower, the output gap largely closed, and a relatively weak global backdrop, it is hard to see a substantial acceleration in economic growth. Occupational markets continue to behave quite differently across sectors, with structural forces being the key drivers. The familiar pattern of falling retail rents, modest upticks in office rents and robust growth in industrials is little changed. The risk of more serious declines in the retail sector is palpable and clearly affecting investor sentiment. The industrial sector continues to be the stand-out performer in the UK real estate market. Although IPD/MSCI data suggests that rental growth is beginning to moderate, with vacancy rates remaining exceptionally low and interest in available space healthy, the necessary drivers are still in place to support further rental growth for the sector. The long-term structural challenges facing the retail sector are now beginning to be reflected in IPD/MSCI data. The outlook for retail tenants has become more challenging as time has gone on and this is now weighing on performance, with all forms of retail experiencing declining rental values. With few retailers, aside from the value operators, expanding and further distress in the sector widely anticipated, it is expected that this trend will continue through 2019. Capital values declined in Q4 2018, according to the IPD/MSCI Monthly Index, with sharp declines in retail and slowing growth in the industrial sector. It is our observation that liquidity became increasingly impaired towards the end of the fourth quarter and that the number of buyers has thinned out across the market. The listed sector has seen discounts to NAVs widen over the quarter, which in part reflects the wider equity market sell-off experienced over the fourth quarter, but it is also a function of slowing NAV growth rates in the second half of this year. The hierarchy of preferred sectors remains largely unchanged with industrials and income-focussed real estate stocks remaining the top picks, and ever wider discounts for retail specialists. Intu and Hammerson shares were down 55% and 40% respectively in 2018.

Investment outlook

Brexit-related uncertainty is reducing liquidity and visibility of pricing in most areas of the market. It is even now affecting the industrial sector after a very strong run of performance. The principal exception to this is assets with long, secure income streams, which remain highly sought after and in short supply. We are conscious that many of the buyers of such properties are not focused on performance relative to the wider real estate market and have different targets, sometimes radically so. This is making assets let to annuity-grade covenants more challenging to access for investors with targets linked to real estate market returns. If the change in momentum during the fourth quarter is sustained and we observe more distress and weaker liquidity in the market during the first quarter of 2019, it is likely that this will create some opportunities. Those with capital to invest may be able to access good-quality real estate at prices that are attractive in the long term. As ever, it is vitally important to assess asset-level risk and income prospects to identify such opportunities.

Dividends

The Company paid total dividends in respect of the quarter ended 30 September 2018 of 1.19p per Ordinary Share, with a payment date of 30 November 2018.

Net Asset analysis as at 31 December 2018 (unaudited)

	£m	% of net assets
Industrial	259.2	70.2
Office	159.6	43.2
Retail	46.5	12.6
Other Commercial	33.8	9.2
Total Property Portfolio	499.1	135.2
Adjustment for lease incentives	-3.9	-1.0
Fair value of Property Portfolio	495.2	134.2
Cash	8.3	2.2
Other Assets	8.7	2.3
Total Assets	512.2	138.7
Current liabilities	-12.7	-3.5
Non-current liabilities (bank loans & swap)	-130.1	-35.2
Total Net Assets	369.4	100.0

Breakdown in valuation movements over the period 1 October 2018 to 31 December 2018

	Portfolio Value as at 31 Dec 2018 (£m)	Exposure as at 31 Dec 2018 (%)	Like for Like Capital Value Shift (excl transactions & CAPEX)	Capital Value Shift (incl transactions (£m)
			(%)
External valuation at 30 Sep 2018				479.0
Retail	46.5	9.3	-7.0	-3.5
South East Retail		2.2	-6.5	-0.8
Rest of UK Retail		0.0	0.0	0.0
Retail Warehouses		7.1	-7.1	-2.7
Offices	159.6	32.0	0.9	24.5
London City Offices		2.6	0.0	0.0
London West End Offices		2.8	3.3	0.5
South East Offices		18.0	0.8	0.7
Rest of UK Offices		8.6	0.0	23.3*
Industrial	259.2	51.9	2.0	-1.3
South East Industrial		14.9	1.4	1.0
Rest of UK Industrial		37.0	2.2	-2.3**
Other Commercial	33.8	6.8	1.3	0.4
External valuation at 31 Dec 2018	499.1	100.0	0.7	499.1

*Purchase of Hagley Rd Birmingham

** Sale of Oldham industrial unit

Top 10 Properties

	31 Dec 18 (£m)
Hagley Road, Birmingham	20-25
Denby 242, Denby	15-20
Symphony, Rotherham	15-20
Chester House, Farnborough	10-15
The Pinnacle, Reading	10-15
Hollywood Green, London	10-15
Marsh Way, Rainham	10-15
New Palace Place, London	10-15
Timbmet, Shellingford	10-15
Atos,Birmingham	10-15

Top 10 tenants

Name	Passing Rent £	% of passing rent
BAE Systems plc	1,257,640	4.5%
Technocargo Logistics Limited	1,242,250	4.4%
Public sector	1,158,858	4.1%
The Symphony Group PLC	1,080,000	3.8%
Timbmet Limited	799,683	2.8%
Bong UK Limited	756,620	2.7%
ATOS IT Services Ltd	750,000	2.7%
Ricoh UK Limited	696,995	2.5%
CEVA Logistics Limited	652,387	2.3%
GW Atkins	625,000	2.2%
Total	9,019,433	32.0%

Regional Split

South East	38.0%
East Midlands	16.9%
West Midlands	13.9%
North West	10.5%
North East	7.1%
Scotland	4.6%
South West	3.6%
London West End	2.8%
City of London	2.6%

The Board is not aware of any other significant events or transactions which have occurred between 31 December 2018 and the date of publication of this statement which would have a material impact on the financial position of the Company.

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014). Upon the publication of this announcement via Regulatory Information Service this inside information is now considered to be in the public domain.

Details of the Company may also be found on the Investment Manager’s website which can be found at: www.slipit.co.uk

For further information:-

Jason Baggaley – Real Estate Fund Manager, Standard Life Investments

Tel +44 (0) 131 245 2833 or jason.baggaley@aberdeenstandard.com

Graeme McDonald - Senior Fund Control Manager, Standard Life Investments

Tel +44 (0) 131 245 3151 or graeme.mcdonald@aberdeenstandard.com

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Ltd

Trafalgar Court

Les Banques

St Peter Port

GY1 3QL

Tel: 01481 745001