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14 Feb 2019 07:00
UK Commercial Property REIT Ltd - Net Asset Value(s)UK Commercial Property REIT Ltd - Net Asset Value(s)
PR Newswire
London, February 13
14 February 2019
UK Commercial Property REIT Limited (“UKCM” or “the Company”)
LEI: 213800JN4FQ1A9G8EU25
Net Asset Value at 31 December 2018 and proposed extension of investment policy
UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM), announces its unaudited quarterly Net Asset Value (“NAV”) as at 31 December 2018. The Company owns a diversified portfolio of high quality income producing UK commercial property and is advised by Aberdeen Standard Investments (“ASI”)^.
NAV
A NAV total return of 4.5% for 2018 with a NAV per share of 93.3p at 31 December 2018 (30 September 2018: 94.3p); a total return of -0.1% for the final quarter with continued low net gearing of 14.6%*. Like-for-like portfolio capital value increased by 0.2% to £1.45 billion (30 Sep 2018: £1.45 billion). Overall capital performance net of capital expenditure investment was -0.8% (which includes the transaction costs and stamp duty associated with the Company’s December 2018 purchase of an £85.4 million portfolio of distribution warehouses, described below).This compares to the –0.1% in the Company’s MSCI IPD benchmark over the period. The overweight position to the Industrial sector and the Company’s prime office portfolio continued to produce strong positive capital returns offset by a decline in values across the Company’s retail holdings.Strong balance sheet providing flexibility
£50 million currently available for investment through an unutilised revolving credit facility Low net gearing of 14.6%* (gross gearing of 17.1%**) remaining one of the lowest in the Company’s peer group and the quoted REIT sector. The Company is at an advanced stage of negotiation with its lenders to both extend the maturity and increase the quantum of debt available by £50 million in order to take advantage of investment opportunities.*Net gearing - Gross borrowing less cash divided by total assets (excluding cash) less current liabilities**Gross gearing - Gross borrowings divided by total assets less current liabilities
Delivering on strategy of producing sustainable income streams
The Company continues its strategy of recycling capital into good quality assets in favoured sectors, which are earnings accretive and offer growth potential, as follows:
Acquisition of a portfolio of five strategically located distribution warehouses across the Midlands for a headline price of £85.4 million, based upon an attractive topped-up net initial yield of 5.5%. The portfolio, which is 100% let to a diverse range of high quality tenants such as TJX UK (TK Maxx), Clipper Logistics and Bestway Pharmacy Ltd, has an average weighted unexpired lease term of 7.3 years and offers opportunities to enhance income through asset management initiatives. With this transaction UKCM’s exposure to the strongly performing industrial sector has risen to 46%, spread between approximately 28% South East and London urban industrial / logistics assets and 18% regionally strategic assets. Having completed a number of asset management initiatives UKCM sold its 15 Great Marlborough Street, London office asset for £73.2 million, ahead of the prior period valuation. £23.5 million sale of a high street retail asset let to H&M and Barclays Bank in Exeter reflecting a net initial yield of 4.75%.Asset management and leasing momentum underpinning performance
Completion of two new 25 year leases to Snows Business Holdings Ltd at Motor Park, Portsmouth, incorporating annual RPI increases of between 1.00% and 3.25%, at a total annual rent of £440,000. Combined with a new 20 year lease signed with Harwoods in Q3 2018, the average weighted unexpired lease term for this asset has increased from 5.5 years to 12.8 years, with a significant proportion of its income now benefitting from RPI inflation-linked rent reviews. Good asset management progress at St George’s Retail Park, Leicester, securing four national tenants at a cumulative annual rent of £420,000 and an average weighted unexpired lease term of 10.25 years, comprising: New lettings to Dreams Ltd and Card Factory in line with ERV. Ahead of Wickes’ lease expiry in January 2019 and associated anticipated vacation of a 25,000 sq ft unit, the Company exchanged an agreement for lease with Home Bargains at ERV on a 15 year term with fixed rental uplifts, commencing on completion of refurbishment works in April 2019. The development and 10 year lease of a new Costa Coffee unit completing at the end of February 2019, providing the park with an appropriate food and beverage offer to increase shopper dwell time. Newton’s Court, Dartford - Unit one in this industrial estate let to Millmoll Group Holdings Ltd on a 10 year lease with a tenant only break option in year five at a rent of £240,578 per annum, 8.5% ahead of the ERV at the time and two ten year lease renewals with Wilhelmsen Ship Services Ltd and Baxi Heating UK Limited for a new combined rent of £244,779 per annum, 3% ahead of ERV. Eldon House, UKCM’s only City of London office was fully let by the year end following lettings to Proclinical Ltd, MLM Building Control Ltd and Civilised Bank securing rents 5-10% ahead of ERV at the time. Lease renewal agreed 47% ahead of the previous passing rent and 15% ahead of ERV at the time, at Dolphin Trading Estate in Sunbury with Lubkowski Saunders & Associates Ltd for 10 years with a break at five, securing a new rent of £510,763 per annum. Occupancy increased from 91% to 93% during the quarter with over half of the remaining vacancy in high quality, well located industrial assets offering strong leasing prospects. The largest of these is the Company’s recently refurbished 377,000 sq ft prime, cross-docked distribution warehouse at Magna Park, Lutterworth in the centre of the Midlands’ logistics “Golden Triangle”. Following the investment and asset management activity described above the gross rent of the portfolio as at 31 December was £69.0 million per annum.Expanded Investment Policy
The Company will shortly announce the publication of a circular to convene an extraordinary general meeting which includes proposals to amend the Company’s investment policy. This is to provide the Investment Manager with the flexibility to invest across the spectrum of commercial property including alternative property assets such as healthcare, student housing, hotels, car parks, pubs, petroleum and automotive and the commercially-managed private rental residential sector.Andrew Wilson, Chairman of UKCM, commented: “2018 has been a significant year of progression for UKCM that has seen REIT conversion and also further positive momentum behind the repositioning of the portfolio. Strategic acquisitions and disposals have continued this year, recycling capital into high quality holdings that deliver sustainable long term rental income. Additionally, successful asset management initiatives extracting latent rental and capital values together with operational results underpin the performance of the business. Although of course there is more work to be done, we are pleased with the results that have been delivered this year and, with a proposal to expand our potential investment universe across a wider range of asset types and new debt facilities, we look forward to being able to continue on this path in 2019.”
Will Fulton, Lead Manager of UKCM at Aberdeen Standard Investments, said: “Over the year we have had significant asset management success, particularly in leasing space where we have created value and improved the Company’s ability to produce high quality income streams, often exceeding ERVs, and increasing the proportion of index linked rents whilst extending lease terms. We have also continued to make strategic sales, recycling capital into assets which we believe offer better opportunities to grow value and income.
Looking forward we believe it is important to ‘move with the times’ in maintaining a well-diversified portfolio of UK commercial real estate to meet our objective; since the Company’s inception in 2006 the real estate landscape has changed with many sectors, previously in their infancy, having matured and become mainstream, commonly referred to as Alternative sectors by the industry. The growth in these additional sectors can largely be attributed to the favourable structural changes driving them including demographic, urbanisation, technology trends, the stability of income returns and diversification benefits they can provide. We believe that the ability to selectively add them to the Company's portfolio is an important additional weapon in our armoury to potentially enhance future returns.”
Breakdown of NAV movement
Set out below is a breakdown of the change to the unaudited net asset value per share calculated under International Financial Reporting Standards ("IFRS") over the period from 30 September to 31 December 2018
| UK Commercial Property REIT Limited | Per Share (p) | Attributable Assets (£m) | Comment |
| Net assets as at 30 September 2018 | 94.3 | 1,225.3 | |
| Unrealised increase in valuation of property portfolio | 0.1 | 1.4 | Predominantly like for like increase of 0.2% in property portfolio. |
| Gain on Sale | 0.1 | 1.2 | Gain on sales at High Street, Exeter and Great Marlborough Street, London |
| Capital expenditure during the period | -1.1 | -14.7 | Principally relates to acquisition costs associated with acquisition of distribution warehouse portfolio, the development of Maldron Hotel, Newcastle, refurbishment of XDock 377 at Lutterworth and ongoing pre-let asset management initiatives at St. George's Retail Park, Leicester and Ventura Park, Radlett. |
| Income earned for the period | 1.4 | 18.0 | Equates to dividend cover of 82% in the calendar year with significant resources still available for income-accretive investment. |
| Expenses for the period | -0.6 | -6.7 | |
| Dividend paid on 31 November 2018 | -0.9 | -12.0 | |
| Interest rate swaps mark to market revaluation | 0.0 | 0.1 | No material movement in the quarter |
| Net assets as at 31 December 2018 | 93.3 | 1,212.6 |
The EPRA NAV per share (excluding swap liability) is 93.4p (30 September 2018: 94.4p) with EPRA earnings per share for the quarter being 0.86p (30 September 2018: 0.75p).
Sector analysis
| Portfolio Value as at 31 Dec 2018 (£m) | Exposure as at 31 Dec 2018 (%) | Like for Like Capital Value Shift (excl sales, purchases and capex) | Capital Value Shift (including sales & purchases) (£m) | |
| (%) | ||||
| Valuation as of 30 Sep 2018 | 1,452.5 | |||
| Industrial | 670.5 | 46.4 | 3.1 | 102.9 |
| South East | 28.3 | 3.3 | 13.1 | |
| Rest of UK | 18.1 | 2.6 | 89.8 | |
| Retail | 384.9 | 26.7 | -5.1 | -43.0 |
| High St – South East | 2.7 | -1.9 | -0.7 | |
| High St- Rest of UK | 3.0 | -1.6 | -23.0 | |
| Shopping Centres | 3.0 | -4.7 | -2.1 | |
| Retail Warehouse | 18.0 | -6.2 | -17.2 | |
| Offices | 231.9 | 16.0 | 2.0 | -68.7 |
| City | 2.6 | 11.9 | 4.0 | |
| West End | 2.0 | 0.0 | -73.2 | |
| South East | 4.9 | 0.0 | 0.0 | |
| Rest of UK | 6.5 | 0.5 | 0.5 | |
| Leisure/Other | 157.9 | 10.9 | 0.9 | 1.5 |
| External valuation at 31 Dec 2018 | 1,445.2 | 100.0 | 0.2 | 1,445.2 |
Net Asset Value analysis as at 31 December 2018 (unaudited)
| £m | % of net assets | |
| Industrial | 670.5 | 55.3 |
| Retail | 384.9 | 31.7 |
| Offices | 231.9 | 19.1 |
| Leisure/Other | 157.9 | 13.0 |
| Total Property Portfolio | 1,445.2 | 119.1 |
| Adjustment for lease incentives | -14.3 | -1.2 |
| Fair value of Property Portfolio | 1,430.9 | 117.9 |
| Cash | 43.5 | 3.6 |
| Other Assets | 22.0 | 1.8 |
| Total Assets | 1,496.4 | 123.3 |
| Current liabilities | -34.2 | -2.7 |
| Non-current liabilities (bank loans & swap) | -249.6 | -20.6 |
| Total Net Assets | 1,212.6 | 100.0 |
The NAV per share is based on the external valuation of the Company’s direct property portfolio. It includes all current period income and is calculated after the deduction of all dividends paid prior to 31 December 2018. It does not include provision for any unpaid dividends relating to periods prior to 31 December 2018, i.e. the proposed dividend for the period to 31 December 2018.
The NAV per share at 31 December 2018 is based on 1,299,412,465 shares of 25p each, being the total number of shares in issue at that time.
Economic and Property Market Review
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 affecting investor sentiment.
The industrial sector continues to be the stand-out performer in the UK real estate market. Although MSCI IPD 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 structural challenges facing the retail sector are now beginning to be reflected in MSCI IPD data with the majority of retail experiencing declining rental values. With few retailers expanding, aside from the value operators, this rental trend is expected to continue through 2019.
‘All Property’ capital values experienced a small decline in Q4 2018, according to the MSCI IPD Monthly Index, with declines in retail offsetting growth in the industrial sector. It is our observation that towards the end of the year the investor pool reduced and became more selective and, whilst not all investment activity during the final quarter has been recorded as yet, the number of deals is down on the recent quarterly average. Despite this, total investment volumes in 2018 reached £61 billion, only £5 billion less than 2017 and substantially more than the 2016 total of £52 billion.
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 wide discounts for the major retail specialists.
Market Outlook
Uncertainty around the near-term political outlook makes it difficult to predict an economic outcome with strong conviction. In the property market this uncertainty is reducing liquidity and visibility of pricing in many areas of the market. With the exception of highly sought after and expensive long term income, 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.
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 Company’s website which can be found at: www.ukcpreit.com
For further information please contact:
Will Fulton / Graeme McDonald, Aberdeen Standard InvestmentsTel: 0131 245 2799 / 0131 245 3151
Edward Gibson-Watt / Oliver Kenyon, J.P. Morgan CazenoveTel: 020 7742 4000
Richard Sunderland / Claire Turvey / Eve Kirmatzis, FTI ConsultingTel: 020 3727 1000
The above information is unaudited and has been calculated by Aberdeen Standard Investments^.
^Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments. The Company is managed and advised by Standard Life Investments (Corporate Funds) Limited (the Company’s appointed AIFM).