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2 Aug 2018 07:00
UK Commercial Property REIT Ltd - Net Asset Value(s)UK Commercial Property REIT Ltd - Net Asset Value(s)
PR Newswire
London, August 1
2 August 2018
UK Commercial Property REIT Limited (“UKCP REIT” or “the Company”)
Net Asset Value at 30 June 2018
UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM), announces its unaudited quarterly Net Asset Value (“NAV”) as at 30 June 2018. It owns a diversified portfolio of high quality income producing UK commercial property and is advised by Aberdeen Standard Investments (“ASI”)^.
Robust second quarter NAV performance
NAV per share up 1.2% to 94.5p (31 March 2018: 93.4p), resulting in a NAV total return of 2.2% in the period with low net gearing of 11.9%**. Like-for-like portfolio capital value increased by 1.9% with overall capital performance of 1.7% net of capital expenditure investment, outperforming the 0.9% increase in the MSCI/IPD Monthly index over the period. The portfolio is now valued at £1.416 billion.Delivering on strategy
Acquisition of The White Building, a fully refurbished, multi-let office in Reading for around £51 million, based upon a topped-up net initial yield of 5.75%. The asset, which is 82% let to nine tenants, has a weighted average unexpired lease term of five years to break and is expected to deliver an annual rental income of around £3.0 million once fully let. Disposal of 1 Rivergate, an office building on Temple Quay in Bristol city centre, to a pension fund for a net price of £26.6 million allowing for a rental top up, ahead of the 31 March valuation. Industrial assets now account for 37% of the portfolio and delivered a capital return of 5.8% in the period.Value Creation through asset management
Contract signed for a new 15 year lease with no breaks at the largest vacant unit on Ventura Park, Radlett. The letting to an existing global tenant on the site is at a rent of £1.34 million per annum with five yearly inflation-linked and upwards only rent reviews, subject to completion of landlord’s roof works, expected November this year. This letting represents an increase of 39% on the previous passing rent and is in-line with ERV. After the completion of the lease 15.3% of the Company’s income will be in leases that are inflation linked or have fixed uplifts. Completion of the pre-agreed new eight year lease with Ovo Energy Ltd at 1 Rivergate, Bristol, for £1.7 million per annum facilitating the sale of this investment ahead of valuation. In addition, £831,000 of annual rental income, 10% ahead of estimated rental value (“ERV”), secured from three new leases / lease renewals and two rent reviews, including: Rent review agreed with Ocado, Hatfield, the Company’s largest single tenant, securing a rent of £3.03 million, 12% ahead of ERV at the review date, an uplift of £322,000 per annum; Ten year lease renewal with Nomenca at Emerald Park, Bristol at £76,000 per annum, 15% ahead of the previous passing rent and 3% ahead of ERV. Occupancy increased to 93%* with half the remaining vacancy in strong locations within the industrial sector, which has good prospects to enhance future income and capital returns, further increasing occupancy. Less than 20% of the vacancy is in the retail sector.Strong balance sheet providing flexibility and attractive dividend yield
Cash resources of £30 million (after allowing for dividend commitment and projected capital expenditure on the portfolio) are currently available for investment in addition to a further £50 million from the undrawn revolving credit facility. Low net gearing of 11.9%** (gross gearing of 16.9%**) remaining one of the lowest in the Company’s peer group and the quoted REIT sector. Dividend yield of 4.2%*, comparing favourably to the FTSE All-Share Index (3.6%*) and FTSE All-Share REIT Index (3.9%*).*30 June 2018**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
Conversion to REIT status completed
Following shareholder approval the Company converted to a REIT on 1 July 2018 and changed its name to UK Commercial Property REIT Limited. This conversion mitigates the risk to the Company resulting from the base erosion and profit shifting legislation due to be implemented in 2020 and the proposal to charge capital gains tax on Guernsey companies who hold UK commercial property.
Reduced Investment Management Fees
The Board of UKCP REIT routinely assesses its fees against the market. As a result of the latest benchmarking exercise, a reduced management fee arrangement has been agreed with ASI^. As from 1 January 2019, the management fee will be calculated as follows:
0.60% on gross assets up to £1.75billion 0.475% on gross assets over £1.75billionThis compares to the current management fee of 0.65% on gross assets plus £100,000 administration fee. Based on the current quarter end’s gross assets this equates to a fee decrease of £839,000 per annum.
Andrew Wilson, Chairman of UKCP REIT, commented:
"It has been another active period for UKCP REIT with the Group’s portfolio continuing to perform well and the successful conversion to a REIT taking effect at the start of July. In line with our strategy, we have crystallised value for our shareholders through the sale of 1 Rivergate in Bristol and recycled the capital into a high quality office asset, which will add materially to the Group’s income stream. We enter the second half of the year with a good momentum and are well placed to continue to unlock value and grow income across our diverse portfolio.”
Will Fulton, Lead Manager of UKCP REIT at Standard Life Investments, said:
“During the period we have successfully grown the group’s income both through net investment into an asset with good potential for income growth, while also delivering on our active asset management strategy, letting up space across the portfolio and agreeing leases at rents ahead of ERVs. The agreement of a new long lease at Ventura Park was a significant achievement as we continue to identify active asset management opportunities across our portfolio, in particular across our industrial assets, to grow future income and capital 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 1 April 2018 to 30 June 2018.
| UK Commercial Property REIT Limited | Per Share (p) | Attributable Assets (£m) | Comment |
| Net assets as at 1 April 2018 | 93.4 | 1,214.0 | |
| Unrealised increase in valuation of property portfolio | 2.1 | 27.2 | Predominantly like for like increase of 1.9% in property portfolio. |
| Gain on Sale | 0.1 | 1.2 | Gain relating to the sale of 1 Rivergate, Bristol |
| Capital expenditure during the period | -0.7 | -8.3 | Principally relates to costs associated with the development of Maldron Hotel, Newcastle and purchase of the White Building, Reading plus ongoing asset management initiative at St. George's Retail Park, Leicester |
| Income earned for the period | 1.3 | 16.9 | Year to date dividend cover of 77.5% but income from White Building, Reading, Newcastle development and Radlett letting yet to be included |
| Expenses for the period | -0.5 | -8.1 | |
| Dividend paid on 31 May 2018 | -0.9 | -12.0 | |
| Interest rate swap mark to market revaluation | 0.0 | -0.2 | No material movement in the quarter |
| Net assets as at 30 June 2018 before deferred tax movement | 94.8 | 1,230.7 | |
| Deferred tax | -0.3 | -3.3 | Following REIT conversion release of deferred tax asset previously set up to reflect the Company's built up tax losses. |
| Net assets as at 30 June 2018 | 94.5 | 1,227.4 |
The EPRA NAV per share (excluding swap liability) is 94.6p (31 March 2018: 93.5p) with EPRA earnings per share for the quarter (excluding deferred tax movement) being 0.67p (31 March 2018: 0.75p).
Sector analysis
| Portfolio Value as at 30 Jun 2018 (£m) | Exposure as at 30 Jun 2018 (%) | Like for Like Capital Value Shift (excl sales, purchases & CAPEX) | Capital Value Shift (including sales & purchases) (£m) | |
| (%) | ||||
| External valuation as of 31 Mar 2018 | 1,364.0 | |||
| Industrial | 526.5 | 37.2 | 5.8 | 28.9 |
| South East | 27.0 | 6.2 | 22.3 | |
| Rest of UK | 10.2 | 4.8 | 6.6 | |
| Retail | 443.2 | 31.2 | -2.4 | -11.1 |
| High St – South East | 2.8 | 0.8 | 0.3 | |
| High St- Rest of UK | 4.6 | -1.9 | -1.3 | |
| Shopping Centres | 3.7 | -6.2 | -3.5 | |
| Retail Warehouse | 20.1 | -2.3 | -6.6 | |
| Offices | 296.2 | 21.0 | 2.1 | 27.6 |
| City | 2.4 | 4.4 | 1.4 | |
| West End | 7.0 | 2.2 | 2.2 | |
| South East | 5.0 | 0.0 | 47.6 | |
| Rest of UK | 6.6 | 1.7 | -23.6 | |
| Leisure/Other | 150.5 | 10.6 | 1.6 | 7.0 |
| External valuation as of 30 Jun 2018 | 1,416.4 | 100.0 | 1.89 | 1,416.4 |
Net Asset Value analysis as at 30 June 2018 (unaudited)
| £m | % of net assets | |
| Industrial | 526.5 | 42.9 |
| Retail | 443.2 | 36.1 |
| Offices | 296.2 | 24.1 |
| Leisure/Other | 150.5 | 12.3 |
| Total Property Portfolio | 1,416.4 | 115.4 |
| Adjustment for lease incentives | -12.8 | -1.0 |
| Fair value of Property Portfolio | 1,403.6 | 114.4 |
| Cash | 84.1 | 6.9 |
| Other Assets | 19.5 | 1.6 |
| Total Assets | 1,507.2 | 122.9 |
| Current liabilities | -29.9 | -2.4 |
| Non-current liabilities (bank loans & swap) | -249.9 | -20.5 |
| Total Net Assets | 1,227.4 | 100.00 |
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 30 June 2018. It does not include provision for any unpaid dividends relating to periods prior to 30 June 2018, i.e. the proposed dividend for the period to 30 June 2018.
The NAV per share at 30 June 2018 is based on 1,299,412,465 shares of 25p each, being the total number of shares in issue at that time.
Investment Manager’s Market Commentary
In contrast to the unusually warm and dry summer the UK has been experiencing, the first quarter’s cold snap appears to have been largely behind the weakness in the UK economy in Q1 rather than a more fundamental slowing. Real income growth should start to provide a modest tailwind to GDP growth during the course of this year although business investment continues to be held back by elevated uncertainty over the UK’s future Brexit “end state” and trading relationship with the EU. Our base case is for a free-trade agreement (FTA) with an all-UK customs union and some regulatory devolution to Northern Ireland. At the start of the year we forecast UK GDP of 1.4% for 2018 and 1.5% for 2019 and our current forecast remains the same.
Looking at inflation, although it is expected the rise in oil prices will push the energy component of CPI inflation higher, the overall rate of inflation is expected to fall over the course of the year. The Bank of England is expected to increase interest base rates by 25bps in August, as the bounce in data reassures the Bank the Q1 slowdown was largely temporary, and then by further gradual increases in 2019 and 2020 continuing a period of relatively low rates into the medium term.
Difficulties in the retail sector have dominated the headlines over the last few months which are now being reflected in retail rents shown by MSCI IPD to be falling. News that half-year profits at John Lewis would be “close to zero” was further evidence of the mounting challenges in the industry. At the opposite end of the spectrum, industrial demand remains buoyant and in the supply-starved South East this has pushed rents 7% higher over the year to June, according to MSCI. Demand is broad-based, with the continued expansion of trade counters and urban logistics uses a feature, and supply is generally constrained. Regional industrial rents rose by a more modest 2.3% over the period with some pockets of more balanced supply and demand. London office rents remain broadly static with take-up supported by flexible office providers who do not drive net absorption. Take-up in the regional office markets has slowed somewhat over the first half of 2018, although grade ‘A’ stock levels are low in many markets, maintaining some rental tension.
Investment volumes in Q2 suggest a higher total than Q1 although there was a noticeable fall in the number of industrial transactions, reflecting the dearth of stock as investors hold what they have and continue to compete very strongly for assets that do come to market. UK institutions were the major net investor on the quarter, selling less real estate than any quarter since 2006. Overseas investors were only marginal net investors but a number of large transactions are expected to complete early in the third quarter. The result of that competitive demand has been continued strong capital growth in the industrial sector, 20.3% for the 12 months to June according to MSCI, and this growth is expected to continue through the rest of 2018, though at a slower pace. Demand for retail assets across the spectrum remained weak.
Activity in the listed sector broadly mirrors the trends being seen in the direct market. Industrial stocks are trading at a premium to NAV which is indicative of optimism for sustained capital growth. London office names are still trading at a discount to NAV, but a narrower one, as the expectation has shifted from a market correction to one of stagnation. Negative sentiment around growth prospects means retail dominated REITs remain at discounts to NAV.
Investment Outlook
Investor sentiment and activity continues to illustrate that the hierarchy of sector preference remains largely unchanged. The industrial sector remains the favoured sector call as investors seek to take advantage of the structural shift towards online retailing. The alternative sectors remain another sector call favoured by many investors. Typically targeting these sectors for their long, stable inflation-linked leases, alternative sectors remain highly sought-after as we move into an environment of predominantly income-led returns. However, the sub-sectors are diverse and the risks associated with these sectors equally so. Nevertheless investors are broadening their investment requirements in the alternative space and rather than purely seeking defensive long income, investors are more comfortable with operational risk in alternatives and the associated diversification and sustainable income benefits. Residential and student accommodation are already firmly established in this regard. Our Investment Manager’s five-year total return forecast for the property market is below market consensus. They do not see inward yield shift contributing positively to total returns going forward. Rather, returns will be driven by income and, as such, a key focus will be appropriate management of income risk at the asset and portfolio level. The focus on income is reflected in their projected sub sector returns which have become more divergent in the short term, with industrials and income-focussed sectors, including the Private Rented Sector, expected to be the strongest performing areas of the market.
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, Standard Life 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).