Net Asset Value at 30 June 2023

UK Commercial Property REIT Limited

(an authorised closed-ended investment company incorporated in Guernsey with registration number 45387)

LEI Number: 213800JN4FQ1A9G8EU25

(The “Company”)

8 august 2023

Net Asset Value at 30 June 2023

CONTINUED STABILISATION OF VALUES, POSITIVE LEASING MOMENTUM, AND LOW DEBT

8 August 2023: UK Commercial Property REIT Limited (“UKCM” or the “Company”) (FTSE 250, LSE: UKCM), which owns a £1.26 billion portfolio of high quality and diversified real estate across the UK today provides a net asset value (“NAV”) and trading update for the second quarter of 2023.

Highlights

• NAV increase of 0.6% reflecting portfolio quality and strength. This continues the trend of portfolio value stabilisation seen throughout 2023;
   
• The portfolio capital value increased by 0.6% on a like-for-like basis, net of capital expenditure, to £1.26 billion. This compares favourably to the MSCI UK Monthly Property Index where capital values fell by 0.4% over the quarter;

• Unaudited NAV per share increase of 0.6% to 81.1p (31 March 2023: 80.6p) with a NAV total return for the quarter of 1.7% (Q1: 2.2%);

• The Company has strengthened its balance sheet further and benefits from low and prudent gearing at 15.6.% group loan to value*. With a current blended interest cost of 3.35% per annum, 88% of UKCM’s debt is at a fixed rate and all covenants are well covered;

• Sale of 186,455 sq ft distribution unit in Wembley for £74 million reflecting a NIY of 3.49%, with the proceeds largely used to enhance earnings by substantially repaying the Company’s Revolving Credit Facility (RCF) and providing further balance sheet strength;

• Underlying EPRA earnings per share grew 6% to 0.86p (31 March 2023: 0.81p) during the quarter. After a one-off non-cash accounting adjustment relating to the restructuring of two Cineworld leases post its US Chapter 11 process, EPRA earnings were 0.64p per share. Importantly this allowed the Company to retain Cineworld as a tenant, ensuring their two units remain occupied and income producing**;

• Dividend maintained at 0.85p per share for the second quarter, payable 31 August 2023. Underlying cover was 102% for the quarter and 98% over the first six months of the year. On an unadjusted basis, as a result of the one-off non-cash accounting item, cover was 75% for the quarter.
   
• Rent collection remains strong at 99% with portfolio occupancy remaining high at 96%.
   

*Calculated, under AIC guidance, as gross borrowings less cash divided by portfolio value.
** More detail on the Cineworld item further below.

Peter Pereira Gray, Chair of UKCM, commented: “These results for the second quarter of the year point to another robust performance for UK Commercial Property REIT. A further valuation increase follows that seen in the first three months of the year, together with continued positive leasing momentum, so highlighting the benefits of the Company’s diversified and active management strategy.  As a result, I am pleased that in my first report to shareholders that we are able to show a small increase in NAV and underlying earnings.  While uncertainty surrounding future inflation and interest rates remains, there is a cautious but increasing feeling that the worst of the market valuation declines are behind us and that we can look forward with more confidence. Our team continues to drive value and income through the successful asset management of the Company’s high quality portfolio and we look forward to this continuing into the second half.

Will Fulton, Lead Manager of UKCM at abrdn, said: “The Company’s diversified portfolio continued to perform well during the second quarter and posted capital growth. Continued positive leasing momentum drove rents forward and occupier demand remains strong.  We have also been able to resolve the potential void at our two Cineworld cinemas as a result of its US Chapter 11 process, successfully retaining them on restructured terms. While this had a one-off impact on earnings for the quarter, and resulted in a reduction in rent, the annualised income of the portfolio grew over the first six months of the year, highlighting the quality of the properties we own and the benefits of our diversified investment strategy.”

Successful sale demonstrates effective balance sheet management

In May, as previously announced and following completion of the asset management programme, the Company sold its 186,455 sq ft Wembley 180 logistics asset in London to Covent Garden IP Limited, a registered charitable company for a consideration of £74 million, which reflects a net initial yield of 3.49%, broadly in line with the 31 March 2023 valuation. UKCM owned the property since 2009 and completed a refurbishment of the asset in 2019 when it let the unit to a global e-commerce company until 2029.

The proceeds were used to enhance earnings by paying down a substantial amount of the Company’s RCF.

Asset management delivering rental growth potential and high occupancy

The Company has a very low void rate of 4% which provides good visibility of future income and clearly demonstrates both the quality of the Company’s portfolio and the asset management team’s ability to retain income while focusing on capturing reversionary potential.  This has continued with another quarter of good leasing momentum including:

• Achieving full occupancy at the Company’s Emerald Park multi-let industrial estate in Bristol following the successful letting of the 22,500 sq ft Unit 101 to Northgate Vehicle Hire Ltd.  Northgate has signed a new 10 year lease, subject to a tenant break in year five at £247,500 p.a. establishing a new rental tone of £11psf.  The agreed rent is 31% ahead of the previous rent over the unit and in line with ERV.

• A further lease was also completed at Emerald Park with Erik’s Industrial Services Ltd renewing its lease on the 8,097 sq ft. Unit 110 for a further 10 years, subject to a break option in year five. The renewal has increased the rent generated at the unit by 24% to £85,000 p.a reflecting £10.50psf, in line with ERV.

• At Gatwick Gate in Crawley, Espresso Solutions became the latest tenant at the multi-let industrial estate agreeing a new 10 year lease, subject to a five year break option, over Unit 3A. The annual rent of £144,625 p.a. equates to £13.00 psf which is in line with ERV and 25% ahead of the unit’s previous passing rent. The tenant will move in following completion of landlord works which are well advanced and expected to complete in Q3 this year.

• Also within the quarter, the rent review dating from March 2022 over Units 2C/D at Gatwick Gate was agreed with International Logistics Group. The review has secured an 8% increase in the passing rent to £483,550 p.a. equating to £10.92 psf, ahead of ERV at the time of the rent review.

• At Trafford Retail Park, Manchester, a lease renewal was completed with Carpetright on Unit 4 which extends to 10,069 sq ft.  The new 10 year lease was agreed at £161,100 p.a. (£16psf), representing a 13% increase on the previous passing rent in line with ERV. The lease is subject to a tenant only break option at the end of the fifth year.

Cineworld Restructuring

The Company has successfully retained Cineworld at Glasgow and Swindon following negotiations in relation to its US Chapter 11 process. The agreement involved a restructuring of the leases to vary turnover and base rent terms to reduce the tenant’s annual outgoings ensuring the cinemas are profitable.  This variation has created an exceptional, one-off, adjustment to accounting earnings but not cashflow for the period. As noted above, the EPRA EPS excluding this adjustment is 0.86 pence and 0.64 pence including it.  The restructure has also been reflected in the portfolio value and NAV and, whilst the Cineworld assets have declined in value in Q2, the portfolio as a whole increased by 0.6% illustrating the benefits of our asset selection and portfolio diversification. The Company has agreed a reduction in Cineworld’s rent representing c.1% of the annualised valuation rent as at 30 June 2023. Despite this adjustment the annualised portfolio rent roll, on a like-for-like basis, remains higher than at the start of the year. The retention of Cineworld as a tenant ensures these two assets remain occupied and income producing.

Developments

• The Company completed the development of Units G&H, Precision Park in Leamington Spa during the quarter. These provide 67,700 sq ft of high-quality industrial space with flexibility of subdivision to accommodate smaller requirements. Well specified, it includes strong ESG credentials with an EPC of A and a BREEAM ‘Very Good’ rating and PV enablement. The completed asset is attracting encouraging levels of occupier interest.

• Excellent progress continues to be made at the Company’s Hyatt-branded 305 bed hotel development at Sovereign Square in Leeds. The hotel remains on target to open in early Q3 2024.

Strong balance sheet with significant covenant headroom and flexibility

The Company’s prudent approach to debt has allowed it to maintain a robust balance sheet with low gearing of 15.6% (Q1:20.0%) across three debt facilities, as calculated using AIC. All covenants are well covered and there is an additional £330 million of unencumbered property which provides further significant headroom and flexibility with respect to the Company’s covenant package. The current blended interest rate is 3.35% per annum (Q1: 3.93% per annum) on drawn debt of which 88% (Q1: 68%) is at a low fixed rate.

UKCM has financial resources of £123.6 million available, after allowing for future capital commitments and the August 2023 dividend. The bulk of these resources relate to the Company’s RCF which is a relatively expensive form of debt and it is therefore only likely to be deployed if a compelling and accretive opportunity arises.

Rent Collection

Rent collection rates have normalised with 99% of third quarter rents already received allowing for those tenants who have paid, by agreement, on a monthly basis.

The Company has a diverse tenant mix of quality occupiers, the largest five of which comprise resilient businesses such as Ocado (6.0% of rent), Public Sector (5.1%), Armstrong Logistics (3.7%), Total (3.2%) and Kantar (2.9%).  In total the portfolio’s income is secured from 193 tenancies.

Dividends

Dividend maintained at 0.85p per share for the second quarter, payable 31 August 2023. Underlying cover was 102% for the quarter and 98% over the first six months of the year. On an unadjusted basis, as a result of the one-off non-cash accounting item, cover was 75% for the quarter.

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 31 March 2023 to 30 June 2023:

UK Commercial Property REIT Limited	Per Share (p)	Attributable Assets (£m)	Comment
Net assets as at 31 March 2023	80.6	1,046.8
Unrealised increase in valuation of property portfolio	1.1	13.6
Realised gain on sale	-	0.3	Sale of Wembley 180 logistics asset
Capex in the quarter	(0.6)	(7.0)	Predominantly relates to ongoing development capex for the industrial units at Sussex Junction and Leamington Spa and the hotel in Leeds.
Income earned for the period	1.3	17.5	Equates to dividend cover of 102% (excluding the exceptional item).
Expenses for the period	(0.5)	(6.3)
Dividend paid in May 2023	(0.8)	(11.0)
Net assets as at 30 June 2023	81.1	1,053.9

The EPRA Net Tangible Assets per share is 81.1p (31 March 2023: 80.6p) with underlying EPRA earnings per share for the quarter being 0.86p (0.64p unadjusted; 31 March 2023: 0.81p).

Sector Analysis

	Portfolio Value as at 30 June 23 (£m)	Exposure as at 30 June 23 (%)	Like for Like Capital Value Shift (net of CAPEX)	Capital Value Shift (including sales & purchases & development spend)  (£m)
			(%)
Valuation as at 31 Mar 23				1,323.9
Industrial	739.3	58.5	3.2	-50.4
South East		33.4	3.5	-57.9
Rest of UK		25.1	2.1	7.5
Retail	185.7	14.7	1.0	1.8
Supermarkets		2.2	0.0	0.0
Retail Warehouses		12.5	1.2	1.8
Offices	160.5	12.7	-4.2	-6.8
West End		2.0	0.0	0.0
South East		5.0	-5.7	-3.8
Rest of UK		5.7	-3.9	-3.0
Alternatives	178.3	14.1	-4.9	-4.7
Leisure		5.3	-11.5	-8.7
Student Accommodation		4.6	0.1	0.0
Hotels		4.2	0.0	4.0
Valuation as at 30 Jun 23	1,263.8	100.0	0.6	1,263.8

Property Yield Analysis (Net Initial and Reversionary Yield by sector)

Sector	NIY	RY
Industrial	4.1%	5.4%
Office	5.7%	7.6%
Retail	6.0%	5.4%
Alternatives*	6.6%	5.0%
Portfolio	4.9%	6.1%

*excludes Hyatt, Leeds development

Top Ten Investments	Sector
Properties valued in excess of £100 million
Ventura Park, Radlett	Industrial
Properties valued between £50 million and £100 million
Ocado Warehouse, Hatfield	Industrial
Dolphin Industrial Estate, Sunbury-on-Thames, London	Industrial
Newton’s Court, Dartford	Industrial
Junction 27 Retail Park, Leeds	Retail Warehouse
XDock 377, Lutterworth	Industrial
Properties valued between £25 million and £50 million
The Rotunda, Kingston on Thames	Alternatives
Emerald Park, Bristol	Industrial
Trafford Retail Park, Manchester	Retail Warehouse
The Maldron Hotel, Newcastle	Alternatives

The independent valuation as at 30 June 2023 was carried out by CBRE Ltd.

Net Asset Value analysis as at 30 June 2023 (unaudited)

	£m	% of net assets
Total Property Portfolio	1,263.8	119.9
Adjustment for lease incentives	(28.0)	-2.7
Fair value of Property Portfolio	1,235.8	117.2
Cash	29.8	2.8
Other Assets	43.2	4.2
Total Assets	1,308.8	124.2
Current liabilities	(29.4)	-2.8
Non-current liabilities (bank loans)	(225.5)	-21.4
Total Net Assets	1,053.9	100.0

The NAV per share is based on the external valuation of the Company’s direct property portfolio as at 30 June 2023. It includes all current period income and is calculated after the deduction of all dividends paid prior to 30 June 2023.

The NAV per share at 30 June 2023 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 Commentary and Sector Outlook

UK economic outlook

Commercial property performance is traditionally closely correlated with the macro-economic picture. However, after over a decade of ultra-low cost of debt, interest rate rises in this cycle have been playing a driving role and have led to quite dramatic market price corrections, particularly in Q4 2022. Looking through monthly volatility, the current underlying trend is one of economic stagnation. And with the bulk of the impact of monetary tightening yet to be felt, it is hard to see how the UK will avoid a technical recession. Encouragingly, June inflation numbers provided a surprise coming in lower than expected with a year-on-year headline rate of 7.9% versus consensus expectations of 8.2%, well down from May’s reading of 8.7%, and expected to drop again in July due to a sharp fall in energy costs. The core rate also recorded a lower rate at 6.9% for June. Nevertheless, both measures continue to be elevated.

Having  just agreed its latest base rate increase to 5.25%, we believe the Bank will have to push rates to at least 5.5% to tackle underlying inflation pressures. Looking forward, given the risks of significantly overtightening policy, we remain sceptical rates will follow the market curve which currently sees rates climbing close to 6%. With the interest rate regime likely to tip the UK economy into recession, our base case forecast sees an easing of monetary policy to begin during 2024, reducing rates. Risks to this base case exist around both a surprise burst of stronger inflation than expected, forcing the Bank into a more aggressive rates stance, and mounting pressure on the government to ease fiscal policy, particularly around introducing substantial mortgage relief. This would make the Bank’s monetary policy less effective, exacerbating the UK’s inflation problems, resulting in interest rates needing to stay higher for longer. This weaker macroeconomic backdrop continues to weigh on UK real estate performance with any improvement in the economic environment likely to support a recovery.

UK property overview

Following the value correction of late 2022, UK real estate pricing has experienced a period of stabilisation through 2023 particularly in those areas of the market that saw the greatest capital declines. Those declines were, by and large, a yield correction driven by rising interest rates rather than a reflection of underlying occupational strength. Indeed, modest capital value growth has been recorded in sectors that benefit from structural tailwinds, such as industrial/logistics.

According to the MSCI Monthly Index, all property capital values fell by 0.4% in Q2 2023, though this hides sector variance. Industrial recorded growth of 1.2% over the quarter followed by Retail growing by 0.3%; Office values remain under pressure and saw capital value declines of -4.1%.

Transaction activity remained muted in the second quarter of 2023, as investors continued to take a more cautious approach to UK real estate. Transaction volumes were £5.6 billion in the second quarter, down 64% on the same period a year earlier and 63% below the 10-year quarterly average. Limited good-quality investment stock has come to market so far in 2023, which has suppressed transaction volumes. Given lower conviction in the market, on the back of a weaker macroeconomic environment, we are likely to see a further slowdown in activity during the summer months.

Investment into the industrial sector accounted for the largest proportion of total investment volume over the quarter at approximately 32%. Total volumes were dominated by overseas investors accounting for approximately 52% with private capital trending upwards.

UK real estate market trends

The office sector remains under structural pressure as evolving working habits and economic uncertainty weigh on the sector. In London, supply levels are rising and over 10 million sq ft of new accommodation is expected to be completed this year according to Deloitte – the highest level in over 20 years. Rising supply and weakening demand are forcing the vacancy rate higher, with the Central London vacancy rate now more than 9% according to CoStar data, the bulk of which relates to old stock as occupiers increasingly seek prime modern space with strong environmental credentials. We expect this to dampen rental growth prospects and expediate the bifurcation in performance between new and old. Investor demand for UK offices remains weak amid a poor outlook for the sector. Further capital value declines, particularly for secondary office assets, are expected across the sector.

Improved sentiment returned to the industrial and logistics sector during the second quarter of 2023 with pricing and performance demonstrating tentative signs of stabilisation. Whilst short-term pressure as a result of the weaker macroeconomic environment and rising debt costs are expected to dent investor confidence, the sector continues to benefit from structural and thematic tailwinds. We expect continued longer term positive performance, principally driven by robust rental growth. Supporting this, and despite an increase since the start of the year, UK industrial vacancy remains near historic lows, with any new supply unlikely to satisfy current occupational demand.

The retail sector has proven to be more resilient than many had expected over the first half of 2023. According to the Office for National Statistics (ONS), retail sales in the UK unexpectedly expanded in May, boosted by spending on summer clothing and outdoor goods. While the presence of discount retailers in the UK is not new, changes in consumer shopping behaviour have propelled them to the top of the wish list for many UK retail schemes. Discounter retailers have been a key beneficiary of a more cost-conscious UK consumer illustrated by B&M’s recent results, reporting like-for-like sales growth of 9.2% in its UK business over the first quarter of 2023. As a result, retail parks with a strong discount-orientated line-up remain in high demand for UK institutional investors.

Investor sentiment towards the purpose-built student accommodation (PBSA) sector remains positive and underlying occupational demand for the sector is robust, as illustrated by strong booking momentum for the 2023/2024 academic year. Like build-to-rent residential, there is an acute shortage of supply, particularly for the strongest university towns, which supports rental value growth for the sector. Investment volumes are down over 80% year-on-year for the sector. However, this is primarily due to a limited amount of investment stock being brought to the market, as opposed to any softening in investor sentiment towards the sector.

Investment Outlook

While more positivity returned to the market in the first half of 2023, the shorter-term outlook for the direct UK real estate market remains clouded on the back of a weaker macroeconomic climate. Gilt yields are anticipated to remain volatile in the third quarter of 2023 and any further rise in gilt yields will result in a tightening margin between UK real estate and gilts, though softened by the previous repricing of UK real estate. Heightened interest rates will also maintain pressure on real estate pricing. On a positive note, debt financing remains available and lender appetite remains for good-quality accommodation. Investors are likely to remain risk-off with good-quality accommodation providing more resilience in the face of weaker economic conditions and benefiting from more robust supply/demand dynamics. Polarisation within sectors is expected to intensify, with secondary rental and capital values under more pressure than prime. Occupational performance is expected to be the predominant driver of real estate returns in the near term and so the resilience of income will be paramount.

An improvement in real estate performance is anticipated in 2024, subject to the path of UK monetary policy which we expect at that time will be designed to stimulate economic growth.

The Board is not aware of any other significant events or transactions which have occurred between 30 June 2023 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 Company’s website which can be found at: www.ukcpreit.com

For further information please contact:

Will Fulton / Jamie Horton, abrdn

Tel: [phone]

William Simmonds, J.P. Morgan Cazenove

Tel: [phone]

Richard Sunderland / Andrew Davis / Emily Smart, FTI Consulting

Tel: [phone]

[e-mail]

The above information is unaudited and has been calculated by abrdn Fund Managers Limited.

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