Net Asset Value(s)

UK Commercial Property Trust Limited
(“UKCPT” or “the Company”)
LEI: 213800JN4FQ1A9G8EU25

UKCPT grows Net Asset Value with a total return of 12.2% over 2017

Guernsey, 1 February 2018:  UK Commercial Property Trust Limited (FTSE 250, LSE: UKCM) announces its unaudited quarterly Net Asset Value (“NAV”) as at 31 December 2017. It owns a diversified portfolio of high quality income producing UK commercial property and is advised by Standard Life Investments.

Strong performance driven by continued outperformance of industrial portfolio

-    NAV per share of 92.8p (30 September 2017: 90.4p), resulting in a NAV total return of 3.7% over the final quarter and 12.2% for the whole of 2017.

-    Like-for-like portfolio capital value increased by 2.4% during the quarter or 2.3% net of acquisition costs and capital expenditure investment. The portfolio is now valued at £1,397 million. This performance compares favourably to the 2.0% increase in the MSCI/IPD Monthly index for the period and was driven principally by the continued strong performance of the Company’s industrial portfolio, which increased by 6.4%.

Continued investment into assets that deliver secure income while reducing retail sector exposure

-    The Company has acquired its first hotel in the quarter with the forward funding of a 265 bedroom four-star Maldron Hotel development in Newcastle City Centre for £32 million.  The development, which includes an ancillary retail unit, has been pre-let on a long lease to the Dalata Hotel Group Plc and is expected to deliver a yield on cost of 5.4%.  

-    Having exchanged contracts in December, the Company completed its sale of Charles Darwin, Pride Hill and Riverside shopping centres in Shrewsbury to Shropshire Council in January for approximately £51 million. This represents a small premium to the year-end valuation and is in line with the Company’s strategy of reducing retail exposure, particularly shopping centres (now 4.2% of the portfolio, down from 7.5%), which it believes will come under further pressure in the polarising retail environment.

-    The Company also sold one of its smallest assets in the quarter, a 25,802 sq ft office in Aberdeen for £6.5 million, representing a premium to book value. 

Delivering value through asset management

In the final quarter, £3.1 million of annualised income was secured through a successful focus on asset management initiatives.

-    In total, nine new leases and 15 lease renewals / rent reviews were concluded, including:

-    A new five year lease of unit 1, Newton’s Court Dartford to Fabb Projects Ltd at £215,250pa, 16% above the ERV for the unit.  The estate is now fully let.
 

-    Two new lettings at Eldon House in the City of London securing a combined rent of £193,751pa for the next five years, at rental levels ahead of ERV and 53% above the average rental tone at acquisition.   
 

-    A one year lease renewal to March 2019 with Marks & Spencer at the Company’s well located distribution facility in Neasden, in line with ERV, securing an improved rent of £2,349,360pa, up 12% on the previous rent agreed in March 2016.

-    Rent review settlements within the Company’s strong performing industrial portfolio, totalling £646,858pa, were 10% ahead of the previous rents and 7% ahead of ERVs at the time of review.  Individual rent reviews took place at Newton’s Court, Dartford, Emerald Park, Bristol and Dolphin Estate, Sunbury. 

-    Void rate of 7.6% at quarter end (30 September 2017, 4.1%) with the increase expected and attributable to a lease expiry during the quarter at the Company’s logistics warehouse at Magna Park, Lutterworth. Almost three quarters of this void rate is in the industrial sector, at strong locations, representing an opportunity to undertake asset management initiatives expected to enhance future income and capital returns.

-    The Company continues to collect 99% of its rental income of £68.9million per annum within 21 days.

Strong financial position and attractive dividend yield

-    Following the sale of Shrewsbury, significant financial resources of £59 million currently available for investment, in addition to the undrawn £50 million revolving credit facility.

-    Low net gearing of 12.8%* (gross gearing of 17.2%*) remaining one of the lowest in the Company’s peer group and the quoted REIT sector.

-    Dividend yield of 4.1%**, comparing favourably to the FTSE All-Share Index (3.6%**) and FTSE All-Share REIT Index (3.5%**).

* 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

**26 Jan 2018

REIT Conversion

The Board notes the proposals in the Budget to charge capital gains tax on offshore holders of UK commercial property and the decision to bring non-resident landlords into the corporation tax regime in 2020 both of which would result in the Company paying significant additional tax if, at the time, the Company was outside the UK REIT regime.

The Company continues to make progress in working through the implications of REIT conversion with various stakeholders.  It now expects to make its final decision in the second quarter of 2018 and, if the decision is taken to convert, it aims to do so during the summer. 

Board Changes

As previously announced Mr John Robertson will step down from the Board at the end of March when Margaret Littlejohns, who joined the Board on 1 January, will become Chair of the Risk Committee. The Board is delighted that Mr Robert Fowlds, a UK resident, has agreed to join the Board on 1 April. Mr Fowlds was previously Head of Real Estate Investment Banking at JP Morgan Cazenove before retiring in 2015. He is a Chartered Surveyor and has extensive experience in the Listed Real Estate sector.

Andrew Wilson, Chairman of UKCPT, commented:

"UKCPT continues to benefit from its sector repositioning, careful stock selection, successful asset management initiatives and its creditable financial position all of which have driven a strong NAV total return of 12.2% in 2017. It has cash to deploy during 2018 and further latent value to be crystallised from successful asset management initiatives in its portfolio.  Therefore the Board remains optimistic in regard to the Company continuing to deliver attractive shareholder returns. Additionally, the Board would like to thank Mr John Robertson for his most valuable contribution to the business and to wish him a very happy and healthy retirement.  Further to the recent appointment of Ms Littlejohns, the Directors and I are delighted that Mr Robert Fowlds has also accepted an invitation to join the Board.”

Will Fulton, Lead Manager of UKCPT at Standard Life Investments, said:

“Alongside good letting activity in the quarter, a focus during the period was continuing to deliver on our portfolio strategy.  We made our first acquisition in the hotel sector and, after the quarter end, completed on the sale of our three shopping centres in Shrewsbury in one transaction to the Borough Council. This significantly reduces our exposure to less prime shopping centres which we believe, as a sub-sector, is particularly susceptible to the ongoing polarisation of the retail landscape.  Our focus for the year ahead is to capitalise on the asset management initiatives within the portfolio and carefully to deploy the capital we have available.  As anticipated, our void rate rose during the final quarter and, with the vast majority of space being in prime, well located assets in our favoured industrial sector, this presents a strong opportunity to grow rents.”

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 October 2017 to 31 December 2017.

UK Commercial Property Trust Limited	Per Share (p)	Attributable Assets (£m)	Comment
Net assets as at 1 October 2017	90.4	1,175.1
Unrealised increase in valuation of property portfolio	2.5	33.5	Like for like increase of 2.4% in property portfolio.
Gain on Sale	0.0	0.1	Gain relating to the sale of the Ensco Site, Aberdeen Gateway
Capital expenditure during the period	-0.2	-2.8	Principally relates to costs associated with the purchase of Maldron Hotel, Newcastle
Income earned for the period	1.4	18.0	Equates to dividend cover of 95% for the quarter.
Expenses for the period	-0.5	-6.6
Dividend paid on 30 November 2017	-0.9	-12.0
Interest rate swaps mark to market revaluation	0.0	0.0	No material movement in the quarter
Net assets as at 31 Dec 2017 pre deferred tax asset	92.7	1,205.3
Deferred tax asset movement	0.1	0.8	*Movement in deferred tax, see additional detail below
Net assets as at 31 Dec 2017	92.8	1,206.1	Increase of 2.7%

* It is forecast that the Company will utilise the losses it has built up since inception to offset future taxable profits. Given this, the Company is required to recognise a deferred tax asset. This reflects the movement in the deferred tax asset over the quarter.

Portfolio Performance

The external portfolio valuation as at 31 December 2017 was £1,397.3 million, representing an increase of 2.4% in the quarter on a like-for-like basis (excluding capital expenditure). Whilst the Company’s benchmark MSCI/IPD Balanced Monthly and Quarterly index has not yet been published, the MSCI/IPD Monthly Index, which can normally be seen as a proxy for the wider market, rose by 2.0% over the same period which can be compared with net capital growth for the Company’s portfolio (after capital expenditure) of 2.3%. 

Sector Analysis

	Portfolio Value as at 31 Dec 2017 (£m)	Exposure as at 31 Dec 2017 (%)	Like for Like Capital Value Shift (excl sales, purchases & CAPEX)	Capital Value Shift (including sales & purchases)     (£m)
			(%)
Valuation as of 30 Sep 2017				1,362.6
Retail	505.1	36.1	-0.2	-1.0
High St – South East		2.8	2.9	1.1
High St- Rest of UK		4.9	0.9	0.6
Shopping Centres*		7.5*	-2.4	-2.6
Retail Warehouse		20.9	0.0	-0.1
Offices	264.9	19.0	1.5	-2.5
City		2.2	0.8	0.2
West End		6.7	2.1	1.9
South East		1.6	0.0	0.0
Rest of UK		8.5	1.5	-4.6
Industrial	487.1	34.9	6.4	29.3
South East		25.1	8.2	26.5
Rest of UK		9.8	2.1	2.8
Leisure/Other	140.2	10.0	0.5	8.9
External valuation at 31 Dec 2017	1,397.3	100.0	2.4	1,397.3

* including the three Shrewsbury shopping centres as at 31 December 2017.

Net Asset Analysis as at 31 December 2017 (unaudited)

	£m
Retail	505.1
Industrial	487.1
Offices	264.9
Leisure/Other	140.2
Total Property Portfolio	1,397.3
Adjustment for lease incentives	-16.7
Fair value of Property Portfolio	1,380.6
Cash	72.4
Other Assets	26.7
Total Assets	1,479.7
Current liabilities	-23.0
Non-current liabilities (bank loans & swap)	-250.6
Total Net Assets	1,206.1

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 2017. It does not include provision for any unpaid dividends relating to periods prior to 31 December 2017, i.e. the proposed dividend for the period to 31 December 2017.

The NAV per share at 31 December 2017 is based on 1,299,412,465 shares of 25p each, being the total number of shares in issue at that time.

The EPRA NAV per share (excluding swap liability) is 93.0p (Sep 2017 – 90.6p) with EPRA earnings per share for the quarter (excluding deferred tax movement) being 0.87p (Sep 2017 – 0.82p).

Economic and Property Market Review 

The Company’s Investment Manager generally expects relatively subdued economic growth for the year ahead, with some further moderation in economic momentum in 2019, as the impact of the UK leaving the European Union becomes more pronounced. Despite the relatively weak economic backdrop, UK real estate returns were stronger than most analysts originally anticipated at the start of 2017. For the calendar year 2017, UK direct real estate recorded total returns of 11.2%, up on the 10.4% total return in the twelve months to end September.  Capital growth was relatively strong over the year with values rising by 5.4%, an increase on the 4.5% growth in the twelve months to end September. Rents increased by 1.9% overall during the year.

The UK equity market gave a total return of 5% over the fourth quarter of 2017, with listed real estate equities delivering a total return of 8.3% over the same period.  For the full year, the total returns for the FTSE All-Share Index and FTSE All-Share REIT Index were 13.2% and 12.2% respectively.

At a property sector level, industrials remained the star performer with healthy take up in comparison to historic standards and a total return of 21.1% for 2017. Retail was the laggard sector, but still generating positive performance, delivering total returns of 7.7% off relatively flat rents and a small amount of capital growth - early indicators are that retailer trading over Christmas 2017 has been a mixed bag with those better attuned to internet sales doing well. Pressures in the sector remain significant with consumers’ disposable income continuing to be under pressure; earnings growth remains muted and consumer confidence is relatively weak. Despite the political uncertainty, the office sector recorded a total return of 8.5% p.a. in the year to end December with Central London leasing activity remaining robust, boosted by an 18% share from “flexible/co-working” companies. Investment in offices continues to be buoyant regardless of the caution in the occupier markets. Overseas investors, and particularly the Chinese, continue to account for a significant proportion whilst investment in the better regional markets remains strong, with a reasonable amount of overseas activity.

Rents remained largely stable in 2017, but within sectors, retail rental growth, at 0.4% p.a., continued to be considerably weaker than the other sectors. It was below office rental growth at 1.4% p.a. and industrials at 4.9% p.a. in the twelve months to end December.

Market Outlook

UK real estate continues to provide an elevated yield compared to other assets and market values are now ahead of the level they attained before the Brexit upheaval in 2016. Lending to the sector remains prudent, liquidity remains reasonable, and development remains relatively constrained by historic standards. With existing vacancy rates below average levels in most markets, aside from pockets of oversupply in some markets such as Central London and concern over poorer retail, these favourable fundamentals and the steady secure income component generated by the asset class is likely to drive an income-led return over the next few years. The retail sector in particular continues to face a series of headwinds likely to hold back recovery in less strong locations and the City of London office market faces most uncertainty driven by politics. The market is likely to be sentiment driven in the short term as politics and the real and perceived economic impact associated with the UK’s withdrawal from the European Union continue to evolve. Given the backdrop of ongoing heightened macro uncertainty, investors are becoming more risk averse and better quality assets are once again broadly outperforming poorer quality. Prime, good quality assets, with stronger tenants on longer leases, are likely to provide the best opportunities in the weaker economic environment we anticipate further into 2018. 

The Board is not aware of any other significant events or transactions which have occurred between 31 December 2017 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 UKCPT’s website which can be found at: www.ukcpt.co.uk

For further information please contact:
Will Fulton / Graeme McDonald, Standard Life Investments
Tel: [phone]

Edward Gibson-Watt / Oliver Kenyon, J.P. Morgan Cazenove
Tel: [phone]

Richard Sunderland / Claire Turvey, FTI Consulting
Tel: [phone]
 

The above information is unaudited and has been calculated by Standard Life Investments Limited.