Third quarter valuation and business update

RNS Number : 4362D

Great Portland Estates PLC

29 January 2015

 

29 January 2015                                                                                

Great Portland delivers more organic growth with portfolio value up 5.2% in Q3

In today's Interim Management Statement, the Directors of Great Portland Estates plc ("GPE" or "Group") announce an update on trading, as well as the quarterly valuation of the Group's properties as at 31 December 2014.  Details of the Group's recent valuation and rental value trends are set out in the Appendices.

http://www.rns-pdf.londonstockexchange.com/rns/4362D_-2015-1-28.pdf

Growth in rental values and capital values driving NAV per share uplift

·       Portfolio valuation¹ up 5.2%, 10.3% and 19.9% over 3, 6 and 12 months respectively

·       Continued strong valuation performance from our development properties up 9.6%, 19.6% and 36.0% over 3, 6 and 12 months respectively

·       Rental value growth¹ of 3.0% (2.9% West End offices, 3.9% West End retail) over 3 months, 11.2% over 12 months

·       EPRA NAV² per share of 680 pence at 31 December 2014  up 6.9%, 14.7% and 29.0% over 3, 6 and 12 months respectively

Continued successful leasing activity; 4.9% ahead of ERV

·     20 new lettings (116,300 sq ft) signed generating annual rent of £6.3 million (our share: £5.4 million), including £2.8 million of lettings at our recently completed scheme at Walmar House, Regent Street, W1; market lettings 4.9% ahead of March 2014 rental values

·     Vacancy rate low at 3.2% (30 Sept 2014: 2.3%), low average office rent passing of £44.90 per sq ft, reversionary potential of 24.1%

Development commitments up; delivering surpluses with more to come

·    Committed programme expanded by 0.1 million sq ft to 0.6 million sq ft, all five schemes in West End, now including 89,700 sq ft new-build development at 73/89 Oxford Street, W1, expected profit on cost of 18%

·    Good progress across further six near-term schemes (0.5 million sq ft) including revised planning application submitted to enhance Hanover Square scheme, all with potential starts in next 18 months, 70% in West End

·    Major development opportunity from additional 12 uncommitted pipeline schemes (1.1 million sq ft)

·    Total development programme of 2.2 million sq ft covering 51% of the existing portfolio, 71% in West End, 46% with planning permission

Disciplined capital recycling crystallising profits

·    Two disposals completed in quarter generating £112.1 million in initial gross proceeds, including £96.3 million from sale of 12/14 New Fetter Lane, EC4 which crystallised ungeared IRR of 55.1%

·    To date, 130 private residential units pre-sold at Rathbone Square, W1 for £223.1 million (79% of the total by value)

Strong financial position

·    Loan-to-value of 21.4%, weighted average interest rate of 3.77%, drawn debt 100% fixed or hedged

·    Cash and undrawn committed facilities of £481 million, capex to come at committed and near-term development schemes of £497 million

Toby Courtauld, Chief Executive, said:

"I am delighted to be able to report another quarter of strong growth.  The Group is performing well on all fronts, with outstanding returns coming from our development properties and attractive rates of rental growth across the investment portfolio.

Despite heightened political uncertainty ahead of the UK General Election, London's economy continues to expand at a sustainable rate, supporting healthy demand for the limited quantity of available office and retail space, particularly in our core market of the West End.
 

As a result, our outlook remains positive; we can expect higher rates of rental growth compared to last year; we will be increasing our development commitments during 2015, starting new schemes across central London; and the strength of our balance sheet will allow us to exploit our many portfolio opportunities to the full."

Investor/analyst conference call

GPE will host a conference call at 09.00am today, 29 January 2015. The details for the conference call are as follows:

Telephone number: [phone]

Password: Great Portland Estates

Contacts:

Great Portland Estates

Toby Courtauld               Chief Executive                                                                                   020 7647 3042

Nick Sanderson              Finance Director                                                                                     020 7647 3034

Finsbury

James Murgatroyd                                                                                                                                  020 7251 3801

Gordon Simpson                                                                                                                      020 7251 3801

Forward Looking Statements

This document may contain certain 'forward-looking statements'. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes of results expressed or implied by such forward-looking statements.

Any forward-looking statements made by or on behalf of GPE speak only as of the date they are made and no representation or warranty is given in relation to them, including as to their completeness or accuracy or the basis on which they were prepared. GPE does not undertake to update forward-looking statements to reflect any changes in GPE's expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based.

Information contained in this document relating to GPE or its share price, or the yield on its shares, should not be relied upon as an indicator of future performance.

 

Portfolio valuation

Our portfolio again delivered positive valuation growth in the quarter to 31 December 2014 driven by our leasing and development successes combined with continued rental value growth. The valuation of the Group's properties as at 31 December 2014 was £3,073.7 million including our share of joint venture properties, an increase of £152.3 million since 30 September 2014. The net valuation uplift for the quarter was 5.2% on a like-for-like basis compared to 5.0% for the previous quarter. Further details are set out in Appendices 2 and 3.

The main drivers of the quarterly valuation uplift were our Rest of West End properties, up 5.9% and our development schemes which rose in value (net of capital expenditure) by 9.6%. Further details on valuation trends are set out in the Appendices. The wholly-owned portfolio was valued at £2,344.0 million at 31 December 2014 (like-for-like valuation uplift of 6.1% on the quarter) and the joint venture properties (100%) at £1,459.4 million (up 2.4% on the quarter). The net impact of the movement in yields and rental values on the portfolio valuation is set out in Appendix 4.

The portfolio true equivalent yield reduced by 8 basis points over the quarter on a like-for-like basis and now stands at 4.5%. The investment portfolio's adjusted initial yield (including contracted income still in rent free periods) was 3.4% at 31 December 2014 (30 September 2014: 3.7%). A yield table is set out in Appendix 5.

Our successful letting activity continues to demonstrate the good demand for our high quality, well located and appropriately priced space. Our tenant retention remains strong and our vacancy rate remains low at 3.2% (30 September 2014: 2.3%).  Across our portfolio, office rental values rose by 2.8% in the quarter, compared to 1.5% in the previous quarter.  West End office rental values were 2.9% higher whilst City, Midtown and Southwark office rental values rose by 2.6% over the three month period. Demand from retail tenants remains robust and rental values in the West End retail portfolio rose by 3.9% in the quarter. The Group's rent roll was £98.0 million at 31 December 2014 (30 September 2014: £99.9 million), with the small reduction primarily the result of achieving vacant possession of 73/89 Oxford Street, W1 ahead of redevelopment.

The Group's average office rent passing remains low at £44.90 per sq ft and the portfolio (including retail) was 24.1% reversionary overall at the quarter end. Rental value trends are highlighted in Appendix 6.

Estimated NAV per share and financing

The main contributor to the NAV per share increase for the quarter was the underlying uplift in the portfolio valuation of £152.3 million. Our portfolio repositioning activities combined with another strong performance from our committed development programme to drive the valuation increase. NAV also benefited from the sale pre-completion of our development scheme at 12/14 New Fetter Lane, EC4 at a net surplus of £9.2 million to the adjusted 30 September 2014 book value. The interim dividend payment of £12.0 million reduced NAV per share by 3 pence.  Overall, as set out in the table below, EPRA NAV per share rose by 6.9% in the quarter to 680 pence (30 September 2014: 636 pence).

Pro Forma Estimated Balance Sheet 1
	£m	pence	percentage
EPRA NAV 2		per share	movement
At 30 September 2014	2,194.3	636
Valuation uplift	152.3	44
Profit on property sale	9.2	3
Interim dividend	(12.0)	(3)
At 31 December 2014	2,343.8	680	6.9%
EPRA NNNAV2
M2M of debt & derivatives	(74.2)	(22)
At 31 December 2014	2,269.6	658	7.2%
At 30 September 2014	2,119.0	614

Note:

¹ The pro forma balance sheet is unaudited and does not include retained earnings for the quarter

² In accordance with EPRA guidance

The mark to market of debt and derivatives of £74.2 million, or 22 pence per share, results in EPRA NNNAV per share of 658 pence at 31 December 2014, a rise of 7.2% from 30 September 2014.

Net debt reduced over the quarter as net sales proceeds more than offset capital expenditure at our committed development schemes.  Combined with the impact of the increased portfolio valuation, our leverage ratios have strengthened further as shown in the table below, with net gearing of 24.3% and a loan to value ratio of 21.4%.

Summary of Debt Statistics

	Dec-14	Sept-14
GPE net debt	£559.8m	£648.0m
GPE gearing	24.3%	30.0%
Total debt including JVs	£659.3m	£746.9m
LTV	21.4%	25.0%

At 31 December 2014, we had significant financial firepower totalling £481 million, comprising £31 million of cash and our £450 million revolving credit facility which was signed in October and is currently undrawn. Our weighted average interest rate was 3.77% at the quarter end (30 September 2014: 3.63%), which would fall to approximately 2.9% if the revolving credit facility were to be fully drawn.

At 31 December 2014, 100% of the Group's total drawn debt was fixed or hedged, although we are continuing to benefit from low floating rates on around 26% of our drawn debt through capped arrangements.
 

Asset management

Tenant interest in the limited amount of available space across our properties remained strong leading to 20 new lettings (116,300 sq ft) during the quarter, generating an annual rent of £6.3 million (our share: £5.4 million).  The majority of these lettings were market lettings which completed on average 4.9% ahead of the valuer's March 2014 estimates. We also settled five rent reviews in the quarter securing £0.6 million of rent (our share: £0.6 million), representing an increase of 31% over the previous passing rent.

During the quarter, leasing activity at our recently completed development schemes was strong. At the comprehensively refurbished Walmar House, Regent Street, W1, we secured £2.8 million of new annual rent including the letting of the entire office accommodation (37,700 sq ft) on a 15 year lease (no breaks) to Richemont, the luxury goods retailer, paying £2.6 million per annum. We also let one of the retail units (4,990 sq ft) for £230,000 per annum and we have good interest in the remaining 10,550 sq ft of retail space.

At our 20 storey 236,700 sq ft development at 240 Blackfriars Road, SE1, we let the sixth floor (12,000 sq ft) to Lonely Planet Publications for £673,500 per annum on a 10 year lease (with a tenant break option at year five), meaning the offices are now 89% let. We have also had further letting successes at City Tower, EC2, with 19,600 sq ft of space let in the quarter at an annual rent of £991,000, meaning the refurbished space is now 87% let.      

Leasing Transactions		Three months ended
		31 December 2014		30 September 2014		31 December 2013
New leases and renewals completed
Number		20		19		29
GPE share of rent p.a.		£5.4 million		£2.1 million		£3.4 million
Area (sq ft)		116,300		72,200		118,200
Rent per sq ft		£54		£50		£45
Rent reviews settled
Number		5		4		3
GPE share of rent p.a.		£0.6 million		£1.2 million		£0.8 million
Area (sq ft)		16,900		23,300		33,500
Rent per sq ft		£37		£51		£33

Note: Includes joint ventures at our share

The letting transactions concluded during the quarter have helped to maintain the Group's low vacancy rate at 3.2% at 31 December 2014 (2.3% at 30 September 2014). Further details are set out in Appendix 7. 

Development management

With the successful completion in the quarter of our comprehensive refurbishment at Walmar House, W1 and the sale of our fully pre-let development scheme at 12/14 New Fetter Lane, EC4, we now have five committed schemes on-site following our commitments earlier this month to develop 73/89 Oxford Street, W1 and 48/50 Broadwick Street, W1. These five committed schemes (617,400 sq ft) are all in the West End and are currently expected to deliver a profit on cost of 18%. In addition, we have six uncommitted schemes that could start in the next 18 months. Beyond that, our pipeline includes a further 12 uncommitted projects, giving us a total programme of 2.2 million sq ft, covering 51% of GPE's existing portfolio. Capital expenditure to come at our committed schemes totals £319 million, which would rise to £497 million (our share) if the six near-term uncommitted schemes were started.

Committed schemes. With demolition works completed at our fully consented 410,400 sq ft mixed-use development scheme at Rathbone Square, W1, we are continuing to prepare the substructure ahead of the expected start of the main construction works in the coming weeks. As detailed below, the successful sales programme of the 142 private residential units continues and we expect to commence our pre-letting campaign for the 214,900 sq ft of office space in early summer. The project is expected to complete in spring 2017 and, based on current market assumptions, is expected to deliver GPE a pre-tax profit on cost of 21.4% (30 September 2014: 17.8%). The eventual profit on cost to GPE will be influenced by a variety of factors, including the overage arrangements agreed with the Royal Mail Group on purchase of the site in September 2011.

At St Lawrence House, 26/34 Broadwick Street, W1, demolition works are progressing well and construction works for our 91,900 sq ft new-build, fully consented office and retail scheme will commence shortly.  The project is expected to complete in autumn 2016 and, based on current market assumptions, is expected to deliver GPE a profit on cost of 16.5%.  We also expect to commence imminently construction works for our 18,900 sq ft mixed use scheme redevelopment at 78/82 Great Portland Street, W1, which will accommodate the off-site residential space associated with our scheme at St Lawrence House, W1.

Earlier this month, we committed to our fully consented development scheme at 73/89 Oxford Street, W1, which will deliver 89,700 sq ft of new-build retail and office space directly opposite the Dean Street entrance to the Tottenham Court Road Crossrail station. With vacant possession achieved, strip-out of the existing property has commenced ahead of full demolition works and we are making positive progress with our pre-letting initiatives for the retail space. Following a strong valuation performance over the last 12 months (up 67%), based on current market assumptions, the scheme is expected to deliver GPE a profit on cost of 10.2% on planned completion in spring 2017. We have also now committed to our development at 48/50 Broadwick Street, W1 which will provide the off-site residential space associated with the development at 73/89 Oxford Street, W1.

A summary of our committed projects is set out in Appendix 8.

Project preparation and pipeline. Our near-term development programme comprises six schemes (515,500 sq ft), all with project starts over the next 18 months.

At Hanover Square, W1, we submitted a revised planning application during the quarter for our mixed-use development in order to further enhance the 207,200 sq ft fully consented scheme through improving the design, increasing the net lettable office area and delivering additional urban realm. The development scheme is owned in our 50/50 joint venture with the Hong Kong Monetary Authority with a proposed potential start in 2016 on delivery of the station structure by Crossrail.

At Oxford House, 76 Oxford Street, W1, we continue to work up our plans ahead of a planning application submission in the coming months for an 88,700 sq ft major refurbishment scheme of the mixed-use property, incorporating a significant increase in the retail space. The property sits directly to the south of Rathbone Square, W1 and opposite 73/89 Oxford Street, W1.

At 148 Old Street, EC1, we submitted a planning application during the quarter for a major refurbishment of the existing 97,800 sq ft building to create around 151,700 sq ft of high quality office space. We now have confirmation that vacant possession will be achieved in May and we are targeting completion of the scheme by the end of 2016.

At Tasman House, 59/63 Wells Street, W1, we expect to submit a planning application by the end of this financial year to replace a tired 1950's building with 36,600 sq ft of new office and retail space.

Investment management

Our investment management activities continue to focus on profitable recycling opportunities. During the quarter, we completed two sales generating £112.1 million in initial gross proceeds.

In November, we exchanged contracts to sell our 142,500 sq ft pre-let office development scheme which is under construction at 12/14 New Fetter Lane, EC4. Following receipt of freeholder consent in December, the purchaser acquired the site from GPE for £96.3 million (11.8% ahead of the adjusted September 2014 book value) and is now funding all development costs up to maximum of £165.8 million, reflecting a yield of 4.5%. Based on the current cost and programme, GPE will also receive a final payment of approximately £5.0 million on practical completion in late 2015. The sale crystallises a return on capital since committing to the scheme of 82.7% and an unlevered IRR of 55.1%.

In the quarter, we also sold our remaining 12.5% interest in the 100 Bishopsgate Partnership to Brookfield for £15.8 million, following our exercise of the 'put' option that we secured on sale of a 37.5% interest in the partnership in October 2012.

Our pre-sales marketing programme of the 142 private residential units at Rathbone Square continues positively and to date we have exchanged contracts to sell 130 apartments for an aggregate amount of £223.1 million, reflecting an average capital value of £1,875 per sq ft. The 130 apartments sold equate to 84% of the total private residential by area and 79% by value. The 12 remaining apartments, eight of which are penthouse units, have a total quoting price of £61.6 million.

Cash collection and tenant delinquencies

The quarterly cash collection performance has continued to be very strong, with 99% of rent secured within seven working days of the quarter day (September 2014: 99%). One of our tenants (0.3% of rent roll) went into administration during the quarter (September 2014: one); however, we remain vigilant and continue to monitor the financial position of all our tenants. The segmentation of our tenant base and portfolio is shown in Appendix 9.

 

END

 

 

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