Interim Results

RNS Number : 0743B

UK Commercial Property Trust Ltd

11 August 2008

 



Interim report for half year ended 30 June 2008

Financial Highlights and Performance Summary

• Annual dividend yield of 7.84% based on the period end share price.

• Average unexpired lease term of 11 years and 4 months.

• Voids rate is 3.42% compared to an industry average of 8.50%.

• Currently no borrowing/gearing to date.

• Property portfolio ranked in top quartile for covenant strength in latest available independent IPD Rental Information Service.

Chairman's Statement

I am pleased to present the Interim Report of the Company for the six month period to 30 June 2008.

Property Market

The six month period to 30 June 2008 has seen a continuation of the difficult market conditions experienced in the final six months of 2007 which have had a continued negative impact on commercial and domestic property valuations, curtailed liquidity and dampened consumer confidence. The difficulties afflicting Banks in particular have not receded despite Bank of England intervention through interest rate reductions and liquidity support. With inflation increases and falls in house prices, consumer confidence appears to be falling and could lead to a significant reduction in consumer spending. While this nervousness and uncertainty persists property markets will face difficult trading conditions in the near term.

NAV/Share Price Performance

The unaudited Net Asset Value per Ordinary Share (calculated under International Financial Reporting Standards and adjusted for the provision of dividend declarations) for the six month period to 30 June 2008 was as follows:

Date	NAV (p)	Share Price (p)	Premium/(Discount) %
31 December 2007	90.79	69.50	(23.45)
31 March 2008	87.65	78.00	(11.01)
30 June 2008	84.53	67.00	(20.74)

The share price performance over the period has been particularly disappointing as there appears to be a very limited distinction being made within the sector with debt free companies such as our own being marked down in line with those listed companies which carry debt despite the obvious impact such borrowings are likely to have in the current difficult markets.  

Borrowing

On 20 June 2008 the Company announced that it had put in place a seven year term loan facility with Lloyds TSB Scotland to enable it to borrow up to £80m (or 10% of Net Assets if less) for general corporate purposes. As noted in the announcement, the addition of this facility to the existing cash balances, recently enhanced by property sales, will ensure that the Company is positioned to take advantage of any opportunities that developing market conditions may present. 

In the period to date the Company had no borrowings.

Dividends

The Company has paid the following dividends during the period:

	Ex Dividend Date	Pay Date	Dividend Rate (p)
6th Interim	13 Feb 2008	29 Feb 2008	1.3125
1st Interim	14 May 2008	30 May 2008	1.3125
			2.6250

In August 2008 the Company declared a 2nd Interim Dividend for the year ended 31 December 2008, of 1.3125p per Ordinary Share with an ex-dividend date of 13 August 2008, payable on 29 August 2008.

Outlook

There is more uncertainty than usual in world markets at present and this has lead to higher volatility, increased unease and little confidence as to when the bottom of the cycle will be reached. In both the commercial and domestic property sectors, forced sellers are not being matched by willing buyers further depressing the market and, until the Banking sector stabilises and confidence returns, transactions will be difficult to complete. 

It would be unwise to forecast with any certainty when sufficient confidence will return to the markets in general to arrest the current declines and 'bear market' thinking. Recent news appears to indicate that worse is to come as consumer concerns over jobs, food and energy prices plus their own personal debt take on a greater significance. However, your Company will continue to pursue a conservative strategy of investment in a high quality portfolio with an impressive list of tenants. This policy should protect investment during the downturn and our advisers will remain alert to opportunities when the cycle improves.

Manager's Report for the half year ended 30 June 2008

Market Overview

Following the sharp correction of quarter 4, 2007 in the property market, the last 6 months have been, in comparison, more settled. Despite some measure of balance returning to the market, over the 6 months period to end June 2008, the IPD Monthly Index has still fallen by 8.6% in capital terms, producing a total return of -6.0%. Since the time of the last Interim Report to investors, the Company's benchmark, (the IPD Monthly and Quarterly Index) has registered a drop in capital values of approximately 17.7%.  

At a sector level, some elements of the market have been more severely affected than others. Retail had started to decline first, particularly Retail Warehouses, which, according to IPD's Monthly and Quarterly benchmark report, have declined by 8.2% in percentage terms over the last 6 months to end June 2008, and by 22.2% over the past 12 months.

The principal question for investors at present is whether we are close to, or at the bottom of, the current cycle of capital decline in the direct property market. In yield pricing terms, the Manager is of the opinion that the direct market is coming close to the point where yields on property have corrected sufficiently. Whilst assets of differing quality will witness further differing declines, overall it is anticipated that the market should find a yield equilibrium level over the next 6 months. Clearly, taking a spot single yield as a point of reference can, at best, be an over simplification of the dynamics of what is quite a diverse market. However, building a basic rational pricing model to produce a single property yield in the current market suggests that a balanced portfolio equivalent yield in a range of 7.0% to 7.5% over the medium term is not unreasonable. Utilising data from the IPD UK Monthly Property Index as at the end of June, the equivalent yield on this Monthly Index was 6.86%. 

Evidence from market transactions agreed, but not yet documented, suggests that property capital markets are steadily moving towards this range over the remainder of 2008. So far as rental growth is concerned, the wider economic background will of course be crucial to the level of rental growth over the next 12-24 months in all property markets. On the optimistic assumption that the economy manages to avoid a full blown recession the expectation is for rents to be flat in certain markets, but rental growth may well turn negative in markets such as the City in 2009. A general mild recovery from 2010 onwards is anticipated. 

Portfolio Performance

The Company's portfolio has held up relatively well over both the last 6 months and over the period since launch.  Compared with the IPD Monthly and Quarterly Index, the Company's portfolio has produced a total return of -4.0% over the last 6 months vs the Index's return of -5.5%.  Over the last 12 months the Company's portfolio has out performed the Index by 1.2%.  Generally, the Company's West End offices, Shopping Centre and High St. shops portfolio have been the main drivers of performance over the last 12 months.  

Investment Activity

The Company has now completed its disposal programme as agreed with the board of directors.

Over the course of the first half of 2008, the Company disposed of the following assets:

	£m
1. 21-23 High St., Uxbridge	3.5
2. 3-7 King William St., London       EC4	21.0
Total	24.5

In addition, the Company has agreed terms to dispose of its holding at 109-119 Queen St., Cardiff which will raise a further £18.1m. The Company has included a profit participation clause in the sale contract which may provide a further return to the Company under certain conditions over the next 2 year period.

The proceeds of all disposals will be held in cash pending re-investment.

Asset Management Activity

As increasing emphasis is being placed on income as a key driver for performance, it is encouraging to note that the level of voids within the Company's portfolio is still trending downward at a time when occupational demand is contracting. Recent lettings at The Parade, Swindon and Colmore Row, Birmingham will produce an additional £335,525 pa once rent free periods have expired.  As at the end of June the void level within the portfolio was 3.42% of portfolio ERV. With a number of other lettings in solicitors' hands, the Manager anticipates this to be much lower again by the end of next quarter.  In a more uncertain economic climate, the challenge will be to keep voids under control.  The Manager remains confident of achieving this target given the prime nature of the portfolio. In addition to the positive letting activity, the Company has renewed 6 leases at rents marginally in excess of ERV and also completed 8 reviews at rents 3.25% in excess of ERV.  

Another key element of the Company's asset management strategy has been to enhance the quality and longevity of the Company's existing income stream. This was achieved through two significant lease restructuring transactions at Hatfield Business Park and 5/7 Chancery Lane which together represented 12% of the Company's annual rent. The cumulative effect of these initiatives together with recent lettings and sales has increased the average lease length of the portfolio to 11 years and 4 months.

The Company continues to make progress on the proposed redevelopment of the BHS store at Swindon and has signed prelet agreements with both BHS and Top Shop. Planning consent for the Company's proposed redevelopment was refused in early July by Swindon Borough Council. The Manager is continuing discussions with the Council on the matter.

Outlook

The June Investment Property Forum forecast for the market as a whole suggests a return of -5.2% for 2008 and 4.7% for 2009. These forecasts now look highly optimistic (certainly for 2008) as the IPD Index Monthly return to end June 2008 is -6.0% and no-one in the market is predicting that this date marks an end to capital decline.  The Manager's house view is for total returns in 2008 to be of the order of -8.0%.  Performance is expected to be lacklustre in 2009 with a real recovery in returns coming through in 2010 coinciding with a forecast pick up in economic activity.

Strategy

Portfolio strategy for the Company for the following 6-12 months can be summarised as follows:

1. Remain underweight in certain key markets - currently Retail Warehouses and City Offices where prospects, short-term, seem particularly poor.
   
2. Concentrate on maintaining a void level below 5% and avoiding higher risk letting strategies.
   
3. Continue to restructure shorter income with key tenants where opportunities exist on commercial terms.
   
4. Undertake lower risk asset management initiatives within the portfolio.
   
5. Seek to enhance returns to investors via opportunely timed acquisitions.
   
6. Focus any acquisition activity in the direct market in the Shopping Centres, High St. parades and South East industrial markets.

Gearing

The Company has now entered into a Facility with Lloyds TSB Scotland under the terms of which the Company can draw down a maximum of £80m, (or a maximum of 10% of NAV, if lower). As intimated to investors, the Company has now built up a reserve via the Facility and cash raised from the sale of a number of assets.

At present the Company has not made any application to draw down the whole or part of the Facility.

Unaudited Group Consolidated Income Statement

For the half year ended 30 June 2008

		Six months ended 30 June 2008 (unaudited)		24 August 2006 to 30 June 2007 (unaudited)*		24 August 2006 to 31 December 2007 (audited)**
	Notes	£'000		£'000		£'000
Income
Rental income		23,177		27,737		50,898
Unrealised (losses) / gains on the revaluation of investment properties	2	(47,312)		42,240		(68,975)
Realised (losses) on investment properties	2	(4,224)		(703)		(1,376)
Interest revenue receivable		1,088		1,256		2,358
Total income		(27,271)		70,530		(17,095)
Expenditure
Investment management fee	8	(2,848)		(4,087)		(7,240)
Direct operating expenses of let property		(649)		(1,125)		(1,441)
Valuation and other professional fees		(599)		(945)		(1,696)
Directors' fees	8	(52)		(90)		(142)
Administration fees	8	(52)		(81)		(128)
Other expenses		(91)		(156)		(257)
Total expenditure		(4,291)		(6,484)		(10,904)
Net operating (loss) / profit before finance costs		(31,562)		64,046		(27,999)
Net finance costs
Finance costs		-		(107)		(107)
Net (loss) / profit from ordinary activities before taxation		(31,562)		63,939		(28,106)
Taxation on (loss) / profit on ordinary activities		-		-		-
Net ( loss) / profit for the period		(31,562)		63,939		(28,106)
Earnings per share (p)	3	(3.64)	p	9.38	p	(3.71)	p

*Please note that this period starts from the launch date of the Company and covers 10 months and 7 days.

** Please note that this  starts from the launch date of the Company and covers 16 months and 7 days.

The accompanying notes are an integral part of this statement.

Unaudited Group Consolidated Balance Sheet
As at 30 June 2008

					30 June 2008 (unaudited)		30 June 2007 (unaudited)			31 December 2007 (audited)
				Notes	£'000		£'000			£'000
Non-current assets
Investment properties				2	701,120		879,895			773,095
					701,120		879,895			773,095
Current assets
Cash and cash equivalents					52,421		36,073			33,593
Trade and other receivables					4,250		6,888			6,465
					56,671		42,961			40,058
Total assets					757,791		922,856			813,153
Current liabilities
Trade and other payables					(13,363)		(12,888)			(14,401)
Total liabilities					(13,363)		(12,888)			(14,401)
Net assets					744,428		909,968			798,752
Represented by:
Share capital					220,000		220,000			220,000
Share premium					267,952		253,937			267,952
Treasury Shares					(10,249)		-			(10,249)
Special distributable reserve					384,378		388,306			388,306
Capital reserve					(117,663)		42,240			(70,351)
Revenue reserve					-		5,475			3,084
Equity Shareholders' funds					744,418		909,958			798,742
Minority interest					10		10			10
					744,428		909,968			798,752
Net asset value per share				6	85.8p		103.4p			92.1p

The accompanying notes are an integral part of this statement

Unaudited Group Consolidated Statement of Changes in Equity
For the half year ended 30 June 2008
					Share		Special
				Share	Premium	Treasury	distributable	Capital	Revenue	Minority
				Capital	Account	Shares	Reserve	Reserve	Reserve	Interest	Total
				£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
For the period from 24 August 2006 to 31 December 2007 (audited)
Issue of Ordinary Shares				220,000	670,500	-	-	-	-	-	890,500
Issue Costs				-	(12,733)	-	(1,509)	-	-	-	(14,242)
Conversion of share premium account				-	(389,815)	-	389,815	-	-	-	-
Shares bought back and held in Treasury				-	-	(10,249)	-	-	-	-	(10,249)
Net loss for the period				-	-	-	-	-	(28,106)	-	(28,106)
Dividends paid				-	-	-	-	-	(39,161)	-	(39,161)
Transfer in respect of losses on investment properties				-	-	-	-	(70,351)	70,351	-	-
Minority Interest				-	-	-	-	-	-	10	10
At 31 December 2007				220,000	267,952	(10,249)	388,306	(70,351)	3,084	10	798,752
Half year ended 30 June 2008 (unaudited)
Net loss for the period				-	-	-	-	-	(31,562)	-	(31,562)
Dividends paid				-	-	-	(3,928)		(18,834)	-	(22,762)
Transfer in respect of losses on investment properties				-	-	-	-	(47,312)	47,312	-	-
At 30 June 2008				220,000	267,952	(10,249)	384,378	(117,663)	-	10	744,428
					Share		Special
				Share	Premium	Treasury	distributable	Capital	Revenue	Minority
				Capital	Account	Shares	Reserve	Reserve	Reserve	Interest	Total
				£'000	£'000	£'000	£'000	£'000	£'000	£'000	£'000
For the period 24 August 2006 to 30 June 2007 (unaudited)
Issue of Ordinary Shares				220,000	670,500	-	-	-	-	-	890,500
Issue costs				-	(26,748)	-	(1,509)	-	-	-	(28,257)
Conversion of share premium account				-	(389,815)	-	389,815	-	-	-	-
Net profit for the period				-	-	-	-	-	63,939	-	63,939
Dividends paid				-	-	-	-	-	(16,224)	-	(16,224)
Transfer in respect of losses on investment properties				-	-	-	-	42,240	(42,240)	-	-
Minority interest				-	-	-	-	-	-	10	10
At 30 June 2007				220,000	253,937	-	388,306	42,240	5,475	10	909,968

The accompanying notes are an integral part of this statement.

Unaudited Group Consolidated Cash Flow Statement
For the half year ended 30 June 2008

			Six months ended					24 August 2006 to		24 August 2006 to
						30 June 2008 (unaudited)		30 June 2007 (unaudited)		31 December 2007 (audited)
						£' 000		£' 000		£' 000
Cash flows from operating activities
Net operating (loss) / profit for the period before finance costs			(31,562)					64,046		(27,999)
Adjustment for:
Losses/ (gains) on investment properties						51,536		(41,537)		70,351
Decrease / (increase) in operating trade and other receivables			2,215					(6,888)		(6,465)
(Decrease) / increase in operating trade and other payables			(1,038)					12,888		14,401
						21,151		28,509		50,288
Interest paid						-		(107)		(107)
Net cash inflow  from operating activities			21,151					28,402		50,181
Cash flows from investing activities
Purchase of investment properties						-		(844,962)		(859,657)
Sale of investment properties						24,486		6,604		17,124
Capital expenditure						(4,047)		-		(913)
Net cash inflow / (outflow) from investing activities			20,439					(838,358)		(843,446)
Cash flows from financing activities
Proceeds from issue of Ordinary Shares			-					890,500		890,500
Issue costs of ordinary share capital			-					(28,257)		(14,242)
Share buyback						-		-		(10,249)
Minority interest						-		10		10
Dividends paid						(22,762)		(16,224)		(39,161)
Net cash (outflow) / inflow from financing activities			(22,762)					846,029		826,858
Increase in cash						18,828		36,073		33,593
Cash balance brought forward						33,593		-		-
Closing cash and cash equivalents			52,421					36,073		33,593

The accompanying notes are an integral part of this statement.

Unaudited Notes on the Accounts for the half year ended 30 June 2008
1.  The unaudited interim results have been prepared in accordance with the accounting policies set out in
the Company's financial statements at 31 December 2007. These accounting policies are expected to be
followed throughout the year ending 31 December 2008.
2. Investment properties								Six months ended
								30 June 2008
								£'000
Freehold and leasehold properties
Opening valuation								773,095
Sales at cost								(28,710)
Capital expenditure								4,047
Loss on revaluation to fair value								(47,312)
Closing valuation								701,120
Losses on investments disposed during period								Six months ended
								30 June 2008
								£'000
Original cost of investment properties sold								(28,710)
Sale Proceeds								24,486
Loss on disposal								(4,224)
3. The earnings per Ordinary Share are based on the net loss for the period of £31,562,000 (30 June 2007: net profit of
£63,939,000) and 867,126,287, (30 June 2007: 681,957,295), Ordinary Shares, being the weighted average number of
shares in issue during the period.
4. Earnings for the period to 30 June 2008 should not be taken as a guide to the results for the period to
31 December 2008.
5. There have been no changes to the issued share capital of the Company since 31 December 2007.
There have been no changes to the number of Ordinary Shares of 25 pence each held as Treasury Shares
during the six months ended 30 June 2008, being 12,873,713 shares.
6. The net asset value per ordinary share is based on net assets of £744,428,000 and 867,126,287 ordinary shares, being
the number of ordinary shares in issue at the period end.

7. Dividends							Period to 30 June 2008
							Rate (pence)	£'000
Dividend for the period 1 October 2007 to 31 December 2007, paid 29 February 2008							1.3125	11,381
Dividend for the period 1 January 2008 to 31 March 2008, paid 30 May 2008							1.3125	11,381
								22,762
A dividend of 1.3125p per share for the period 1 April 2008 to 30 June 2008 is payable in August 2008.
Under International Financial Reporting Standards, these unaudited financial statements do not reflect this dividend.
8.  No Director has an interest in any transactions which are or were unusual in their nature or significance to the Group.
The Directors of the Company received fees for their services totalling £52,000 for the six months ended 30 June 2008,
none of which was payable at the period end.
Resolution Investment Services Limited received fees for its services as Investment Managers; the total charge to the
Income Statement during the period for these fees was £2,900,000 of which £52,000 was administration fees. £1,423,000 of this total charge remained payable at the period end.
9.  The Group results consolidate those of UK Commercial Property Holdings Limited, UK Commercial Property GP
Limited and UKCPT Limited Partnership.
The Company owns 100 per cent of the issued share capital of UK Commercial Property Holdings Limited, a
company incorporated in Guernsey whose principal business is that of an investment and property company.
This company holds the property portfolio which was acquired on 1 March 2007.
The Company owns 100 per cent of the issued share capital of UK Commercial Property GP Limited, a
company incorporated in Guernsey whose principal business is that of an investment and property company.
UKCPT Limited Partnership is a Guernsey limited partnership, and it holds the properties comprised in the
initial property portfolio. UK Commercial Property Holdings Limited and UK Commercial Property GP Limited,
have a partnership interest of 98.99 and 1 per cent respectively in this limited partnership. The remaining
0.01 per cent partnership interest is held by The Droit Purpose Trust, which is a Jersey purpose trust.

Statement of Director's Responsibilities in respect of the half yearly Financial Report to 30 June 2008.

We confirm that to the best of our knowledge:

• The condensed set of financial statements have been prepared in accordance with the statement 'Half-Yearly Financial Reports' issued by the UK Accounting Standards Board, and give a true and fair view of the assets, liabilities, financial position and return of the Company as required by the Disclosure and Transparency Rules, DTR 4.2.4R.

• The Interim Management Report includes a fair value review of the information required by:

(a)   DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have 
        occurred during the first six months of the financial year and their impact on the condensed set of financial 
       statements and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b)   DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six 
       months of the current financial year and that have materially affected the financial position or performance of 
      the Company during that period; and any changes in the related party transactions described in the last Annual Report that   
      could do so.

All enquiries:

Nigel Russell/Graeme Caton/Graham Reaves, G&N Collective Funds Services Limited

0131 226 4411

The Company Secretary, Northern Trust International Fund Administration Services (Guernsey) Limited

01481 745529

Announcement Ends

 

END

 

 

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