Net Asset Value at 31 December 2016

RNS Number : 2812W

UK Commercial Property Trust Ltd

08 February 2017

 

Guernsey, 8 February 2017

UK Commercial Property Trust Limited ("UKCPT" or "the Company")

Net Asset Value at 31 December 2016

UK Commercial Property Trust Limited (FTSE 250, LSE: UKCM), which is advised by Standard Life Investments, owns a diversified portfolio of high quality income producing UK commercial property. It announces its unaudited quarterly Net Asset Value ("NAV") as at 31 December 2016.

Solid Performance

• NAV per share of 86.2p (30 September 2016: 83.7p), resulting in a NAV total return of 4.1% over the final quarter

• Like-for-like portfolio capital value increased by 2.6% during the quarter; after allowing for capital expenditure investment on the existing portfolio, net capital growth was 2.2%. This compares favourably to the 1.1% increase in the MSCI/IPD Monthly index for the period and was underpinned by the completion of a significant amount of positive leasing and asset management activity

Delivering value through asset management

·     Three significant leasing transactions enhancing and extending income and increasing capital value:
 

·     A new eight year lease of the entire office at 1 Rivergate, Bristol, with an 11.7% increase in rent to £1.7 million p.a. to the current sub-tenant, Ovo Energy Ltd, commencing in April 2018 on expiry of the current lease
 

·     Extension of Cineworld's lease on its flagship Glasgow cinema from 20 to 35 years term certain with the inclusion of 1.5% p.a. fixed rental increases, compounded and captured every five years, together with a 5.8% increase in the starting rent to £1.5 million p.a.
 

·     Prelets signed with new tenants, Tapi Carpets and Wren Living, at the St Georges Retail Park extension in Leicester, generating £500,000 of additional annual rent on an average lease duration of 10 years without break, commencing when construction completes (due to be 2018)
 

·     A further £2.2 million of annual rental income secured from nine new leases and six lease renewals / rent reviews including:
 

·     10 year term certain with Stace LLP at Eldon House, City of London, at an improved level of rent £340,000 p.a. (£53 psf), including additional floor space, up from £190,000 p.a. (£32.50 psf) 
 

·     Rent review settlement at the Marks & Spencer distribution facility in Neasden, 9% ahead of ERV and improving rent by £323,000 p.a., or 18.1%, to £2.1 million p.a.
 

·     An assignment of a lease on Junction 27, Leeds, has introduced Carpetright to this prime retail park and secured a rent of £230,000 p.a., 10% ahead of ERV

·     New lettings to International Logistic Group at industrial holding Gatwick Gate, Crawley, generating £360,000 p.a., 9% ahead of ERV. 

·     Void rate of 3.7%*, well below the MSCI/IPD benchmark figure of 6.8%**

Positive Investment Activity

In early January 2017, the Company took advantage of a special opportunity to sell one of its West End Soho office properties, 13 Great Marlborough Street, to the owner of the adjoining property. The disposal price of £30.5m - ahead of the year end valuation - equated to a yield of 3.3%. The lease to Sony had less than two years remaining, the sale removing short term letting risk and the need for potentially significant capital expenditure.
 

Strong financial position and attractive dividend yield

·   Taking account of the investment activity noted above, significant financial resources of £98 million are currently available for investment.  Additional firepower from the undrawn £50 million revolving credit facility remains available.

·    Low net gearing of 11.4%*** (gross gearing of 18.2%***) remaining one of the lowest in the Company's peer group and the quoted REIT sector.

·   Dividend yield of 4.4%*, comparing favourably to the FTSE All-Share Index (3.5%*) and FTSE REIT Index (3.9%*).

*1 February 2017

** 30 September 2016

*** 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

Andrew Wilson, Chairman of UKCPT, commented:

"2016 saw the Company maintain its sound progress in strengthening its portfolio, and particularly its income profile, both through successful asset management initiatives, as well as selective and profitable disposals.  As a result the business is well placed in 2017 to continue providing an attractive return to shareholders during economic and political uncertainty."

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

"During the final quarter of the year we successfully completed a significant amount of leasing activity which added to the annual rent roll and extended the visibility of our income.  I am pleased that last year's positive portfolio momentum has continued into Q1 2017 with the sale of short income at 13 Great Marlborough Street in Central London at a strong price and we are working hard to recycle this capital into higher yielding assets in sectors and locations which we believe offer better prospects for further income and value growth. " 

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 2016 to 31 December 2016.

UK Commercial Property Trust Limited	Per Share (p)	Attributable Assets (£m)	Comment
Net assets as at 1 October 2016	83.7	1,087.2
Unrealised increase in valuation of property portfolio	2.3	30.1	Like for like increase of 2.6% in property portfolio
Capital expenditure during the period	-0.4	-5.2	Principally relates to costs associated with ongoing work at Shrewsbury to facilitate opening of Primark store
Income earned for the period	1.4	18.5	Strong income generation in the quarter due to successful asset management activity at Craven House and Neasden, both London,  and Colmore Row, Birmingham,  resulting in dividend cover of 93% for the whole of 2016
Expenses for the period	-0.5	-6.1
Dividend paid on 30 November 2016	-0.9	-12.0
Interest rate swaps mark to market revaluation	0.1	1.6	Decrease in swap liabilities as longer term interest rates rose in the quarter
Net assets as at 31 Dec 2016 pre deferred tax asset	85.7	1,114.1
Deferred tax asset	0.5	6.5	*See note below
Net assets as at 31 Dec 2016	86.2	1,120.6

* Due to the refinancing of the Company's internal loan notes 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 asset will be written off in future years as the losses are utilised against profits.

Net Asset Analysis as at 31 December 2016 (unaudited)

	£m	% of net assets
Retail	478.4	42.7
Industrial	408.0	36.4
Offices	265.2	23.7
Leisure	129.2	11.5
Total Property Portfolio	1,280.8	114.3
Adjustment for lease incentives	-10.1	-0.9
Fair value of Property Portfolio	1,270.7	113.4
Cash	104.9	9.4
Other Assets	21.4	1.9
Total Assets	1,397.0	124.7
Current liabilities	-24.7	-2.2
Non-current liabilities (bank loans & swap)	-251.7	-22.5
Total Net Assets	1,120.6	100.0

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 2016. It does not include provision for any unpaid dividends relating to periods prior to 31 December 2016, i.e. the proposed dividend for the period to 31 December 2016.

The NAV per share at 31 December 2016 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 86.5p (Sep 2016 - 84.1p).

Economic and Property Market Review 

The year ahead is expected to be an eventful one in the UK and abroad. The UK's economic landscape is expected to be dominated by the continued political wrangling over the Article 50 process for exiting the European Union in the UK and the twists and turns of politics will no doubt grab headlines elsewhere in the world as the year progresses. UK economic growth after  the EU referendum was stronger than anticipated and December's Markit PMIs for manufacturing, construction and the service sector finished 2016 on a high note - although caution is required as firms are planning widespread price rises which is likely to translate into inflationary pressure in 2017. There are suggestions that consumers may be using credit facilities to bring forward big-ticket purchases in anticipation of higher inflation in 2017.

In 2016, the All Property total return, as measured by the MSCI/IPD Monthly Index, recorded a gain of 2.6%.  Having fallen immediately after the EU Referendum result, capital values recovered to an extent in the fourth quarter.  However, for the year as a whole, MSCI/IPD All Property capital values fell by 2.8% whilst rental growth slowed to 2.0% compared to 4.2% in 2015.

In equity markets, the FTSE All Share and the FTSE 100 total returns were 3.9% and 4.3% respectively over the fourth quarter.  For listed real estate equities, total returns delivered modest growth of 0.6% over the quarter.  In comparison, direct property delivered a total return of 2.6% over the same period (MSCI/IPD Monthly Index).

At a sector level, retail was no longer the laggard in the twelve months to end December as it crept marginally ahead of offices, which recorded a total return of 1.0%. The industrial sector continued to demonstrate most resilience, generating a total return of 7.0% in the same period.  Industrial values remained positive over the calendar year as opposed to capital declines experienced in both the other major sectors.

UK real estate investment turnover for 2016 is estimated to be £50 billion, down from £71 billion in 2015. Overseas investors accounted for 55% of the 2016 total, dominated by North American and Asian money.

Portfolio Performance

The external portfolio valuation as at 31 December 2016 was £1,280.8 million, representing an increase of 2.6% 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 1.1% over the same period which can be compared with net capital growth (after capital expenditure) for the Company's portfolio of 2.2%. 

Sector Analysis

	Portfolio Value as at 31 Dec 2016 (£m)	Exposure as at 31 Dec 2016 (%)	Like for Like Capital Value Shift (excl CapEx)	Capital Value Shift (£m)
			(%)
Valuation as of 30 Sep 2016				1,248.4
Retail	478.4	37.3	2.2	10.3
High St - South East		2.9	0.0	0.0
High St- Rest of UK		5.1	8.0	4.8
Shopping Centres		7.4	3.0	2.8
Retail Warehouse		21.9	1.0	2.7
Offices	265.2	20.7	2.6	6.7
City		2.2	1.8	0.5
West End		8.9	3.7	4.1
South East		1.6	0.0	0.0
Rest of UK		8.0	2.1	2.1
Industrial	408.0	31.9	3.1	12.1
South East		23.6	4.1	12.0
Rest of UK		8.3	0.1	0.1
Leisure/Other	129.2	10.1	2.6	3.3
External valuation at 31 Dec 2016	1,280.8	100.0	2.6	1,280.8

Market Outlook

Despite the uncertainty associated with current political wrangling, UK real estate continues to provide an elevated yield compared to other assets. Lending to the sector is at a significantly lower level than in the very different 2007/08 Global Financial Crisis and liquidity remains reasonable. Development continues to be relatively constrained by historic standards which, with existing vacancy rates below average levels in most markets, should help to continue to stabilise the market.

In this environment, where economic growth is expected to soften and with elevated uncertainty, we anticipate lower returns from property than has been the case over the last few years. Location and investment quality will be crucial determinants of how assets respond to pressures in the year ahead with the income generated likely to be the key driver of returns.  The market is likely to be sentiment driven in the short term as politics continue to evolve.  This will affect capital values, while in the medium term the impact will continue to hinge on the economic effects.  From a sector perspective, we continue to favour the comparative resilience of industrial and logistics property.  Inflationary pressures may prove to be a significant headwind for the retail sector and further polarisation within the market is likely to be more pronounced.  We continue to expect Central London offices to be the most impacted sector, given the linkages to European markets via cross border trading.  Overall, in this lower yielding investment environment, we expect UK real estate investors' appetite to be sustained because of the relatively high yield offered by the asset class.

Base Erosion and Profit Shifting ("BEPS")

The Board of UKCPT has noted the recent announcements in the 2016 Autumn Statement relating to BEPS (including the ramifications for non-UK resident property companies) and the proposed restrictions on the use of corporation tax losses. Although legislation has not yet been finalised, the proposals as currently drafted, would mean the Group would almost certainly pay additional tax on its net rental profits in the medium term.  The Board are exploring means to mitigate these tax costs, including possibly joining the UK REIT regime.

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.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 / Polly Warrack, FTI Consulting

Tel: [phone]

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

 

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