Net Asset Value(s)

RNS Number : 2049R

UK Commercial Property Trust Ltd

01 November 2011

 



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

Net Asset Value/ Interim Management Statement

for the three month period from 1 July 2011 to 30 September 2011

Values maintained through successful active asset management initiatives

UK Commercial Property Trust Limited (LSE: UKCM), the largest UK focused commercial property trust, today provides its Interim Management Statement for the three months to 30 September 2011 and unaudited quarterly Net Asset Value ("NAV") as at 30 September 2011.

Financial Highlights

§ NAV per share* as at 30 September 2011 was 75.9p (30 June 2011: 76.9p);

§ The portfolio is now valued at £1,015.5million. This represents a like-for-like increase of 0.2% in the quarter, the same as the capital return on the IPD Monthly funds index return;

§ This increase was more than offset by movements in swap values due to the ongoing fall in swap rates as a result of the worsening domestic and global economic outlook;

§ The Company intends to declare a third interim dividend, in respect of the period from 1 July 2011 to 30 September 2011, of 1.3125p per Ordinary Share, with expected ex-dividend and payment dates of 9 November 2011 and 30 November 2011 respectively;

§ Based on an annual dividend of 5.25p and the share price as at 30 September 2011 of 76.0p, the Company's shares yield 6.9%, which compares favourably  to the IPD Monthly All Property Yield of 6.2% and the FTSE All-Share Index yield of 3.7%;

§ Over five years the Company has produced a NAV total return of 6.9% and share price total return of 7.2%, both comfortably ahead of the -5.4% total return on the IPD Balanced Monthly Funds Index and 4.0% total return on the FTSE All-Share Index over the same period.

Property Highlights

§ Valuation gains achieved through active asset management in the Company's retail warehouse portfolio.

o  Planning permission obtained for a major retail superstore at St.George's Retail Park in Leicester;

o  Planning permission gained for additional A3 accommodation at the Junction 27 Retail Park in Leeds;

§ High level of letting activity continues against a backdrop of difficult retail conditions, with £340,000 of new lettings achieved in the quarter;

§ Central London offices continue to support capital growth in the Company's office holdings, which were also boosted by an additional letting at Colmore Row, Birmingham;

§ The void position of the portfolio as at 30 September 2011 was 3.5% (30 June  2011 - 3.6%) which compares favourably to the monthly IPD equivalent of 10.0%

Christopher Hill, Chairman of UKCPT, commented:

"The importance of maximising income return through asset management initiatives and of targeting a reduction in vacancies, given the limited capital gains in most market sectors, was again demonstrated clearly during the quarter."

*The NAV per share is calculated under International Financial Reporting Standards ("IFRS") and is unaudited.  It includes all current period income and is calculated after the deduction of all dividends paid prior to 30 September 2011.  It does not include provision for any unpaid dividends for the periods prior to 30 September 2011including i.e. the proposed dividend for the period to 30 September 2011.

The NAV per share at 30 September 2011 is based on 1,197,348,858 shares of 25p each, being the total number of shares in issue at that time (excluding 41,445,142 shares held in treasury).

Breakdown of the NAV movement

UK Commercial Property Trust Limited	Per  Share (p)	Attributable Assets (£m)
Net assets as at 1 July 2011	76.9	921.3
Unrealised increase in valuation of property portfolio	0.2	1.8
Capital expenditure during the period	(0.1)	(1.0)
Income earned for the period	1.4	16.6
Expenses for the period	(0.4)	(5.0)
Dividend paid on 31 August 2011	(1.3)	(15.7)
Interest rate swaps mark to market revaluation	(0.8)	(8.9)
Net assets as at 30 September 2011	75.9	909.1

UK Commercial Property Trust Limited
Net Asset Analysis as at 30 September 2011	£m	%
Property Portfolio
Retail	567.9	62.5
Office	261.8	28.8
Industrial	135.9	14.9
Leisure	49.9	5.5
Total Property Market Value	1,015.5	111.7
Adjustment for lease incentives	(4.4)	(0.5)
Fair Value of Property Portfolio	1,011.1	111.2
Net Current Assets	48.1	5.3
Net Long Term Liabilities	(150.1)	(16.5)
Total Net Assets as at 30 September 2011	909.1	100.0

Total Expense Ratio ("TER")

The TER of the Company for the period ended 30 September 2011, based on the average net assets as at 30 September 2011 and on the basis of annualised expenses, was 0.84%. For the purposes of this calculation, "expenses" includes the costs of running the Group, including the investment management fee, administration fees, Directors' fees, insurance costs, Board costs, registrar costs and any irrecoverable VAT, but excludes finance costs, capital expenditure and refurbishment and irrecoverable property running costs.

Economic and Property Market Review

Many forecasters continue to highlight the fragility of the UK economy, with the Bank of England`s re-introduction of their Quantitative Easing programme representing a further indication of the gravity of the situation. This uncertainty, together with the US debt downgrade and Eurozone solvency worries, has created an atmosphere of caution which pervades investment sentiment and business expansion at home and abroad.  As a result, gilt and swap rates have fallen further, resulting in the largest property risk premium since 2009. However, it is the increase in the perception of risk for most of the UK property sector that dominates investors' mindsets, rather than any prospect of further yield compression.  Due to this perception of increased risk, transaction volumes have reduced 10% year-on-year, with anecdotal evidence emerging that the recent turmoil has resulted in some funds re-appraising agreed transactions.

Demand for prime property remains strong but availability is still limited.  Although some institutions are prepared to wait for assets fitting their traditional criteria, there is also evidence of a few investors being more creative in their search for value and return, with a number of leisure, residential and student accommodation deals transacted over the quarter. 

Against this backdrop, prime yields have remained broadly stable, with an IPD Monthly All Property Yield of 6.2% representing a margin of more than 3% above 10 year gilts. While there are increasing downside risks to the secondary market, income return remains the dominant feature with the IPD Monthly Index reporting 1.7% income return for the quarter(total return being 1.9%).

Core London markets and particularly the West End emerged unscathed from the riots over the summer and remain robust.

Caution remains in regional markets, although there have been some improved signs in both occupational and investment markets within the Thames Valley and the South East.

Higher yield industrials are attracting buyers but the focus has been on the distribution warehouse sector rather than multi-let, where occupational demand outwith the South East remains weak.

Portfolio Review

The portfolio performed well over the quarter, with a valuation of £1,015.5 million reflecting a like-for-like increase of 0.2% before capital expenditure.

Although there were valuation increases across the portfolio in the retail, office and industrial sectors, the Company's Central London, retail warehousing and shopping centre properties continued to be the strongest performers, albeit fortunes have been mixed in the case of shopping centres. Overall, retail recorded an increase of 0.1% supported primarily by sound asset management driven valuation increases in the retail warehouse holdings. In particular we secured planning permission for a 73,500 sq. ft. superstore at St.George's Retail Park, Leicester and additional A3 accommodation at Junction 27 Retail Park, Leeds.

The Company's office properties continue to show divergence of performance between Central London assets and the rest of the UK, where shorter term and weaker occupier markets prevail.  Overall, the sector increased in valuation by 0.3% with Central London recording a respectable 1.3% versus the rest of the UK which saw a fall of -0.4%. However, asset management initiatives helped mitigate the fall in the rest of the UK, including the completion of an agreement for a lease with Costa for a 2,300 sq.ft. retail unit at Colmore Row, Birmingham.

The strong investment demand that continues for South East industrials, coupled with a good level of letting activity at Dolphin Industrial Park, Sunbury, is the primary driver for the 0.7% increase in the Company's industrial holdings.

Income Review

Rental Income increased moderately over the quarter with annualised income of £68.2 million which represents a 6.7% income yield before costs.

Despite an uncertain economic background, in which letting deals are proving more difficult to achieve, lettings have been secured, primarily focussed in shopping centres, resulting in £340,000 per annum of additional income after rent free periods. However, this has been offset by retail administrations within the shopping centre portfolio, highlighting the challenging nature of the current retail occupational market.

The company's void position as at the end of the quarter was 3.5% of net income (3.6% as at 30 June) comparing favourably to the IPD Monthly Index of 10%.

Finance

As noted in the Interim Report, the Company borrowed an additional £35 million in August 2011, taking total borrowing to £140 million as at the end of September 2011. To mitigate the risk of interest rates rising, thereby increasing the cost of this borrowing, the Company has entered into interest swap rate agreements to fix the interest rates payable for the term of the loan.  As swap rates fell in the third quarter, the NAV of the Company was adversely affected, as accounting rules require that the swap agreements be marked to market.  The impact of this was £9 million or 0.8p per share.  However, this reduction in NAV should be only temporary, as it will reverse either as the swap agreements approach their maturity date or, more quickly, if swap rates begin to increase.

As at 30 September 2011 gearing, expressed as a percentage of total assets less current liabilities, stood at 13.2%.

Outlook

A new wave of retail failures will place further pressure on rental income streams and on a large proportion of the UK property which is tied to that sector.  The industry will have to accept a lower level of bank funding as a substantial proportion of the debt on the market will neither be re-financed nor replaced at maturity.

Nonetheless property can justify its pricing at the present time, with the average income yield offering a considerable base return compared to other assets; however, a further reduction in Government yields would be a superficial attraction as it could be an indicator of further economic strife.

We expect property to deliver solid real returns over the next three years, albeit with stronger performance in 2011, and London to continue to offset weaknesses in other markets. In addition insatiable investment demand continues for prime buildings, while weaker sectors continue to offer attractive average income yields.

The limited capital across most markets underlines yet again the importance of maximising income return through asset management initiatives and targeting vacancies. 

The reaction of investors and banks to the recent turmoil in the financial markets will drive sentiment in the short term and this should provide further opportunities to invest for the Company.

Sector Analysis

	Exposure % as at 30 Sept 2011	Capital Value Shift (%)	£m
External Valuation at  1 July 2011			1013.5
Sub-sector Analysis
Retail	56.0	0.1	0.4
High St - South East High St- Rest of UK	9.2            4.2	0.0 0.7	0.0 0.3
Shopping Centres	16.6	(0.1)	(0.3)
Retail Warehouses	26.0	0.1	0.4
Offices	25.8	0.3	0.7
West End	8.8	1.3	1.1
South East	6.2	(1.4)	(0.9)
Rest of UK	10.8	0.4	0.5
Industrial	13.3	0.7	0.9
South East	8.7	1.1	0.9
Rest of UK Leisure	4.6 4.9	0.0 0.0	0.0 0.0
External valuation at 30 Sept  2011	100.0	0.2	1015.5

The Board is not aware of any further significant events or transactions which have occurred between 30 September 2011 and the date of publication of this statement which would have a material impact on the financial position of the Company.

Enquiries

Robert Boag/Graeme McDonald, Ignis Investment Services Limited

Tel: [phone]

Stephanie Highett/Richard Sunderland/Will Henderson, FTI Consulting,

Tel: [phone]

Important Note

The above information is unaudited and has been calculated by Ignis Investment Services Limited.

1 November 2011

 

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