Net Asset Value(s)

RNS Number : 7861P

UK Commercial Property Trust Ltd

30 October 2012

 



                                 Net Asset Value/ Interim Management Statement

for the three month period to 30 September 2012

UK Commercial Property Trust Limited (LSE: UKCM), the largest Guernsey based, UK focused commercial property trust, today provides its Interim Management Statement for the three months to 30 September 2012 and unaudited quarterly Net Asset Value ("NAV") as at 30 September 2012.

Financial Highlights

§ NAV per share* as at 30 September 2012 was 70.9p (30 June 2012: 72.3p), a fall of 1.9%;  

§ The portfolio is now valued at £1,033.2million. This represents a like-for-like decrease of 1.0% in the quarter before capital expenditure;

§ The Company intends to declare a third interim dividend, in respect of the period from 1 July 2012 to 30 September 2012, of 1.3125p per Ordinary Share, with ex-dividend and payment dates of 14 November 2012 and 30 November 2012 respectively;

§ Based on an annual dividend of 5.25p and the share price as at 30 September 2012 of 65.55p, the Company's shares yield 8.0%, which compares favourably to the IPD Monthly All Property Initial Yield of 6.4% and the FTSE All-Share Index yield of 3.6%;

§ Gearing of 18.8% (borrowings (excl SWAPS) divided by total assets less current liabilities) remains the lowest in the Company's peer group.Net gearing (borrowings (excl SWAPS) less cash divided by total assets less current liabilities and cash) was 15.0%.

§ Over five years to the end of September 2012, the Company has produced a NAV total return of       -0.3% and share price total return of 12.1% outperforming the -8.8% total return on the IPD Monthly Index and -39.3% total return on the FTSE Real Estate Investment Trusts Index respectively over the same period.

Property Highlights

§ Seventeen lettings completed during the period, which will produce £1.02 million per annum of additional rental income after rent free periods and incentives;

§ Net lease activity in the quarter, adjusted for sales, has resulted in an increase of £55,000 in annualised rental income to £72.0 million;

§ Ten year lease completed with Sportsdirect.com Retail Ltd for an 8,000 sq.ft unit in Kensington High Street, London, W1 at an annual rent of £440,000 per annum which was above ERV and represented an increase of £21,000 on the rent payable by the previous tenants, the Outdoor Group Ltd (in administration);

§ Positive rent review settlement at George Street, Edinburgh which generated £65,000 per annum of additional income;

§ Sale of Sovereign House, Slough, at a price of £8.6 million which was in line with the expected September valuation, eliminating the Company's exposure to an asset that will require significant capital expenditure with limited return prospects;

§ The void position of the portfolio as at 30 September 2012 was 5.2% (30 June 2012: 5.0%) which compares favourably to the monthly IPD equivalent of 10.2% and reflects the continued focus on income enhancing asset management initiatives.

Christopher Hill, Chairman of UKCPT, commented:

"While market and sector conditions continue to be challenging and therefore valuations remain cautious in their outlook, our Manager's forecasts indicates that, with the usual macroeconomic caveats, the economy will finish the year stronger than it began.  Income return remains the cornerstone of commercial property returns and we believe that current property yields are providing a reasonable risk premium for investors.  Furthermore, the Company's portfolio of prime assets and the attractive income return it generates, combined with a strong track record of value creation through intensive asset management, means we are well placed to continue meeting the expectations of investors."

*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 2012.  It does not include provision for any unpaid dividends relating to periods prior to 30 September 2012 i.e. the proposed dividend for the period to 30 September 2012. Excluding swap liabilities the NAV per share is 72.3p

The NAV per share at 30 September 2012 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).

Enquiries:

David Rodger / Graeme McDonald, Ignis Investment Services Limited

Tel: [phone]

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

Tel: [phone]

Breakdown of NAV movement

Set out below is a breakdown of the change to the unaudited net asset value per share calculated under IFRS over the period from 1 July 2012 to 30 September 2012.

UK Commercial Property Trust Limited	Per  Share (p)	Attributable Assets (£m)
Net assets as at 1 July 2012	72.3	865.7
Unrealised decrease in valuation of property portfolio	(1.0)	(11.4)
Capital expenditure during the period	(0.2)	(2.4)
Income earned for the period	1.6	19.1
Expenses for the period	(0.4)	(5.4)
Dividend paid on 31 August 2012	(1.3)	(15.7)
Interest rate swaps mark to market revaluation	(0.1)	(1.2)
Net assets as at 30 September 2012	70.9	848.7

UK Commercial Property Trust Limited
Net Asset Analysis as at 30 September 2012	£m	%
Property Portfolio
Retail	542.7	63.9
Office	243.5	28.7
Industrial	196.5	23.1
Leisure	50.5	6.0
Total Property Market Value	1,033.2	121.7
Adjustment for lease incentives	(5.2)	(0.6)
Fair Value of Property Portfolio	1,028.0	121.1
Net Current Assets	35.7	4.2
Net Long Term Liabilities	(215.0)	(25.3)
Total Net Assets as at 30 September 2012	848.7	100.0

As at 30 September 2012, gross gearing (borrowings (excl SWAPS) divided by total assets less current liabilities) was 18.8%. To enable comparison with the Company's peer group, net gearing (borrowings (excl SWAPS) less cash divided by total assets less current liabilities and cash) was 15.0%.

Economic and Property Review

Prospects for the UK economy are showing signs of some improvement with two subsequent upward revisions to the second quarter's GDP figure followed by provisional figures showing growth of 1% in the third quarter. Inflation continues to move towards the Government`s long term target and the number of people in employment reached its highest level since May 2008 with the unemployment rate down from 8.3% at the start of the year to 7.9%. However, it should be emphasised that, with the ongoing backdrop of the Eurozone crisis, the legacy of debt and the deficit reduction plan, any sustained improvement in confidence and hence in the overall economy is still some way off. 

The IPD Monthly index recorded a total return of 0.6% for Q3 compared to a total return of 0.3% for Q2. This improvement was driven by an increase in income return to 1.7% whilst average capital values declined by 1.1%, a smaller fall than the 1.3% recorded for Q2. Retail again under-performed the other broad sectors with a total return of 0.3% which trailed comparable figures for offices and industrial assets of 1.0% and 0.6% respectively.

The decline in capital values can be mainly attributed to negative sentiment that drove a rise in average valuation yields, reducing capital values by 0.8%. The greatest drag from rising yields was in relation to industrial properties. Average rental values reported a modest decline in Q3 2012, with falling rents in retail and industrial assets not fully compensated by a further increase in office rents. It should be noted, however, that gross rental income streams across the industry increased in both the retail and office sectors more than offsetting a fall in the industrial sector. Average vacancy rates reported a modest drop whilst the scale of over-renting continued.

The market remains polarised between London/South East and the other regions of the UK and between prime and secondary assets. The paucity of prime asset trades continues to have an impact on the IPD performance figures.

Portfolio Review

The portfolio valuation experienced a modest fall of 1.0% (Q2: -1.35%) with a valuation of £1,033.2 million before capital expenditure and after sales.

The retail sector continues to be the principal source of underperformance in the portfolio, a trend which also prevails in the wider market as the weakness in occupier markets continues to unnerve investors. The Company's retail portfolio fell 1.9% (Q2: -1.8%) with shopping centres being the principal source of this decline, recording a reduction in value of 2.5% as a result of the combined effects of outward yield shift and reduced level of income.

Despite being a focus of some positive asset management which resulted in an improvement in income, the high street portfolio still witnessed an overall decline of 1.2%, mainly due to the market-led falls in estimated rental values in one of the South East assets.

As has been the case throughout 2012, the Company's retail warehouse portfolio continues to be the most resilient of all the retail sub-sectors but has not been immune to falls in value with a 0.9% reduction as yields moved out marginally.

The Central London office portfolio is yet again the best performing sub-sector in the portfolio with a 0.9% increase in value, driven mainly by rental growth. This, however, was not enough to offset the outward yield shift evident in the rest of the country which showed a 2.3% decline in value as ongoing concerns over occupier markets continue to unsettle investor sentiment.  The overall fall in the office market portfolio was 0.9% (Q2: -1.2%).

The Company's industrial and leisure properties continue to be the strongest performers with yields holding firm in both sectors. The industrial sector recorded a marginal fall of 0.2% (Q2: -0.7%) as a consequence of a tenant exercising a break.  The leisure sector showed a small increase of 0.1% (Q2: 0.0%) due to some income accretive asset management.

Income Review

Annualised rental income after rent free periods decreased over the quarter from £73.6 million to £72.0 million. However, adjusting for the sale of Sovereign House, Slough annualised rental income rose by £55,000, which is a pleasing result in such a challenging market. The continued focus and realisation of income enhancing asset management initiatives has limited the negative impact of the ongoing lease expiries and in some cases, the finalisation of administrations announced earlier in the year.

The lease activity in the quarter included the completion of seventeen lettings which will produce £1.02 million per annum of rental income after rent free periods and capital contributions. A number of these lettings continue to be in the Company's shopping centre portfolio with new lettings to Café Nero (Sovereign Centre, Weston-super-Mare) and Hotter Shoes (Pride Hill Shopping Centre, Shrewsbury) being the most notable. In both cases, these lettings related to properties previously affected by administrations in the second half of 2011. There were also lettings in the office portfolio with new leases in ground floor retail units to Costa (Great Marlborough Street, London) and Whitewall Gallery (Colmore Row, Birmingham) which, when combined, increase income by £205,000 per annum.

The most notable letting was in Kensington High Street, London, WC1 where an 8,000 sq ft unit previously let to The Outdoor Group Ltd (in administration) was re-let to Sportsdirect.com Retail Ltd    on a new ten year lease at an improved rental of £440,000 per annum. This letting is above the current ERV, represents a £21,000 increase in annual rent from that previously paid and also improves the lease length. Due to proactive asset management, there was no loss of income between the administration and the new letting. This good result, allied to the underlying quality of a number of properties within the portfolio, highlights the continued ability to maintain and, in some cases, improve income even in the face of weakening occupier markets.

A positive rent review settlement at George Street, Edinburgh produced an additional £65,000 per annum. This settlement is further evidence that rental growth can occur in a quality location outside the South East where occupier demand remains healthy.

Aside from the surrender of The Outdoor Group lease at Kensington High Street which was actively promoted to accommodate the Sportsdirect letting, rental income of £456,000 was lost within the shopping centre portfolio from lease expiries, breaks and the finalising of administrations involving Hawkins Bazaar, Alexon, Internationale and Peacocks. In addition, two other tenants were lost due to a lease break and an expiry in two industrial locations which resulted in just over £200,000 in lost income. These losses were offset by the positive progress outlined above.

The Company's void position at the end of the Quarter was 5.2% of annualised income (June 2012 - 5.0%) or 6.6% (June 2012 - 7.3%) including administrations. This is still significantly below the IPD Monthly Index figure of 10.2%.  

Transactions

On 29 September the Company completed the sale of an office property at Sovereign House, Brunel Way, Slough for £8.6 million, which was in line with the expected September valuation.  Significantly over-rented with only two years unexpired on the lease and the tenant not in occupation, the sale was in accordance with the Company's strategy to reduce exposure to those assets that demand a significant level of capital expenditure with limited total return prospects. The proceeds will be added to the Company's existing cash resources for working capital.

There were no purchases during the Quarter.

Market Outlook

Given that a number of growth forecasts for 2013 have been pared back in recent months, the publication of provisional GDP figures showing 1% growth for quarter three was a welcome boost to confidence. However, growth in exports and investment will have to be substantial for a return to 'traditional' or trend rates of growth to be achieved. With the Eurozone sovereign debt crisis still not fully resolved, positive news has to be viewed with caution in the context of the outlook for the economy, with the path back to reasonable levels of sustainable growth likely to be challenging.

In relation to the property market, valuations are increasingly reflecting pessimistic assumptions on re-letting prospects, voids, lease expiries and investor demand.  With income return remaining the cornerstone of commercial property returns and current property yields providing a reasonable risk premium to reflect the illiquidity and costs involved when investing in the asset class, weak sentiment and negative headlines are not the complete story.

Our Manager's forecasts indicates that the economy will finish the year stronger than at its start although the release of economic indicators, home and abroad, could continue to have a substantial impact. Over the medium term, however, the value of core, investment grade real estate remains compelling to a wide range of investors and the intensive competition to acquire any decent asset that comes to market demonstrates this. In addition, high and sustainable income returns are seen as the key for many investors given the historically low rates available from conventional sources of income yield.  With a prime portfolio of assets generating a strong and sustainable income return and consistent track record of intensive asset management, the Company is well placed to meet investors' expectations.

Sector Analysis

	Portfolio Value as at 30 Sep 2012 (£m)	Exposure as at 30 Sep 2012 (%)	Capital Value Shift (%)*	Capital Value Shift (£m)
				1,052.8
External valuation at 30 June 2012
Retail	542.7	52.5	-1.9	-7.8
High St - South East		9.0	-1.3	-1.3
High St- Rest of UK		4.0	-0.9	-0.3
Shopping Centres		14.5	-2.5	-3.8
Retail Warehouse		25.0	-0.9	-2.4
Offices	243.5	23.6	-0.9	-2.8
West End		9.0	0.9	0.8
South East		4.4	-4.2	-2.0
Rest of UK		10.2	-1.5	-1.6
Industrial	196.5	19.0	-0.2	-0.5
South East		12.3	0.0	0.0
Rest of UK		6.7	-0.6	-0.5
Leisure/Other	50.5	4.9	0.1	0.1
Sale of Sovereign House, Slough				-8.6
External valuation at 30 Sept  2012	1033.2	100.0	-1.0	1,033.2

*Excludes capital expenditure

The Board is not aware of any further significant events or transactions which have occurred between 30 September 2012 and the date of publication of this statement which would have a material impact on the financial position of the Company.

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

30 October 2012

 

END

 

 

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