Net Asset Value(s) & Interim Management Statement

RNS Number : 1664Z

UK Commercial Property Trust Ltd

04 February 2014

 



4 February 2014

UK Commercial Property Trust Limited (the "Company")

Net Asset Value/ Interim Management Statement

For the three month period from 1 October 2013 to 31 December 2013

 ABOVE BENCHMARK NAV GROWTH, POSITIVE PORTFOLIO ACTIVITY AND REVISED DIVIDEND POLICY

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 31 December 2013 and unaudited quarterly Net Asset Value ("NAV") as at 31 December 2013.

Key Highlights

§ 5.2% increase in NAV per share* as at 31 December 2013 to 73.1p (30 September 2013: 69.5p);

§ 4.2% increase in portfolio valuation over the quarter on a like-for-like basis before capital expenditure,  driven by strong performance in the Company's Central London Office, South East Industrial and Retail Warehouse assets;

§ Portfolio total return for the quarter estimated to be 5.9%, significantly outperforming the IPD Monthly Index total return of 4.7%; 

§ The Board announces a move to a more sustainable dividend policy of 3.68p per annum equating to 0.92p per share per quarter, a 30% reduction to take affect from May.  This underpins the Company's portfolio strategy, whilst still providing an attractive yield of 4.8% (based on share price as at 30 January 2014);

§ Key portfolio activity:

o  Sale of Charter Place, Uxbridge for significantly above the £22.0million September 2013 valuation, materially de-risking the portfolio,  removing the prospect of significant capital expenditure and helping reduce the void rate to 4.4%;

o  Commitment in January 2014 to purchase three pre-let assets at Aberdeen Gateway Business Park for up to £48.3m, fully pre-let to tenants with strong covenants, at an initial yield of 6% on completion (estimated to be December 2014) with fixed guaranteed uplifts over the average term of 19 years.

§ A reduced management fee, subject to regulatory approval, has been agreed with the Company's Investment Manager, further strengthening the income position. In addition, Ignis Fund Managers Limited is to be appointed as Alternative Investment Fund Manager of the Company under the Alternative Investment Fund Managers Directive ("AIFMD") encompassing a number of changes affecting portfolio and risk management.

Christopher Hill, Chairman of the Company, commented:

"It is encouraging to report a further increase in the Net Asset Value of the Company for the fourth quarter of 2013.  This reflects the quality of our portfolio in London and the South East where values are showing improvement.

As part of our portfolio strategy, Charter Place, Uxbridge was sold in Q4 2013 removing one of the Company's largest voids at a price significantly above valuation. There are further signs of an uptick in confidence in the UK regions and I am confident that, in 2014, the quality of our regional portfolio will be recognised through improved values, as the rest of the UK economy comes back to full health. 

With the re-positioning of the portfolio carried out during 2013 and following a detailed review of dividend policy, I believe the re-based dividend level from Q1 2014 is a sensible and prudent decision that will set a sustainable base for the future performance of the Company, balancing an attractive level of income with a solid total return."  

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 quarter from 1 October 2013 to 31 December 2013. The property portfolio has been externally valued by CBRE.

UK Commercial Property Trust Limited	Per  Share (p)	Attributable Assets (£m)	Comment
Net assets as at 1 October 2013	69.5	832.5
Unrealised increase in valuation of property portfolio	3.5	41.9	Like for like increase of 4.2% before capital  expenditure
Realised gain on sale	0.4	4.5	Sale of Charter Place, Uxbridge for above previous valuation.
Capital expenditure during the period	(0.2)	(2.9)	Principally relates to asset management initiatives
Income earned for the period	1.5	18.4	Equates to dividend cover of 79% for the quarter
Expenses for the period	(0.5)	(6.0)
Dividend paid on 29 November 2013	(1.3)	(15.7)
Interest rate swaps mark to market revaluation	0.2	3.0	Strong rise in longer term swap rates resulting in reduction in swap liabilities
Net assets as at 31 December 2013	73.1	875.7

*The NAV per share is calculated under IFRS and is unaudited.  It includes all current period income and is calculated after the deduction of all dividends paid prior to 31 December 2013.  It does not include provision for any unpaid dividends relating to periods prior to 31 December 2013 i.e. the proposed dividend for the period to 31 December 2013.

The NAV per share at 31 December 2013 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).

The EPRA NAV (IFRS NAV but excluding swap liabilities) is 73.7p

Net Asset Analysis as at 31 December 2013	£m	%
Property Portfolio
Retail	520.7	59.5
Office	242.4	27.7
Industrial	232.6	26.6
Leisure	53.0	6.0
Total Property Market Value	1,048.7	119.8
Adjustment for lease incentives	(6.0)	(0.7)
Fair Value of Property Portfolio	1,042.7	119.1
Net Current Assets	68.5	7.8
Net Long Term Liabilities	(235.5)	(26.9)
Total Net Assets as at 31 December 2013	875.7	100.0

As at 31 December 2013, gross gearing was 20.7% (gross borrowings (excluding swaps) divided by total assets less current liabilities) which remains the lowest in the Company's peer group. Net gearing (borrowings (excluding swaps) less cash divided by total assets less current liabilities and cash) was 14.5%;

Dividend Policy

The Company's dividend policy was set at launch in 2006 at a time of strong rental growth prospects.  The economic downturn has, however, significantly undermined rental growth and, despite an improving economic outlook, the prospects for rental growth remain muted outside Central London.  Recognising this, and following the portfolio activity during  2013, the Board in consultation with the Manager and other  advisers has undertaken a review of the long term sustainability of the dividend, taking into account projected purchases, capital expenditure and lease activity, as well as current and forecast market conditions.

Based on the current level of dividend, cover is forecast to be in the region of 70%-80% for the foreseeable future.  While the Company's balance sheet can sustain this level of dividend cover for the short term based on current forecasts, ultimately this would place a strain on the Company's resources. As a result, the Board has concluded that rebasing the dividend to a more sustainable level from the first quarter of 2014 is the most prudent course of action and will provide a solid base for the future growth of the Company.

Consequently, the Board announces their intention to re-set the dividend to 3.68p on an annual basis (0.92p per quarter), effective from the dividend payable in May 2014; this represents a reduction of 30%. This level fully underpins the portfolio strategy, would have achieved approximately 106% cover had it applied in the year to 31 December 2013 and also diversifies the future financing ability of the Company.  The shares will still provide a yield of 4.8% (based on the share price at 30 January 2014) remaining attractive when compared to the yield available from other asset classes and REITs (see below as at 30 January):

·     FTSE All-Share yield - 3.4%

·     3-5 year Triple B Bond yields - 3.2% 

·     FTSE REITS Index yield - 3.3%.

Management Fee Reduction

The Board has also agreed a reduced management fee with the Manager as part of an annual benchmarking exercise. With effect from 1 July 2014, subject to regulatory approval, the revised management fee will be 0.65% of total assets, a reduction of 7% based on the total assets as at 31 December 2013. This agreement will further underpin the revised dividend policy. This fee reduction also takes into account the additional services that the Manager will provide in relation to AIFMD which is further explained below.  

Alternative Investment Fund Managers Directive ("AIFMD")

The Alternative Investment Fund Managers Directive, which creates a European-wide framework to regulate managers of Alternative Investment Funds ("AIFs") came into force in July 2013 but a transitional period means that existing AIFs such as the Company have until July 2014 to comply with the relevant regulations.  The AIFMD is intended to reduce systemic risk created by the financial sector and aims to improve regulation, enhance transparency and investor protection and develop a single EU market for AIFs; as such, full compliance with the Directive represents best practice for an AIF. 

The Board is pleased to announce it has decided to appoint Ignis Fund Managers Limited (subject to FCA approval) to act as the Company's AIFM. The Board is confident that the processes and procedures that Ignis has in place will ensure that the Company's shareholders will receive the full benefits and protection envisaged by the AIFMD.

Economic and Property Market Review

Thestrengthening outlook for the UK economy, built on foundations of improving business and consumer confidence, supports the case for real estate as an asset class.  Business investment is now increasing as corporations become more confident about future profitability, a crucial requirement for sustained expansion.  It has been some considerable time since the UK economy has enjoyed positive news of this scale and magnitude.

When the rate of GDP growth accelerates there is usually a corresponding uplift in rental growth, and we expect to see this as we enter the next phase of the current economic cycle.  However, some commentators, including ourselves, believe that this may be more muted than in previous cycles, with a rate of rental growth of only around 2%, focused in certain sub sectors and regions of the UK, the most likely outcome.

The volume of investment transactions in the UK rose steadily during 2013, reaching £53 billion over the year. This increase does not fully reflect investor demand, as the supply of good quality stock remains constrained and is arguably holding back transaction levels, although investor appetite has now spread from London and the South East markets to the UK's regional markets, albeit on a more selective basis.

The UK commercial property sector delivered a total return of 4.7% in Q4 2013, as measured by the IPD Monthly index, (the highest quarterly total return since the final quarter of 2010) with total return for whole of 2013 being 10.9%.  Prime yields in key regional markets have fallen by over 0.5%. However, this yield shift is not evident in the poorer quality secondary/tertiary end of the spectrum, where structural shifts in attitudes to risk and occupational demand mean that vacancy rates will remain stubbornly high, void periods will be longer and rents lower.

Portfolio Performance

The external portfolio valuation as at 31 December 2013 is £1,048.7 million, a like-for-like increase of 4.2% on the quarter (Q3 2013: +1.0%) which is ahead of the IPD Monthly Index capital return of 3.0%. This figure excludes the sale of Charter Place, Uxbridge. The table below sets out the capital value movements in each of the main sub-sectors.

	Portfolio Value as at 31 Dec 2013 (£m)	Exposure as at 31 Dec	Capital Value Shift	Capital Value Shift (£m)
		2013 (%)	(%)
External valuation at 30 September 2013				1,028.4
Retail	520.7	49.7	2.3	11.9
High St - South East		10.0	3.7	3.7
High St - Rest of UK		2.5	-0.9	-0.3
Shopping Centres		12.4	-1.6	-2.1
Retail Warehouse		24.8	4.3	10.6
Offices	242.4	23.1	7.7	17.2
Central London		11.2	12.1	12.6
South East		1.8	1.2	0.2
Rest of UK		10.1	4.3	4.4
Industrial	232.6	22.2	5.2	11.5
South East		15.0	5.3	7.9
Rest of UK		7.2	5.0	3.6
Leisure/Other	53.0	5.0	3.3	1.7
Sale of Charter Place, Uxbridge				-22.0
External valuation at 31 December 2013	1048.7	100.0	4.2	1,048.7

Office

The Company's office holdings continued to provide the portfolio's strongest capital growth in Q4 2013 of 7.7% (Q3 2013: +2.6%).  Once again, this was led by continued yield compression and rental growth in Central London with very strong capital growth of 12.1%.

In December, the Company acquired the long leasehold investment of a residential flat within its existing ownership at 6 Arlington Street, London, SW1 for £1.75m. The purchase affords the Company greater control and flexibility in realising its strategy for the residential conversion of this office building.

Beyond London, the investor sentiment highlighted in the market overview helped deliver positive capital growth for the regional office portfolio of 4.3% in the quarter.

Within the regional office portfolio, leases were re-geared at Pall Mall Court, Manchester and at Colmore Row, Birmingham which ensured the continued occupation of certain tenants, improved longevity of income and increased value for both assets. This was the culmination of a number of successful asset management initiatives over the year which has resulted in a 99% occupancy rate within the Company`s regional office portfolio.

Industrial

This sector was the Company`s second best performer during the quarter. The combined effects of improved yields and stable rental values, boosted by a favourable rent review award which resulted in a 7% rental increase for the warehouse facility at Hatfield, produced an uplift in value within the Company's industrial holdings of 5.2% over the quarter (Q3 2013: +2.5%).

Retail

The Company's retail portfolio provided positive capital growth in the quarter for the first time since June 2011.   Across the portfolio, values improved by 2.3% compared to a fall of 0.5% during the previous quarter.  The retail portfolio provided the greatest divergence in capital growth with Retail Warehouses, driven by asset management and improving yields, providing a healthy 4.3% valuation increase, contrasting with a 1.6% fall in shopping centre values.

The shopping centre portfolio, which represents 12.4% of the total portfolio, continues to be the most challenging sub-sector, with the fall in value primarily due to the closure of the Menzies Hotel at The Parade, Swindon, where the tenant was placed into liquidation. In addition, there was a further reduction of income and estimated rental values at the Sovereign Centre, Weston-super-Mare.

In line with our strategy to stabilise and rebuild income for the Shrewsbury shopping centres, new leases were completed with A Levy & Sons Ltd t/a Blue Inc. and Ryman Ltd.  A number of short term leases were completed in the lead up to Christmas improving net operating income and vibrancy within the Centres.  Lease renewals were also completed with QVC and Massarella Restaurants Ltd in the Charles Darwin Centre.  The lease expiry profile within the Charles Darwin Centre remains challenging but strong asset management and occupier retention should ensure that values are stabilised. 

Within the Retail Warehouse portfolio, contracts have been exchanged with Betta Living and Multi York, who will be granted new leases at improved levels of rent when the former Comet unit at Junction 27 Retail Park, Leeds is sub-divided, with works scheduled to complete in late March 2014. 

High Street Retail in Central London performed well and, including the Company's wider ownership in the South East High Street sector, generated a combined 3.7% capital value increase this quarter. 

Leisure

Increasing investment demand for this sector resulted in yields strengthening again in Q4 2013. Combined with consolidation of the rental tone within the Company's sole investment in the sector (The Rotunda, Kingston upon Thames), the value improved by 3.3% on the quarter (Q3 2013: +1.5%). 

A new lease has been agreed with the up-market burger chain Five Guys which will be a welcome addition to the existing tenant line up and generate new interest and valuable footfall for this asset. 

Sales

In December 2013 the Company completed the sale of Charter Place, Uxbridge at a price significantly ahead of the 30 September 2013 valuation of £22.0million.  Importantly, the sale reduced the portfolio's void position by almost 2.5% and it was also in line with the Company`s strategy to limit portfolio income risk and development risk and to sell assets where significant capital expenditure is required.

Purchases

In January 2014, the Company concluded conditional missives for the purchase of three properties by way of forward funding and forward purchase commitments on the Aberdeen Gateway Business Park, Old Wellington Road, Aberdeen.  The three predominantly industrial properties will extend to 265,000 sq. ft. The Company`s maximum commitment will be up to £48.3m on phased completion through to December 2014 and  will initially generate a yield of 6.0% and a 19 year average weighted unexpired lease length.  All leases provide for fixed guaranteed uplifts.

This purchase demonstrates the continued recycling of cash realised from 2013 disposals towards the industrial sector in a strong underlying economy with sound market fundamentals, which is in line with Company`s strategy.  It also provides the Company with further tenant diversification with the tenants involved being new to the Company and of strong covenant, operating within the dynamic and prosperous oil sector.

Voids

The Company's void position as at 31 December 2013 was 4.4%, compared to 6.1% in September 2013.  Allowing for tenant failures through administrations, the void rate could increase to 6.2%. However, it should be highlighted that tenant failure does not always equate to a loss in income or value and both figures remain comfortably below the IPD Monthly Index void rate of 10.1%.

Market Outlook and Forecast

The supply of good quality investment stock will remain constrained and this factor, combined with continued strong investor demand, should ensure that downward pressure on yields continues through at least the first half of 2014.

Central London markets, retail and offices, are forecast to deliver double digit total returns in 2014 based on the conviction that rental value growth will be converted into higher net incomes.  Central London yields could be bid down even lower in the short term.

With the regional industrial and office markets now attracting greater investor interest and an improving outlook for occupational demand, performance in 2014 will primarily be driven by further yield compression, which is expected to extend to good quality secondary property.

Retail Warehouses, supermarkets and leisure schemes offer better prospects within the retail sector over the medium term.  Rising house prices and activity in that market will support consumer spending to a degree, but shopping centre and High Street retail returns will continue to be polarised between prime investments and secondary centres in weaker locations.

Overall, as a further downward yield shift occurs in the first part of the 2014 assisted by the forecast modest rise in the rate of rental growth, our Manager anticipate a total return of more than 11% in 2014, ahead of the latest consensus view.  Over the medium term, the Manager's forecast suggests that all major sectors will generate capital value growth over a three-year horizon, pushing the 'all property' three year annualised total return to 8.7%.

Portfolio Strategy

In early 2013, as part of the annual strategy review, the Manager made a proposal to the Board to re-balance the portfolio by shifting away from capital intensive and shorter income assets. The strategic aims agreed by the Board were to:

1.    Improve the income return

2.    Reduce voids

3.    Increase the average lease length

4.    Significantly reduce the call on capital for redevelopment/major refurbishments within the portfolio.

Good progress has been made throughout 2013, with capital intensive assets such as Bushey Road, Raynes Park, South West London and  Charter Place, Uxbridge, both being sold at prices well ahead of valuation.  In addition, at Shrewsbury, the Company has adopted an income retention strategy which runs in tandem with the medium term re-development proposals of the shopping centre asset.

Portfolio strategy remains focussed on disposing of non-core assets, particularly where there is a significant and immediate call on capital and income is at risk.

Whilst the market is expected to remain very competitive for the best assets, the Board and the Manager are confident that further acquisitions can be secured to complement the portfolio.  The recent forward funding of Aberdeen Gateway is a good example of the quality of location, specification and longevity of income, with the existence of guaranteed fixed uplifts, which will be sought by the Manager.

The Company is in an excellent position to build on the very good progress achieved in 2013, given the attractive backdrop of a wider improvement in the economy, improved portfolio performance and a revised dividend policy.

Directors

On 12 December 2013, following a systematic selection process, Mrs Sandra Platts was appointed as a non-executive Director of the Company. Mrs Platts, a resident of Guernsey, acts as a Director to public and private financial services companies and brings skills that will complement and strengthen the skill set of the Board as a whole.

Mr Christopher Fish has announced his intention to retire at the 2014 AGM, scheduled for the 18^th June 2014. The Board would like to thank him for the enormous contribution he has made in both developing and growing the Company since inception in 2006 and the insightful and knowledgeable manner in which  he chaired the Audit Committee.

Following Mr Fish's departure, Mr Ken McCullagh, a Chartered Accountant with significant financial experience in the real estate sector, will chair the Audit Committee.

The Board is not aware of any further significant events or transactions which have occurred between 31 December 2013 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]

Edward Gibson-Watt / Oliver Kenyon, J.P. Morgan Cazenove

Tel: [phone]

Stephanie Highett/Richard Sunderland/Will Henderson, FTI Consulting

Tel: [phone]

The above information is unaudited and has been calculated by Ignis Investment Services Limited. Further information can be found on the Company's website at www.ukcpt.co.uk.

 

END

 

 

MSCEASADEADLEFF