Net Asset Value at 30 June 2021

5 August 2021

UK Commercial Property REIT Limited (“UKCM” or “the Company”)
LEI: 213800JN4FQ1A9G8EU25

Net Asset Value at 30 June 2021

STRONG BALANCE SHEET, POSITIVE INVESTMENT AND ASSET MANAGEMENT ACTIVITY TOGETHER WITH IMPROVED OUTLOOK SUPPORT DIVIDEND

-Directorate change-

Net Asset Value

• 2.5% growth in NAV per share to 90.2p (31 March 2021: 88.0p), resulting in a NAV total return of 4.0% for the second quarter

• Continued low net gearing of 1.9%* (gross gearing 14.6%**).

• Like-for-like portfolio capital value, net of capital expenditure, increased by 3.2% to £1.21 billion, outperforming the MSCI monthly index, which increased 2.6% over the quarter.

• Rent collection for the third quarter of 2021 (collectively the 24 June and 1 July, English, and 28 May, Scottish, quarterly billing dates) stood at 91% after allowing for agreed rent deferrals and including those tenants who have paid, by agreement, on a monthly basis. This figure is ahead of collection rates for the whole of 2020, underscoring the improving economic picture as restrictions are eased and the vaccination rollout progresses.

• The increased quarterly dividend of 0.644p per share approved for the first quarter has been maintained for the second quarter.

*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

Positive Investment Activity

• As previously disclosed, in April, the Company completed the sale of 140-146 Kings Road, London for £9,925,000, in line with valuation. This high street retail asset was predominantly let to French Connection with a small O2 unit and we believe presented particular income and sector risk, with the likelihood of future non-accretive capital expenditure requirements in the near future. As a result of the disposal, with the exception of two fully let retail outlets that form the ground floor of UKCM’s Edinburgh office asset, the Company has no exposure to traditional high street retail, the sector most affected by the disruption caused by the Covid-19 pandemic. The Company’s remaining retail exposure, standing at 11% of the portfolio value, is comprised entirely of supermarkets and robust retail warehouses.  

• The Company, through its Investment Manager, continues to actively assess opportunities to invest in modern economy, future fit, property sectors which are supported by structural changes in both the economy and society, while at the same time ensuring its investors still benefit from the geographic and sector diversification its portfolio affords.

Asset management driving occupancy and value

The easing of government imposed restrictions on business activities should translate into increased activity in the occupier markets as businesses begin to have more clarity on their future real estate requirements.

Following the very strong momentum generated in Q1 2021, the Company has further reduced its void rate to 3.7% as the asset management team continue to make good progress on growing the portfolio’s income.

Notable transactions over the last quarter include:

• At The Rotunda, Kingston the Company secured a new tenant for unit 6 when it signed Aegon Ltd, t/a Kung Fu, on a 10 year lease at a base rent of £80,000 per annum, ahead of ERV, with a 10% turnover top up.  

• At Regents Circus, Swindon a significant letting was secured to Boom Battle Bars, a specialist operator in competitive socialising. The 15,000 sq ft letting will see units 4,5 7 & 8 let on a new 15 year lease at an annual rent of £150,000 per annum in line with the units’ combined ERV. 

• Also at Regents Circus, Swindon, unit 3 has been let to DSM Holdings Ltd t/a Korean BBQ on a new 15 year lease.  The restaurant extends to c.3,500 sq. ft and the agreed rental equates to an average rent of £45,000 per annum over the first 5 years of the lease. 

• As part of its ongoing ESG commitments the Company is also pleased to welcome several hundred new tenants to its industrial asset at Ventura Park, Radlett, with the addition of two bee hives. In addition to their positive environmental impact, the honey produced by the bees will be sold to raise funds for charity.

Strong balance sheet with significant covenant headroom and flexibility

• Robust balance sheet with low gearing and significant financial resources of £272 million available, comprising uncommitted cash of £122 million, after allowing for future capital commitments and the dividend payable in August 2021, as well as £150 million available from UKCM’s low cost, revolving credit facility. Together, these resources provide the Company with significant liquidity and flexibility at both a corporate and portfolio level.

• At 1.9% as at 30 June 2021, the Company’s net gearing continues to be one of the lowest in its peer group and the wider REIT sector. The drawn debt has an overall blended interest rate of 2.88% per annum with a weighted maturity of 7.7 years. Gross gearing as at 30 June 2021 was 14.6% (Mar 21: 14.9%).

Rent Collection remains robust

• Rent collection has remained robust, improving into the third quarter.  Payments received so far for Q3 rent reflect 91% of rents due as at close of business on 30 July 2021, (collectively the 24 June and 1 July English, and 28 May Scottish, quarterly billing dates) after allowing for agreed rent deferrals and including those tenants who have paid, by agreement, on a monthly basis. 

The table below sets out the third quarter’s rent collection, split between sectors:

	% of Q3 2021 rent demanded	% collected
Industrial	53%	95%
Office	19%	93%
Retail	14%	91%
Other	14%	68%
Total	100%	91%

The Company has a diverse tenant mix with a number of high quality occupiers, the largest five of which comprise COVID-19 resilient businesses such as Ocado (5.5% of rent), Warner Brothers (5.3%), Amazon (5.0%), Total (3.9%), and B&Q (3.4%). 

Rent collection rates have remained robust albeit there is still a large discrepancy between the high collection rates achieved in the industrial and office assets and the lower levels amongst leisure sector assets. With the lockdown measures being lifted in England and easing elsewhere we expect to continue to see rent collection rates increasing as businesses return to normalised trading conditions and the Team continues to work closely with tenants in connection with the collection of rents.

A key aim of the Board throughout the pandemic has been to continue to pay a dividend, recognising how important income is to shareholders. The Board has also been keen to ensure that the dividend level being paid is sustainable given the Company’s rent collection levels and investment activity.Following the 40% dividend increase announced in relation to the first quarter of 2021, the second quarter dividend will be maintained at 0.644p per share

The Board believes this current rate to be an appropriate level given the improved outlook for the wider economy and rent collection as lockdown is eased. This level also offers the potential for future growth as and when the Company’s significant financial resources are utilised.

Board of Directors

As part of our continuing Board succession programme, we are delighted to announce that Fionnuala Hogan will today be appointed to the Board as a Non-Executive Director. Fionnuala’s wealth of knowledge and range of key skills will complement the Board and the Group. She brings over 25 years of experience of corporate advisory, investment and financing, with a particular emphasis on commercial real estate and technology. We are very pleased to welcome her to the Company.

We also announce that Robert Fowlds has announced his intention to retire as a Non-Executive Director effective today to focus on his growing portfolio of other business interests having served the Company since April 2018. During this time, he has made an invaluable contribution to the Board and Robert leaves with our sincere thanks and best wishes for the future.

Ken McCullagh, Chair of UKCM, commented:  “The positive momentum we experienced in the first quarter continued to build throughout the remainder of the first half and on to the third quarter, with confidence growing as the vaccination programme is successfully rolled out across the UK.  This is reflected in the portfolio valuation growth and strong leasing activity, which has further reduced our void rate, as well as further improvements to our rent collection figures.  Following the student housing forward funding investment in Edinburgh we made in the first quarter, we have actively assessed a number of further acquisition opportunities, in line with our strategy of investing in modern economy sectors while allowing investors to continue to benefit from a diversified portfolio.”

Will Fulton, Lead Manager of UKCM at Aberdeen Standard Investments, said:  “During the first half of the year we have made considerable progress in further reducing the vacancy across the portfolio.  This asset management and the quality of the industrials portfolio we have built up over the past few years has once again led to growth in portfolio valuation.  We have the financial resources to invest in our strategy for growth and, with a strong pipeline of investment opportunities currently being assessed, expect to add further new high quality assets to our diversified portfolio in the second half.”

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 31 March 2021 to 30 June 2021:

UK Commercial Property REIT Limited	Per  Share (p)	Attributable Assets (£m)	Comment
Net assets as at 31 March 2021	88.0	1,143.1
Unrealised increase in valuation of property portfolio	3.0	39.4	Predominantly like for like increase of 3.2% in property portfolio
Loss on sale	-0.0	-0.1	Principally small loss on sale after costs relating to Kings Road, London
Capex	-0.2	-2.1	Predominantly relates to planned funding payments for student accommodation developments at Exeter and Edinburgh
Income earned for the period	1.1	14.7	Equates to dividend cover of 92%, based off current dividend level of 0.644p.
Expenses for the period	-0.6	-7.2
Dividend paid on 28 May 2021	-0.6	-8.4
Dividend paid on 21 May 2021	-0.5	-6.9	Fifth interim top-up dividend for prior year to comply with REIT rules.
Net assets as at 30 June 2021	90.2	1,172.5

The EPRA Net Tangible Assets per share is 90.2p (31 Mar 2021: 88.0p) with EPRA earnings per share for the quarter being 0.57p (31 Mar 2021: 0.58p).

Sector Analysis

	Portfolio Value as at 30 Jun 21 (£m)	Exposure as at 30 Jun 21 (%)	Like for Like Capital Value Shift (net of CAPEX)	Capital Value Shift (including sales & purchases & development spend)  (£m)
			(%)
Valuation as at 31 Mar 21				1,175.6
Industrial	758.6	62.8	4.9	35.4
South East		40.5	4.7	21.8
Rest of UK		22.3	5.3	13.6
Retail	129.1	10.7	4.1	-5.0
High St – South East		1.2	5.6	-9.3
High St- Rest of UK		1.4	6.2	1.0
Retail Warehouse		8.1	3.5	3.3
Offices	172.6	14.4	-1.7	-3.1
West End		2.5	0.0	0.0
South East		4.3	-2.0	-1.1
Rest of UK		7.6	-2.1	-2.0
Alternatives	145.3	12.1	0.4	2.7
External valuation at 30 Jun 21	1,205.6	100.0	3.2	1,205.6

The independent valuation as at 30 June 2021 was carried out by CBRE Ltd.

Net Asset Value analysis as at 30 June 2021 (unaudited)

	£m	% of net assets
Industrial	758.6	64.7%
Retail	129.1	11.0%
Offices	172.6	14.7%
Alternatives	145.3	12.4%
Total Property Portfolio	1,205.6	102.8%
Adjustment for lease incentives	-26.8	-2.3%
Fair value of Property Portfolio	1,178.8	100.5%
Cash	176.7	15.1%
Other Assets	41.0	3.5%
Total Assets	1,396.5	119.1%
Current liabilities	-26.0	-2.2%
Non-current liabilities (bank loans)	-198.0	-16.9%
Total Net Assets	1,172.5	100.0%

The NAV per share is based on the external valuation of the Company’s direct property portfolio as at 30 June 2021. It includes all current period income and is calculated after the deduction of all dividends paid prior to 30 June 2021.

The NAV per share at 30 June 2021 is based on 1,299,412,465 shares of 25p each, being the total number of shares in issue at that time.

Investment Manager’s Market Commentary
The UK economy has bounced back strongly during Q2 and is set to achieve growth of around 7% for 2021 as a whole. However, after a fall of nearly 10% in 2020, the level of economic activity is expected to remain below pre-Covid levels until at least next year. Given the implied output gap, unemployment is expected to rise towards 6% when the furlough scheme ends in September, despite labour shortages in some specific sectors of the economy.

The recovery has seen inflation start to spike with the pandemic severely affecting supply, which, whilst being rebuilt, is contending with surging demand. But base effects, due to lockdown impact on demand and emergency fiscal policies last summer, are the principal drivers of UK inflation and the ASI Research Institute believes the surge will prove transitory. Importantly, the Bank of England’s rate-setters are expected to ‘look through’ higher short-term inflation.

Most remaining Covid-related restrictions were relaxed in England on 19 July, despite a growing third wave of infections driven by the Delta variant. Encouragingly, the successful vaccination programme in the UK appears to have significantly weakened the link between infections and hospitalisations.  However, the risk to less well-vaccinated countries of the more infectious Delta variant, where two vaccine doses are required to afford high levels of protection, is likely to continue to restrict international travel both into and out of the UK, with negative implications for some key real estate sectors and markets.  Hotels, leisure and luxury retail in central London are the most susceptible to protracted travel restrictions.

The tapering down of relief from business rates will put further pressure on those sectors later in the year, although vulnerable occupiers will benefit from the government’s controversial decision to extend the moratorium on tenant evictions until March 2022. The re-basing of retail and leisure rents is ongoing but the process has much further to run in fashion-oriented shopping locations, particularly in shopping centres and traditional High Street locations.

For offices, removal of the guidance to work from home where possible should spur greater re-occupation over Q3 and into Q4. But remote and hybrid working policies will outlive the pandemic and most occupiers are acting cautiously and consultatively with their workforces in respect of future requirements. Availability rates have risen in all major office markets but most steeply in London with smaller, more secondary buildings hardest hit. Vacancy may be plateauing but at a high level that is consistent with falling rents, especially in secondary stock that is out of favour with tenants.

In contrast take-up in the industrial sector shows little sign of slowing, driven as it is by ongoing structural changes to the distribution of goods and the increased importance of effective supply chains amongst businesses in general. The larger logistics size brackets have been especially active. There is, however, a sense that affordability is increasingly an issue for smaller and lower margin businesses, especially in low supply/high demand urban industrial locations.

Investment transaction volumes for Q2 2021 are set to total around £11.5 billion, according to Property Data, which is almost identical to quarter one. Industrials continue to represent a huge proportion of activity and over the last 12 months represented 30% of investment volumes against a long-term average of just 12%. Those volumes continue to apply downward pressure to yields, enhancing returns already supported by rental value growth of 3.7% over the year to May, according to MSCI. The “beds, meds and sheds” sectors are likely to continue to drive investment volumes as we move into Q3.

Investment Outlook

While the economy is now in recovery mode as Covid-related restrictions are relaxed, for much of the UK real estate market it is structural trends that are set to drive performance over the medium term. With the fundamentals supportive of further rental growth, investment demand for industrials is set to push yields lower in the second half of the year, with the sector forecast to remain the best performer over the next three years. Meanwhile,  office fundamentals point to falling rental values and rising income risk. With little adjustment to values thus far, we are forecasting weak returns for the sector over the course of the next three years. Importantly, though, the market is likely to be bifurcated, with the best quality space favoured by tenants and more resilient for investors and secondary space increasingly distressed.

Bifurcation is also expected in the retail sector;  for modern retail warehouse parks, leased at affordable rents and anchored by grocery, discount retailers and DIY occupiers, values are now rising and quite rapidly. Fashion-oriented parks, however, are more vulnerable in line with the challenges faced by high streets and shopping centres, where we anticipate a further year of negative total returns.

Assets offering  long, secure income streams with indexation are expected to deliver favourable risk-adjusted returns. Longer income assets with good tenant covenants are currently outperforming shorter income assets by a very wide margin in absolute terms and ongoing strong demand for those cash flows is expected to drive continued outperformance this year.

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.ukcpreit.com

For further information please contact:

Will Fulton / Gregg Carswell, Aberdeen Standard Investments

Tel: [phone]

Harry Randall, J.P. Morgan Cazenove

Tel: [phone]

Richard Sunderland / Claire Turvey / Eve Kirmatzis, FTI Consulting

Tel: [phone]

[e-mail]

The above information is unaudited and has been calculated by Aberdeen Standard Investments^.