NAV and Interim Management Statement

RNS Number : 2649D

UK Commercial Property Trust Ltd

26 April 2013

 



26 April 2013

UK Commercial Property Trust Limited

Net Asset Value/ Interim Management Statement

For the three month period from 1 January 2013 to 31 March 2013

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

Highlights

§ NAV per share* as at 31 March 2013 was 68.6p (31 December 2012: 69.6p), a fall of 1.4%;  

§ The portfolio is now valued at £1,003.6million. This represents a like-for-like decrease of 0.7% in the quarter before capital expenditure, in line with the IPD Monthly Index and primarily driven by capital value falls in the Company's shopping centre and Rest of UK High Street retail exposure;

§ Void rate remained broadly flat at 5.0% as at 31 March 2013, significantly below that of the 9.9% benchmark;

§ The Company intends to declare a first interim dividend, in respect of the period from 1 January to 31 March 2013, of 1.3125p per Ordinary Share, with ex-dividend and payment dates of 8 May 2013 and 31 May 2013 respectively;

§ Based on an annual dividend of 5.25p and the share price as at 31 March 2013 of 69.45p, the Company's shares yield 7.6%, which compares favourably to the IPD Monthly All Property Initial Yield of 6.3% and the FTSE All-Share Index yield of 3.4%;

§ Gearing of 21.6% (gross 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 14.9%;

§ Over five years to the end of March 2013, the Company has produced a NAV total return of 9.3% and share price total return of 28.5%, outperforming the 4.9% total return on the IPD Monthly Index and negative 25.3% total return on the FTSE Real Estate Investment Trusts Index over the same period.

Christopher Hill, Chairman of UKCPT, commented:

"The first quarter of 2013 saw a slight reduction in portfolio valuation, again largely driven by weakness in values within our retail holdings outside London. However, the stronger performance of our London retail assets and good progress in our asset management initiatives elsewhere in the portfolio offer reasons to be more optimistic about the outlook for the year. Broader economic indicators are beginning to show signs of gradual improvement, and we are confident that, with the high quality of our portfolio and the skills of our specialist asset management team, we are well positioned to benefit from any improvement in the market."

*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 31 March 2013.  It does not include provision for any unpaid dividends relating to periods prior to 31 March 2013 i.e. the proposed dividend for the period to 31 March 2013.

The NAV per share at 31 March 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 (excluding swap liabilities) is 70.0p

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 January 2013 to 31 March 2013.

UK Commercial Property Trust Limited	Per  Share (p)	Attributable Assets (£m)
Net assets as at 1 January 2013	69.6	832.8
Unrealised decrease in valuation of property portfolio	(0.6)	(6.8)
Capital expenditure during the period	(0.1)	(0.6)
Income earned for the period	1.5	17.7
Expenses for the period	(0.5)	(5.6)
Dividend paid on 28 February 2013	(1.3)	(15.7)
Interest rate swaps mark to market revaluation	(0.0)	0.1
Net assets as at 31 March 2013	68.6	821.9

UK Commercial Property Trust Limited
Net Asset Analysis as at 31 March 2013	£m	%
Property Portfolio
Retail	516.1	62.8
Office	241.8	29.4
Industrial	195.1	23.7
Leisure	50.6	6.2
Total Property Market Value	1,003.6	122.1
Adjustment for lease incentives	(5.3)	(0.6)
Fair Value of Property Portfolio	998.3	121.5
Net Current Assets	68.4	8.3
Net Long Term Liabilities (incl swaps)	(244.8)	(29.8)
Total Net Assets as at 31 March 2013	821.9	100.0

Economic and Property Market Review

The year opened with continued uncertainty over the immediate prospects of economic recovery. The loss of the UK's AAA credit rating from Moody's, the inconclusive results of the Italian elections and the downgrading of the GDP growth forecasts all contrived to impart negative sentiment.  In contrast, however, there were some tentative early indicators of an economic recovery with preliminary Q1 GDP figures showing an increase of 0.3%, continued improvement in the UK equity market, and ongoing resilience in the employment market all being signs of a healthier economic outlook. Whilst the prospect of a triple dip recession has receded, it does appear that inflation will remain stubbornly above target and, with growth expected to be weak at least for the first half of the year, the economy looks set to experience a period of mild stagflation. 

This ongoing uncertainty was the major reason for capital value falls in the commercial property market for the first quarter of 2013, with the IPD Monthly Index recording a capital value fall of 0.6%, led by weakness in the retail sector. It should be highlighted however, that this fall was more modest than in the previous quarter.

Occupier weakness is undermining most property markets outside Central London, with investment in core assets continuing to dominate. Prime property values remain firm with competition remaining strong for those assets of the right quality. Although there has been evidence of increased risk appetite in the equity market, this has yet to manifest itself in the UK commercial property market although there is some emerging evidence of value added and opportunistic deals increasing in number whilst not yet improving values. The latest data suggests that investment volumes have held up in what is a traditionally a quieter period of the year with the ongoing theme of overseas investment dominating London and large out-of- town shopping centres along with some institutional and REIT interest in the latter.

Recent administrations involving Jessops, Blockbuster, Dreams and HMV have negatively impacted occupier and investment sentiment although the best retail locations, including Central London, continue to show strong rental growth justifying, for some, the keen pricing which prevails.

Retail warehouse values remain fairly resilient whilst there has been a lot of activity in the shopping centre market where investor appetite remains strong for prime shopping centres. Sentiment is improving for those secondary assets which offer asset management opportunities but it remains weak for poorer secondary or tertiary centres, where there has been an increase in sales from bank disposals or restructuring.

The office sector remains the strongest performer, although the sector remains highly segmented by region and quality, with positive rental growth in Central London continuing to support keener pricing. Both the City and West End markets continue to show strong performance - particularly the latter, with overseas investors continuing to exert a heavy influence on that market.

There are tentative signs of improvement in occupational and investment demand in certain core South East and Greater London office markets which has been supported by decreasing levels of supply of Grade A location in these markets.

There has not been much change to the investment and occupier activity in regional office markets with values still softening. There are however, tentative and modest signs of improvement in sentiment for good quality assets within certain city centres which are showing potential for rental growth as Grade A supply contracts.

Capital and rental values within the industrial sector remained broadly flat with pricing in prime assets holding firm. Multi-let industrial and logistics assets in particular are finding a market with some institutions, driven by the income return and diversification of risk that they offer.

Portfolio Performance

The independent portfolio valuation as at 31 March is £1,003.6 million, a like-for-like decline of 0.7% (Q4 2012 negative 1.2%) which is broadly in line with the  IPD benchmark Monthly Index, and before the portfolio's superior income return is taken into account.

Industrial

Industrial was the Company`s best performer during the quarter. The combined effects of stable yields and rental values boosted by the outcome of positive asset management at Dolphin Industrial Estate, Sunbury, resulted in an uplift in value within the Company's industrial holdings of 0.2% over the quarter (Q4 2012 negative 0.9%). 

Office

The Company's Central London office holding once again delivered positive capital growth and was the source of the biggest valuation uplift in the portfolio with an increase of 2.3%.

As has previously been the case, the office sector offered the widest divergence in performance across markets as evidenced by the contrasting valuation falls in the Regional and South East portfolio, which continued to see outward yield shift and, in some isolated cases, a weakness in rents.  The combined effect was to deliver a modest fall of 0.2% across the office portfolio (Q4 2012 negative 0.5%).

Retail

The Company's retail holdings remain the principal drag on performance with an overall fall in valuation of 1.4% (Q4 2012 negative 1.7%). As identified above our shopping centre and Rest of UK High Street holdings both remain a source of disappointing performance with the loss of income, weakening rents and continued outward yield shift, all resulting in a  2.8% fall in the value of shopping centres and a 2.1% fall in the Rest of UK High Street Retail.

The rebasing of rents and outward yield shift in some of the Company's retail warehouse investments were the main drivers for a 1.5% fall in that sub-sector, although we are currently undertaking a number of initiatives in order to limit this decline and generate value later in the year.

A positive factor within the retail portfolio is the performance of the Company's London retail assets, where a combination of successful rent review settlements and sharpening of yields based on recent transactions resulted in a 0.7% increase in value for the Company's South East retail holdings.

Leisure

Repeating the trend seen in the previous the quarter and in common with the market, the value of the Company`s single Leisure asset held firm. It benefits from a robust income yield and performed well over the period.

Income

There continues to be maximum effort and focus on the maintenance and retention of income within the Company's portfolio.  The first quarter of the year is traditionally a quieter period for transactions and as a consequence, retail income fell over the quarter, particularly as a number of seasonal lettings expired. 

At Dolphin Industrial Estate, Sunbury, conditional contracts have been exchanged with one of the Company's principal tenants which involves the restructuring of the existing lease arrangements. This will ensure the tenant`s continued occupation within larger accommodation, resulting in an 27.8% increase in rental income and a five year extension of the lease term.

The Company's void position as at 31 March was 5.0%, a modest uplift from the 4.8% in December 2012.  Allowing for tenant failures through administrations, the void rate would increase to 7.7%. However, it should be highlighted that administrations do not always equate to a loss in income.  Both figures remain comfortably below the benchmark void rate of 9.9%.

Sales

On 31 January 2013 the Company sold 2/8 Buchanan Street, Glasgow for £10.45m which was in line with valuation.  The property was one of the smallest in the UKCPT portfolio and its disposal is in line with the Company's strategy to sell smaller, lower yielding properties and to reduce its exposure to the high street retail sector. The sale also crystallised a strong return on the investment, which had achieved an average return of 7.7% per annum since its acquisition by UKCPT in July 2010.

Market Outlook and Forecast

We expect to see a modest improvement in total return for 2013 although we anticipate that capital values will remain under pressure in many markets such as High Street Retail which, with the exception of Central London, continues to face structural changes in the retail sector and lower levels of income growth.

The economic climate remains challenging and property fundamentals of lease events and active management will drive investment performance with income returns continuing to be the fundamental driver of commercial property total returns. Ignis's most recent forecast for all property total return in 2013 is 5.8% with annualised total returns for the next three years (2013 - 2015) of 7.2%, which represents a modest reduction from previous figures.

It is anticipated that the divergences between both prime and secondary and London and the rest of the country will continue. However, many commentators feel that these will begin to narrow throughout 2013.  There are already emerging signs of an increased appetite from certain investors for "good" secondary properties, particularly where asset management skills can be employed to extract perceived latent value.

The Company's focus continues to be on income and the management of risk across a strong, well diversified portfolio which we believe offers the best defence in these uncertain times. The portfolio expiry profile does offer the prospect of some income enhancing initiatives even in a market with selective occupier demand, which will counteract the forecast increase in voids in the short term. 

Sector Analysis

	Portfolio Value as at 31 Mar 2013 (£m)	Exposure as at 31 Mar	Capital Value Shift	Capital Value Shift (£m)
		2013 (%)	(%)
External valuation at 31 December 2012				1,021.2
Retail	516.1	51.5	-1.4	-7.1
High St - South East		9.4	0.7	0.7
High St- Rest of UK		2.8	-2.8	-0.8
Shopping Centres		14.4	-2.1	-3.1
Retail Warehouse		24.9	-1.5	-3.9
Offices	241.8	24.0	-0.2	-0.4
West End		9.5	2.3	2.2
South East		4.4	-2.2	-1.0
Rest of UK		10.1	-1.5	-1.6
Industrial	195.1	19.5	0.2	0.4
South East		12.6	0.4	0.6
Rest of UK		6.9	-0.3	-0.2
Leisure/Other	50.6	5.0	0.0	0.0
Sale of Buchanan Street, Glasgow				-10.5
External valuation at 31 March 2013	1003.6	100.0	-0.7	1,003.6

The Board is not aware of any further significant events or transactions which have occurred between 31 March 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 UKCPT website at www.ukcpt.co.uk.

 

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