UK Commercial Property REIT Limited
(an authorised closed-ended investment company incorporated in
Guernsey with registration number 45387)
LEI Number: LEI number: 213800JN4FQ1A9G8EU25
(The “Company” or “UKCM”)
19 April 2024
FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2023
UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM) which owns a £1.25 billion diversified portfolio of high-quality income-producing UK commercial property and is managed and advised by abrdn, announces its final results for the year ended 31 December 2023.
Productive portfolio management and weighting to structurally supported sectors driving earnings growth
Asset management generating earnings growth
Values stable with continued outperformance from diversified portfolio
Investing in future earnings growth
Disciplined Capital Allocated
1 Excludes Cineworld non cash adjustment announced in Q2 2023 results.
2 Benchmark: MSCI UK Balanced Portfolios benchmark to 31 December 2023
3 Calculated under AIC guidance, as gross borrowings less cash divided by portfolio value.
For further information please contact:
Will Fulton / Jamie Horton / Peter Taylor, abrdn
Via FTI consulting
Richard Sunderland / Emily Smart / Andrew Davis, FTI Consulting
Tel: 020 3727 1000
UKCM@fticonsulting.com
The Company's Annual Report and Accounts for the year ended 31 December 2023 will shortly be available to view on the Company's corporate website at https://www.ukcpreit.com/en-gb/literature/. The Documents have also been submitted to the National Storage Mechanism and are available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
PERFORMANCE SUMMARY
CAPITAL VALUES AND GEARING | 31 December 2023 | 31 December 2022 | % Change |
Total assets less current liabilities (excl Bank loan) £’000 | 1,259,579 | 1,327,405 | -5.1% |
IFRS Net asset value (£’000) | 1,023,247 | 1,035,719 | -1.2% |
Net asset value per share (p) | 78.7 | 79.7 | -1.3% |
Ordinary Share Price (p) | 62.0 | 58.4 | 6.2% |
Discount to net asset value (%) | (21.2) | (26.7) | n/a |
Gearing (%)*: | 17.2 | 20.0 | n/a |
|
|
|
|
| 1 year % return | 3 year % return | 5 year % return |
TOTAL RETURN |
|
|
|
NAV † | 3.0 | 2.5 | 1.7 |
Share Price † | 13.1 | 6.6 | (4.7) |
UKCM Direct Portfolio | 3.9 | 9.3 | 12.0 |
MSCI Balanced Portfolios Quarterly Property Index | (1.9) | 3.7 | 4.3 |
FTSE Real Estate Investment Trusts Index | 11.6 | (1.1) | 8.3 |
FTSE All-Share Index | 7.9 | 28.1 | 37.7 |
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| 31 December 2023 | 31 December 2022 |
|
EARNINGS AND DIVIDENDS |
|
|
|
Net profit / (loss) for the year £’000 | 31,708 | (222,329) |
|
Adjusted EPRA Earnings per share (p) | 3.35 | 3.15 |
|
IFRS Earnings per share (p) | 2.44 | (17.11) |
|
Dividends declared per ordinary share (p) | 3.40 | 3.25 |
|
Dividend Yield (%)# | 5.5 | 5.6 |
|
MSCI Benchmark Yield (%) | 5.1 | 4.8 |
|
FTSE Real Estate Investment Trusts Index Yield (%) | 4.5 | 4.6 |
|
FTSE All-Share Index Yield (%) | 4.0 | 3.6 |
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ONGOING CHARGES AND VACANCY RATE |
|
|
|
As a % of average net assets including direct property costs | 1.5 | 1.2 |
|
As a % of average net assets excluding direct property costs | 0.9 | 0.8 |
|
Vacancy rate (%) | 4.0 | 2.0 |
|
* Calculated, under AIC guidance, as gross borrowings less cash divided by portfolio value.
† Assumes re-investment of dividends excluding transaction costs.
# Based on dividend paid in 2023 of 3.40p and the share price at 31 December 2023.
Sources: abrdn, MSCI
CHAIR’S STATEMENT
Dear Shareholder,
I am pleased to present the UKCM Annual Report for the year to December 2023.
The Board can report that the UK market has recovered a little of the poise that was lost in the steep decline in commercial property values experienced in the second half of 2022. The MSCI UK Quarterly property index recorded a –1.0% total return for the year; a marked improvement from the –9.1% of 2022.
To set the scene for this muted performance, the Bank of England (BoE) aggressively raised interest rates through the first half of 2023 before settling at 5.25% in their August 2023 meeting, (and where they remain at the time of writing). The UK’s Consumer Price Index (CPI), measuring inflation, declined over the calendar year from a peak of 10.4% in February 2023 to 4.0% by December 2023.
In such a context, with interest rates rising as inflation was falling, the Government’s 10-year Gilt has been relatively volatile. Starting from a yield as low as 1.13% at the beginning of January 2022, it peaked at around 4.5% in September that year, and then declined to around 3.0% by February 2023. The later months of the year have seen gilt yields rise back and surpass that September 2022 peak, hitting 4.75% in August 2023. At the time of writing, the 10-year Gilt has fallen back to a yield of around 4.3%, but the generally increasing rate environment of 2023 has made it a difficult backdrop for values to move ahead strongly, especially as GDP growth has remained lacklustre.
The improvement in property returns recorded in 2023 (whilst still overall negative) was led by the industrial and living sectors, both of which posted positive total returns for the year, counterbalancing the office sector which continued its decline as thematic headwinds remained. The lack of uniformity across the sectors has been notable and offered opportunities for diversified portfolio managers to orientate toward those sectors which would prospectively perform well.
The industrial market rebounded from a bruising second half of 2022, posting a positive annual total return of 4.1% by the end of the year according to the MSCI Quarterly Index. Yields stabilised so that capital value growth levelled out on an annual basis at the All Industrial level at –0.4%. London and the Southeast posted
total returns of 3.2% and 4.0% respectively, and all regions posted positive capital value changes on an annual basis. Market rental growth has decelerated from the positive growth seen in 2022 as levels of supply and demand became more balanced.
The retail sector posted an annual total return of –0.1% to December 2023 according to the MSCI Quarterly Index. The sector enjoyed something of a year of two halves, with a relatively robust total return of 2.2% in the first half but reducing again in the second half as the cost-of-living pressures cemented themselves in consumer psychology. Consequential consumer spending habits and structural changes in the market continue to influence performance. Typically, value-conscious consumers have propelled discount retailers to the forefront of UK retail sales and much of the recovery was influenced by strong performance within the high-yielding shopping centres and resilient retail warehousing sub-sectors, with the latter posting consistent month-on-month rental growth over the year.
The office sector continued to underperform, delivering an annual total return of –10.2% to December 2023 according to the MSCI Quarterly Index. Weakening capital values led this decline, with the deterioration accelerating over 2023 as the Bank of England raised interest rates. An uneven performance
across the sector was experienced as London West End offices were substantially stronger at –2.4% total annual return than the –13.9% and –15.4% for the City of London and wider Southeast respectively. Market rental value growth was also uneven with Midtown and West End offices leading the pack with an annual 4.8% and 4.4% respectively, compared to 2.4% for the year for all offices.
The alternatives sector, or ‘Other’ as categorised by MSCI, saw an annual total return of –0.3% over 2023. Notable within these returns were a resilient living sector, benefitting from a supply demand imbalance. Purpose Built Student Accommodation (PBSA) delivered strong total returns of 2.7%, with a return of 1.4% delivered solely in Q4. Elsewhere, the hotel market reversed its recent fortunes in the face of sustained cost of living pressures and delivered above All Property total returns at 0.8% to December 2023.
2024 has started with a renewed confidence and whilst ‘caution’ is the watchword, the market is displaying the hallmarks of producing a positive annual return for the year which would be welcomed by many. The Real Estate Investment Trust market is seen by some as a leading indicator of the direct market, and share prices have moved ahead in recent months, triggered by clear anticipation of an improving macroeconomic
picture and the consequent potential for corporate transaction activity. The direct property market is expected to follow later in the year and should continue to improve into 2025 if lower interest rates result from inflation stabilising. At the time of writing, oil and commodity prices are rising which suggests the path to lower interest rates and uninterrupted economic growth might not be straightforward.
In such a diverse out turn across sectors, assets and regions, the Company’s managers have done well to record a relatively strong positive total return, meaningfully exceeding the MSCI Benchmark index for the year.
Portfolio and Corporate Performance
Earnings Growth – the Company delivered a net £4.9 million p.a. increase in rental income from active asset management (excluding lease incentive adjustments) and three development completions (243,000 sq ft) during the year.
Interest costs have been managed carefully and the company has shown considerable balance sheet discipline. For example, during the year, the Company sold an industrial asset in Wembley at 3.49% initial yield and paid down its revolving credit facility (RCF) which had an interest cost of approx. 7.2% hence significantly enhancing net earnings on this sum.
Dividend cover on adjusted EPRA earnings for 2023 was 99% with an expectation of this improving later in 2024 as asset management initiatives come through.
Year | Adjusted EPRA EPS |
2021 | 2.65 pence per share |
2022 | 3.15 pence per share |
2023 | 3.35* pence per share |
*Excluding non-cash Cineworld adjustment announced in Q2 2023 results
NAV Stability – Valuations stabilised following the aggressive market repricing in the final quarter of 2022, recording a -1.2% net asset value movement in 2023. Taking into account the positive earnings for the year, the Company’s NAV total return was 3% for the year.
The Board continued to authorise capital expenditure throughout the year to invest in assets that would drive future earnings growth. The majority of capital was utilised to progress the Company’s Hyatt hotel development in Leeds which is expected to generate a 7.25% yield on cost when it completes later this year, and which should contribute to enhanced earnings for the company overall.
| Pence per share |
Opening Net Asset Value 31 December 2022 | 79.7 |
Gross Valuation movement | 1.3 |
Capital Expenditure | (2.3) |
Net revenue | 3.4 |
Quarterly dividends paid | (3.4) |
Closing Net Asset Value 31 December 2023 | 78.7 |
Disciplined Balance Sheet Management – Mindful of the uncertain macroeconomic and geopolitical environment at the current time, the Company continues to maintain a prudent approach to debt to allow it to maintain a robust balance sheet. Gearing remains low relative to UKCM’s peer group at 17.2% (2022:20.0%) across its three debt facilities, as calculated using AIC methodology.
All debt covenants are well covered and there is an additional £330 million of unencumbered property which provides further significant headroom and flexibility with respect to the Company’s covenant package.
UKCM consequently had financial resources of £91 million available at the end of the year, after allowing for future capital commitments and the February 2024 dividend. The bulk of these resources relate to the Company’s reduced RCF which is currently a relatively expensive form of debt and so only likely to be deployed if a compelling and accretive opportunity arises.
Blended Group Loan to Value | 17.2%* |
Blended period to maturity | 4.7 years |
Weighted cost of drawn debt | 3.56% |
Drawn debt at fixed rate | 84% |
*Calculated under AIC guidance
As mentioned, the combination of balance sheet and asset management has led to a property performance of 3.9% total return from UKCM’s high quality portfolio, which represents a strong 1-year outperformance of 5.8%. against the MSCI benchmark. UKCM’s Board and Manager are pleased to report long-term outperformance of the property portfolio against the MSCI Benchmark over all the traditional time periods of 1, 3,5 and 10 years as shown below.
| UKCM | Benchmark |
1 Year | 3.9% | -1.9% |
3 Years (% p.a.) | 3.0% | 1.2% |
5 Years (% p.a.) | 2.3% | 0.9% |
10 Years (% p.a.) | 6.0% | 5.4% |
Since Inception (% p.a.) | 4.7% | 3.9% |
Source :- MSCI
Portfolio Activity
Further details on all investment transactions and significant lettings during 2023 are outlined in the Annual Report and Accounts which is available to view on the Company's corporate website at https://www.ukcpreit.com/en-gb/literature/
Post the December 2023 year end, at the end of January 2024, the Company completed the sale of its Craven House offices in London’s West End for £22 million at December 2023 valuation, representing a 4.6% net initial yield. The Company believes that the benefits of recycling sale proceeds to reduce floating rate debt costing 7.2% at this time outweighed the planning risk and capital expenditure that would have been required to generate future rental growth from the asset.
Furthermore, at the end of February 2024, the Company completed the sale of its Temple Quay office in Bristol for £14.5 million, in line with the year end December 2023 valuation. Although well located in Bristol, the property was close to the end of its economic life with a short lease remaining. The Investment Manager worked on many options but concluded that the property would require a significant injection of capital to rejuvenate the asset, which, together with planning risk and a redevelopment period would have resulted in an extended period of no income.
Dividends
The Company paid four interim dividends totalling 3.40 pence per share during the period. This represents an 4.6% increase in ordinary distributions over the year, a level which was 99% covered. Positive initiatives in hand within the portfolio are anticipated to give the Board an opportunity to keep this dividend level under review in 2024.
Environmental, Social and Governance (“ESG”)
The Board fully appreciates the importance of embedding ESG within our ways of working, and ESG considerations underpin every Board discussion and decision. Whilst taking ESG seriously is of critical importance to the world in general, the Board believes that it also plays a critical role in both protecting and creating future value for the company’s portfolio, and that the Board’s focus on ESG at the company and asset level will lead to enhanced income for shareholders.
Real estate has a very large role to play in our environment, and the Company has previously announced two significant Net Zero Carbon targets following a bottom-up asset-level review across the entire portfolio. By 2030, we aim to achieve Net Zero Carbon for landlord operational emissions and extend this to all emissions by 2040. These targets are in advance of the UK Government’s target of 2050. Further details on all targets are outlined in the ESG Report.
I would like to thank my fellow Board members and the Investment Manager for their considerable commitment to the company over the reporting year, and it has been gratifying to see the share price improve markedly to the benefit of shareholders over this time.
Recommended all-share combination
On 21 March 2024, the Company announced they had reached agreement on the terms of a recommended all-share combination with Tritax Big Box REIT plc (“BBOX”) pursuant to which BBOX will acquire the entire issued and to be issued ordinary share capital of the Company (the "Combination").
The Combination is conditional on, among other things, the approval of the Company's shareholders at a Court Meeting and a General Meeting to be held on 2 May 2024.
For full details of the Combination, please refer to the scheme document published by the Company on 9 April 2024, available through the Company's website at ukcpreit.com/en-gb/merger
Peter Pereira Gray
Chair
19 April 2024
DIRECTORS’ RESPONSIBILITY STATEMENT
The Directors are responsible for preparing the Annual Report and the Group Consolidated Financial Statements in accordance with applicable Guernsey law and those International Financial Reporting Standards (“IFRS”) as adopted by the European Union. They are also responsible for ensuring that the Annual Report includes information required by the Rules of the FCA.
In preparing those Group Consolidated Financial Statements the Directors are required to:
The Directors confirm that they have complied with the above requirements in preparing the Group Consolidated Financial Statements.
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain, the Group’s transactions and disclose with reasonable accuracy at any time, the financial position of the Group and enable them to ensure that the Group Consolidated Financial Statements comply with The Companies (Guernsey) Law 2008.
The Directors are responsible for ensuring that the Group complies with the provisions of the Listing Rules and the Disclosure Rules and Transparency Rules of the FCA which, with regard to corporate governance, require the Group to disclose how it has applied the principles, and complied with the provisions, of the AIC Code on Corporate Governance applicable to the Group.
The maintenance and integrity of the Company’s website is the responsibility of the Directors through its Investment Manager; the work carried out by the auditors does not involve considerations of these matters and, accordingly, the auditors accept no responsibility for any change that may have occurred to the Consolidated Financial Statements since they were initially presented on the website. Legislation in Guernsey governing the preparation and dissemination of the consolidated financial statements may differ from legislation in other jurisdictions.
On behalf of the Board
Peter Pereira Gray
Director
19 April 2024
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME |
| ||
For the year ended 31 December 2023 | |||
|
| Year ended 31 December 2023 £’000 | Year ended 31 December 2022 £’000 |
INCOME |
|
|
|
Rental income |
| 66,602 | 66,930 |
Service charge income |
| 6,229 | 6,451 |
Loss on investment properties |
| (8,451) | (263,090) |
Loss on liquidation of subsidiaries |
| - | (117) |
Total income / (expense) |
| 64,380 | (189,826) |
EXPENDITURE |
|
|
|
Investment management fee |
| (6,738) | (8,617) |
Direct property expenses |
| (6,911) | (6,266) |
Service charge expenses |
| (6,229) | (6,451) |
Other expenses |
| (2,832) | (2,299) |
Total expenditure |
| (22,710) | (23,633) |
Operating profit / (loss) before finance costs |
| 41,670 | (213,459) |
FINANCE COSTS |
|
|
|
Finance costs |
| (11,189) | (9,181) |
Interest income |
| 1,227 | 311 |
Net finance costs |
| (9,962) | (8,870) |
Operating profit / (loss) after finance costs |
| 31,708 | (222,329) |
Net profit / (loss) from ordinary activities before taxation |
|
31,708 |
(222,329) |
Taxation on profit/(loss) on ordinary activities |
| - | - |
Net profit / (loss) for the year |
| 31,708 | (222,329) |
|
|
|
|
Total comprehensive income / (deficit) for the year |
| 31,708 | (222,329) |
|
|
|
|
Basic and diluted earnings per share |
| 2.44p | (17.11)p |
Adjusted EPRA earnings per share |
| 3.35p | 3.15p |
The accompanying notes are an integral part of this statement, these are available to view on the Company's corporate website at https://www.ukcpreit.com/en-gb/literature/
All of the profit and total comprehensive income for the year is attributable to the owners of the Company. All items in the above statement derive from continuing operations.
CONSOLIDATED BALANCE SHEET |
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As at 31 December 2023 | |||
|
| Year ended | Year ended |
|
| 31 December 2023 £’000 | 31 December 2022 £’000 |
NON-CURRENT ASSETS |
|
|
|
Investment properties |
| 1,179,527 | 1,275,610 |
|
| 1,179,527 | 1,275,610 |
CURRENT ASSETS |
|
|
|
Investment properties held for sale |
| 44,068 | - |
Trade and other receivables |
| 42,125 | 52,648 |
Cash and cash equivalents |
| 22,115 | 30,861 |
|
| 108,308 | 83,509 |
Total assets |
| 1,287,835 | 1,359,119 |
CURRENT LIABILITIES |
|
|
|
Trade and other payables |
| (28,256) | (31,714) |
|
| (28,256) | (31,714) |
NON-CURRENT LIABILITIES |
|
|
|
Bank loans |
| (236,332) | (291,686) |
|
|
|
|
Total liabilities |
| (264,588) | (323,400) |
Net assets |
| 1,023,247 | 1,035,719 |
REPRESENTED BY |
|
|
|
Share capital |
| 539,872 | 539,872 |
Special distributable reserve |
| 538,451 | 542,472 |
Capital reserve |
| (55,076) | (46,625) |
Revenue reserve |
| - | - |
Equity shareholders’ funds |
| 1,023,247 | 1,035,719 |
Net asset value per share |
| 78.7p | 79.7p |
The accompanying notes are an integral part of this statement, these are available to view on the Company's corporate website at https://www.ukcpreit.com/en-gb/literature/
The accounts were approved and authorised for issue by the Board of Directors on 19 April 2024 and signed on its behalf by:
Peter Pereira Gray
Director
|
|
Share Capital | Special Distributable Reserve |
Capital Reserve |
Revenue Reserve | Equity shareholders’ funds |
| £’000 | £’000 | £’000 | £’000 | £’000 | |
At 1 January 2023 |
| 539,872 | 542,472 | (46,625) | - | 1,035,719 |
Total comprehensive income |
| - | - | - | 31,708 | 31,708 |
Dividends paid |
| - | - | - | (44,180) | (44,180) |
Transfer in respect of loss on investment property |
|
- | - | (8,451) | 8,451 | - |
Transfer from special distributable reserve |
| - | (4,021) | - | 4,021 | - |
As 31 December 2023 | 539,872 | 538,451 | (55,076) | - | 1,023,247 |
|
|
Share Capital | Special Distributable Reserve |
Capital Reserve |
Revenue Reserve | Equity shareholders’ funds |
| £’000 | £’000 | £’000 | £’000 | £’000 | |
At 1 January 2022 |
|
539,872 |
568,891 |
216,465 |
- |
1,325,228 |
Total comprehensive deficit |
| - | - | - | (222,329) | (222,329) |
Dividends paid |
| - | - | - | (67,180) | (67,180) |
Transfer in respect of loss on Investment property |
|
- |
- | (263,090) | 263,090 |
- |
Transfer from special distributable reserve | - | (26,419) | - | 26,419 | - | |
As 31 December 2022 | 539,872 | 542,472 | (46,625) | - | 1,035,719 |
The accompanying notes are an integral part of this statement, these are available to view on the Company's corporate website at https://www.ukcpreit.com/en-gb/literature/
CONSOLIDATED CASH FLOW STATEMENT |
| ||
For the year ended 31 December 2023 | |||
|
| Year ended | Year ended |
|
| 31 December 2023 £’000 | 31 December 2022 £’000 |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
Net profit/(loss) for the year before taxation |
| 31,708 | (222,329) |
Adjustments for: |
|
|
|
Loss on investment properties |
| 8,451 | 263,090 |
Loss on liquidation of subsidiaries |
| - | 116 |
Movement in lease incentives |
| (4,451) | (2,360) |
Movement in provision for bad debts |
| 1,876 | 256 |
Decrease in operating trade and other receivables |
| 13,098 | 219 |
(Decrease) / Increase in operating trade and other payables |
| (3,458) | 4,016 |
Net Finance costs |
| 9,962 | 8,870 |
Net cash inflow from operating activities |
| 57,186 | 51,878 |
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
Purchase of investment properties |
| (225) | (8,304) |
Sale of investment properties |
| 73,664 | 25,609 |
Capital expenditure |
| (29,707) | (48,517) |
Net cash inflow/(outflow) from operating activities |
| 43,732 | (31,212) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
Facility fee charges from bank financing |
| (828) | (727) |
Dividends paid |
| (44,180) | (67,180) |
Bank loan repaid |
| (68,000) | (10,000) |
Bank loan drawdown |
| 12,500 | 53,000 |
Bank loan interest paid |
| (9,609) | (7,166) |
Loan facility set up costs |
| (744) | (164) |
Interest income |
| 1,227 | 311 |
Net cash outflow from financing activities |
| (109,664) | (31,926) |
|
|
|
|
Net decrease in cash and cash equivalents |
| (8,746) | (11,260) |
|
|
|
|
Opening cash and cash equivalents |
| 30,861 | 42,121 |
|
|
|
|
Closing cash and cash equivalents |
| 22,115 | 30,861 |
REPRESENTED BY |
|
|
|
Cash at bank |
| 16,066 | 21,321 |
Money market funds |
| 6,049 | 9,540 |
|
| 22,115 | 30,861 |
The accompanying notes are an integral part of this statement, these are available to view on the Company's corporate website at https://www.ukcpreit.com/en-gb/literature/
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: 01481 745001
Fax: 01481 745051
Will Fulton / Jamie Horton / Peter Taylor, abrdn
Via FTI consulting
Richard Sunderland / Emily Smart / Andrew Davis, FTI Consulting
Tel: 020 3727 1000
UKCM@fticonsulting.com