RNS Number : 0806C
UK Commercial Property Trust Ltd
26 April 2012
Net Asset Value/ Interim Management Statement
for the three month period from 1 January 2012 to 31 March 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 31 March 2012 and unaudited quarterly Net Asset Value ("NAV") as at 31 March 2012.
-- NAV per share* as at 31 March 2012 was 74.1p (31 December 2011: 75.5p) reflecting the ongoing challenging market conditions;
-- The portfolio is now valued at GBP1,067.2million. This represents a like-for-like decrease of 0.9% in the quarter before capital expenditure. This decrease was partially mitigated by movements in swap valuations in the quarter;
-- The Company intends to declare a first interim dividend, in respect of the period from 1 January 2012 to 31 March 2012, of 1.3125p per Ordinary Share, with ex-dividend and payment dates of 9 May 2012 and 31 May 2012 respectively;
-- Based on an annual dividend of 5.25p and the share price as at 31 March 2012 of 72.3p, the Company's shares yield 7.3%, which compares favourably to the IPD Monthly All Property Initial Yield of 6.2% and the FTSE All-Share Index yield of 3.5%;
-- Over five years to the end of March 2012, the Company has produced a NAV total return of 1.1% and share price total return of -2.9%. This compares favourably to the -8.7% total return on the IPD Monthly Index and -55.5% total return on the FTSE Real Estate Investment Trusts Index over the same period.
-- In February 2012 UKCPT announced the purchase of a portfolio of multi-let industrial properties, covering three locations, for GBP63.5 million (including costs and stamp duty) at an overall initial yield of 7.3%, funded by a further GBP60 million drawdown of Barclays loan facility;
-- Successful asset management initiatives include :
o Positive rent review settlements at Kew Retail Park, Richmond, and at an industrial warehouse holding at Neasden will provide around GBP145,000 p.a. uplift;
o Lease surrender and re-let to Poundworld at St George`s Retail Park, Leicester, providing GBP209,000 income p.a. and an uplift of GBP50,000 from the previous lease terms.
o Resolution to grant planning consent from Shropshire Council for the proposed New Riverside redevelopment in Shrewsbury and signing of a pre-let agreement with anchor tenant Debenhams for the creation of a 95,000 sq ft department store.
-- The void position of the portfolio as at 31 March 2012 was 4.1% (31 December 2011: 3.4%) which compares favourably to the monthly IPD equivalent of 10.1% underlining the quality nature of the portfolio. The increase in the quarter was mainly due to the expiry of seasonal lettings.
Christopher Hill, Chairman of UKCPT, commented:
"Our results for the first quarter show a resilient performance, in a market that continues to be characterised by low transaction volumes as well as pressure on rental levels and valuations. In spite of these challenges, the quality of our portfolio and our team's expertise in hands on asset management has allowed us to continue our longer term outperformance of the broader market.
"Although signs of economic recovery remain muted, we do see reasons for cautious optimism, and have seen some evidence of an increasing appetite for risk from some property investors, although the limited availability of funding may constrain this to a certain extent."
*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 2012. It does not include provision for any unpaid dividends for the periods prior to 31 March 2012 i.e. the proposed dividend for the period to 31 March 2012.
The NAV per share at 31 March 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).
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 2012 to 31 March 2012.
UK Commercial Property Trust Limited Per Attributable
Share Assets (GBPm)
Net assets as at 1 January 2012 75.5 903.9
Unrealised decrease in valuation of property
portfolio (0.9) (9.9)
Capital expenditure during the period (0.4) (4.6)
Income earned for the period 1.5 18.1
Expenses for the period (0.4) (5.2)
Dividend paid on 28 February 2012 (1.3) (15.7)
Interest rate swaps mark to market revaluation 0.1 0.9
Net assets as at 31 March 2012 74.1 887.5
UK Commercial Property Trust Limited
Net Asset Analysis as at 31 March 2012 GBPm %
Retail 560.5 63.2
Office 258.1 29.1
Industrial 198.1 22.3
Leisure 50.5 5.7
Total Property Market Value 1,067.2 120.3
Adjustment for lease incentives (4.8) (0.5)
Fair Value of Property Portfolio 1,062.4 119.8
Net Current Assets 35.5 3.9
Net Long Term Liabilities (210.4) (23.7)
Total Net Assets as at 31 March 2012 887.5 100.0
The total expense ratio of the Company for the period ended 31 March 2012, based on the average net assets as at 31 March 2012 and on the basis of annualised expenses, was 0.84%. For the purposes of this calculation, "expenses" includes the costs of running the Group, including the investment management fee, administration fees, Directors' fees, insurance costs, Board costs, registrar costs and any irrecoverable VAT, but excludes finance costs, capital expenditure and refurbishment and irrecoverable property running costs.
Economic and Property Market Review
Despite some encouraging economic data, fears over a double-dip recession have been realised with GDP figures showing the economy contracted by 0.2% in the first quarter of the year. Following on from the recently downgraded figure for the previous quarter of -0.3%, the UK economy is now officially back in recession presenting the Government with a number of problems. The recent Budget was broadly neutral from a fiscal viewpoint and seems to have been supported by the capital markets due to pro-growth measures such as the cut in corporation tax and increase in personal allowances. However, with unemployment generally on an upward trend, especially among the younger element of the workforce, the chancellor of the exchequer has limited room for manoeuvre to stimulate growth due to the ongoing public sector deficit. In addition the Eurozone crisis remains a major challenge to the recovery of the UK and global economies, as demonstrated by market reaction to the auction of Spanish government bonds undertaken on 4 April which resulted in a sharp rise in Spanish borrowing costs as the auction came in at the lower end of a targeted range. It is hoped that the healthy nature of corporate balance sheets will translate into a source of investment to drive the economy forward. However, until confidence returns, the UK economy will remain fragile as is most evident in consumer markets with retail sales being erratic and a number of retail administrations being reported.
The weak economy is continuing to undermine the UK commercial property market. The IPD Monthly Index recorded a total return of 0.9% over Q1 2012, which represented the lowest level of performance since the market turned positive in the middle of 2009. Income returns remained stable at 1.6% whilst average capital values declined by 0.7%, their fifth consecutive monthly fall. The decline in capital values can be attributed, principally, to negative sentiment reflected in a modest increase in yields which reduced capital values by 0.5%. Average rental values across the market reported a modest decline of 0.1% in Q1, although it should be noted that they stabilised in March.
Retail under-performed the other broad sectors with a quarterly total return of 0.5%, which trailed comparable figures for offices and industrial assets of 1.1% and 1.3% respectively. Retail market falls in both yield and rental values reflected weakening occupier and investor demand for all but prime properties. Shopping Centre values witnessed the most acute decline.
Office markets outside Central London were also hampered by weak occupational demand as a result of sluggish regional economic growth exacerbated by Government austerity measures.
Industrial markets, characterised by the higher income component, were the most stable over the quarter although not without some regional variations as certain provincial markets experienced a softening of rental values.
There is a degree of inertia in the investment market, with investors holding core assets as uncertainty prevails. Although there is some evidence of a few investors showing an increasing appetite for risk, this is still restricted by the availability of debt, with new lending to property reducing over the quarter.
The portfolio valuation experienced a modest fall of -0.9% (before capital expenditure) with a like for like valuation of GBP1,006.9 million. The portfolio as a whole was valued at GBP1,067.2 million.
In common with the wider market, retail was the worst performing sector within the portfolio with a 1.4% fall in capital values. The most notable decline was from the Company`s shopping centre holdings with a 3.0% fall, caused mainly by the softening of both yields and rental values but also as a consequence of a reduction in income levels. These characteristics were also evident within the high street portfolio, with a 2.3% fall primarily from the provincial high street portfolio, albeit this sub-sector only represents 4.2% of the portfolio. The Company`s retail warehouse holdings continue to be the most resilient element of the retail portfolio but have nevertheless witnessed a small reduction in valuation (-0.8%) from a slight outward movement in bulky goods yields. The full impact of this was, however, partly mitigated through asset management initiatives, which are highlighted further in the income review.
The Company`s office portfolio continued to mirror the wider market and the opposing dynamics of Central London and the rest of the country resulting in an overall 1.0% fall in value. West End office holdings held their value whilst South East offices showed the most significant fall, given the shorter income in these particular properties. The Company`s offices throughout the regions remain resilient, with a modest 0.6% fall in values, and are expected to remain ahead of benchmark.
The Company`s industrial portfolio was the strongest performer over the quarter. Yields maintained their levels with a further boost to the already high income return through a rent review increase in one of the Company`s South East properties highlighted below in the income section. Overall, the industrial sector increased in value by 0.4%. The resilience of the industrial sector at a portfolio and market level, thanks to its high income component, is encouraging, particularly as the Company has increased its exposure to that sector over the quarter.
Actual rental income for the portfolio experienced a 2.2% fall over the quarter from GBP18.5million to GBP18.1million although annualised income has increased from GBP68.3million to GBP71.6million, mainly through acquisitions. The fall in quarterly income was primarily as a result of leases not renewed at expiry, particularly in one specific case within the Company`s South East office portfolio, but it also reflected the finalisation of administrations involving, in particular, TJ Hughes and Priceless Shoes within the shopping centres. In most cases the properties affected by administrations have been re-let.
The implications of the high profile administrations of both Peacocks and Blacks are not expected to have a material impact on the Company`s retail portfolio. Although negotiations continue with the relevant parties, it is expected that income will be preserved, either through continued occupation by the new owners or from other retailers on assignment.
Although there have been some positive rent review settlements at Kew Retail Park, Richmond, and at one of the Company`s industrial warehouse holdings at Neasden, which between them will provide around GBP145,000 p.a. uplift, the full impact of these rental increases will not be enjoyed until the next quarter. This is also the case with the income resulting from a lease surrender and re-letting at St George`s Retail Park, Leicester where a letting to Poundworld will provide GBP209,000 income p.a. (following a rent free period) and create a new rental tone for the park. The full benefit of the income from February's multi let portfolio purchase will also feature more fully in next quarter's figures
The Company`s void position as at the end of the quarter was 4.1% of annualised income (3.4% in December 2011) or 6.4% (4.2% in December 2011) including units held in administration, although, as mentioned previously, it is anticipated that not all income will be lost from those leases affected by administrations.
The Company completed the acquisition of a multi let Industrial portfolio for GBP60.4million (7.3% net income yield after costs) on 17 February 2012. The purchase involved three individual locations at Emerald Park, Bristol, Gatwick Gate, Crawley and Motor Park, Portsmouth. The purchase price was met from a GBP60million drawdown of the Barclays facility, leaving GBP30million of the GBP150million facility still available and revised gearing of 18.2%. The purchase has provided the Company with the opportunity to increase its exposure to the multi-let industrial sector with strong income characteristics offering clear potential to build on the rental income through hands on asset management.
Linked to the above, the Company took out a further GBP20 million interest rate swap instrument at a rate of 1.89%, resulting in the interest rates on all debt facilities now being fully hedged and a weighted average interest rate across the debt facilities of 4%.
The Company also announced on 19(th) April that Shropshire Council had resolved to grant planning consent for the Company's proposed New Riverside redevelopment in Shrewsbury and signed a pre-let agreement with anchor tenant Debenhams for the creation of a 95,000 sq ft department store.
This follows a consultation process with the Council and a wide range of local stakeholders, culminating in the Company's application in January to transform its three existing shopping centres into a single, combined centre called New Riverside. The GBP150 million regeneration project will include the demolition of the existing Riverside centre and the construction of a new 225,000 sq ft centre that will be integrated with the Darwin and Pride Hall centres and provide stronger links to the town centre.
In addition to the 95,000 sq ft department store, there are plans for 50 new shops, 10 restaurants, offices and car parking; combined, the enlarged centre will extend to 480,000 sq ft and continue to represent the principal retail focus for the town.
There were no sales over the quarter.
The economic predictions which underpin Ignis property forecast models continue to suggest that the South East and London will out-perform. Over-renting must be factored into pricing and, being one of the principal risk metrics, will impact on valuations for years to come.
We expect investor demand will remain for prime assets across the broad sector of property types given the right size and location - pricing will however, remain keen. The gap between prime and secondary assets is expected to remain, although the discount on secondary has started to attract some experienced buyers and it is expected that the yield gap between property and long term gilts will also generate buyer demand.
Performance in 2012 will be hit by weakness in the retail sector and over-priced City properties with our Manager's most recent forecast for the market predicting 5.1% total return for 2012, dominated by income returns. Over the longer term, however, the expectation is for property to deliver solid real returns over a three year period of closer to 7.0% p.a.
Exposure Capital Capital
% Value Shift Value
as at (%) Shift
31 Mar 2012 GBPm
External Valuation at 1 Jan
Retail 55.7 (1.4) (7.9)
High St - South East 9.4 0.0 0.0
High St- Rest of UK 4.2 (2.3) (1.0)
Shopping Centres 15.8 (3.0) (4.9)
Retail Warehouses 26.3 (0.8) (2.0)
Offices 25.6 (1.4) (2.7)
West End 9.0 0.0 0.0
South East 5.7 (3.6) (2.1)
Rest of UK 10.9 (0.5) (0.6)
Industrial 13.7 0.4 0.5
South East 9.1 0.6 0.5
Rest of UK 4.6 0.0 0.0
Leisure 5.0 1.1 0.6
Adjustments for acquisitions:
Emerald Park, Emersons Green,
Gatwick Gate, Crawley
Motor Park, Portsmouth
External valuation at 31 Mar
2012 100.0 (0.9) 1067.2
The Board is not aware of any further significant events or transactions which have occurred between 31 March 2012 and the date of publication of this statement which would have a material impact on the financial position of the Company.
Robert Boag / Graeme McDonald, Ignis Investment Services Limited
Tel: 0141 222 8000
Stephanie Highett / Richard Sunderland/Will Henderson, FTI Consulting,
Tel: 020 7831 3113
The above information is unaudited and has been calculated by Ignis Investment Services Limited.
26 April 2012
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