Standard Life Investments Property Income Trust - Net Asset Value(s)

31 October 2018

STANDARD LIFE INVESTMENTS PROPERTY INCOME TRUST LIMITED (LSE: SLI)

LEI: 549300HHFBWZRKC7RW84

Unaudited Net Asset Value as at 30 September 2018

Key Highlights

Solid Performance

• Net asset value (“NAV”) per ordinary share was 91.4p (Jun 18 – 90.1p), a rise of 1.4%, resulting in a NAV total return, including dividends, of 2.8% for Q3 2018;

• The portfolio valuation increased by 1.7% on a like for like basis, whilst the IPD/MSCI Monthly Index rose by 0.4% over the same period.

Investment activity

• Purchase of an industrial unit close to Kettering. The property is let to an engineering company which has taken a new 20 year lease with five yearly indexed reviews. The purchase price of £8.1m reflects an initial yield of 7.15%.
• Purchase of an industrial unit at Cambuslang, near Glasgow for £5.03m reflecting a net initial yield of 7% and is fully let to Speedy Hire until June 2023.
• Post period end, sale of a vacant industrial unit in Oldham for £6.3m, 12% above the 30 June valuation.

Strong balance sheet with prudent gearing

• Prudent LTV* of 21.4% at the quarter end, one of the lowest in the Company’s peer group and the wider REIT sector.

Share Issues

• Strong demand for the Company’s shares in the quarter with 1.5m shares issued in the quarter raising proceeds of £1.4m at prices accretive to NAV.

Attractive dividend yield

• Dividend yield of 5.3% based on a quarterly dividend of 1.19p and the share price of 89.5p as at 26 October 2018 compares favourably to the yield on the FTSE All-Share REIT Index (4.3%) and the FTSE All Share Index (4.2%) as at the same date. 

*LTV calculated as Debt less cash divided by portfolio value

Net Asset Value (“NAV”)

The unaudited net asset value per ordinary share of Standard Life Investments Property Income Trust Limited (“SLIPIT”) at 30 September 2018 was 91.4p. The net asset value is calculated under International Financial Reporting Standards (“IFRS”).

The net asset value incorporates the external portfolio valuation by Knight Frank LLP at 30 September 2018.

Breakdown of NAV movement

Set out below is a breakdown of the change to the unaudited NAV calculated under IFRS over the period 1 July 2018 to 30 September 2018.

			Per  Share (p)				Attributable Assets (£m)		Comment
Net assets as at 1 July 2018			90.1				364.2
Unrealised increase in valuation of property portfolio			1.9				7.6		Like for like increase of 1.7% in property portfolio
Transaction costs, including SDLT on purchases			-0.2				-0.9		Acquisition costs at Kettering and Cambuslang
CAPEX in the quarter			-0.5				-1.8		Predominantly CAPEX at Kirkgate, Epsom
Net income in the quarter after dividend			-0.1				-0.2		Dividend cover of 95% in the quarter
Interest rate swaps mark to market revaluation			0.2				0.7		Decrease in swap liabilities in the quarter.
Share issues			0.0				1.4		NAV accretive issue of 1.5m shares in the quarter raising £1.4m
Net assets as at 30 September 2018			91.4				371.0
	European Public Real Estate Association (“EPRA”)*			30 Sep 2018				30 Jun 2018
	EPRA Net Asset Value			£371.2m				£365.0m
	EPRA Net Asset Value per share			91.5p				90.3p

The Net Asset Value per share is calculated using 405,865,419 shares of 1p each being the number in issue on 30 September 2018.

* The EPRA net asset value measure is to highlight the fair value of net assets on an on-going, long-term basis. Assets and liabilities that are not expected to crystallise in normal circumstances, such as the fair value of financial derivatives, are therefore excluded.

Investment Manager Commentary

The Company has 54% of the portfolio in the industrial / logistics sector, 28% in the office sector, 7% in Other (leisure and data centres), and 11% in retail, with strong diversification of asset and tenant base across all the sectors. We believe this allocation will continue to support ongoing outperformance against the benchmark.  Notably, despite the continued problems facing the retail sector, the Company has benefited from its low exposure to the sector. SLIPIT has seen two retail tenant failures in the last year, but both units are now under offer – indeed one of them has three parties in competition and a rental level the same as under the old lease.

Three investment transactions were contracted during the quarter; the purchase of an industrial facility close to Kettering let for 20 years with five yearly indexed reviews for £8.1m, reflecting a yield of 7.15%, and the purchase of a 61,000 sq. industrial unit close to Glasgow for £5.03m, reflecting a yield of 7% on the settlement of an outstanding rent review. After the quarter end the company completed the sale of a vacant industrial unit in Oldham, which had been the largest void for the last 18months. The sale price of £6.3m was nearly 13% above the 30 June valuation.

Q3 2018 should have been a quiet quarter for asset management – after all, there is so much noise about political turmoil, Brexit, trade wars and the outlook for the UK economy. The managers have, however, remained busy in ensuring tenants continue to have good quality accommodation that works for their businesses.  The managers completed six lease renewals / extensions with a rental value of £1.15million p.a. along with three smaller lettings totalling just under £200,000 p.a. SLIPIT also took a surrender of a short lease on some office accommodation in a multi-use asset in Westminster, (with a three month rent penalty), and simultaneously agreed to re-let the space on a new 10 year lease.

The reported vacancy rate actually increased over the quarter to 10.8% as the company had a lease expiry on a large logistics unit where the tenant vacated (representing 2.5% of the void); however the managers have already agreed terms to re-let the unit. In addition, since the quarter end, the void rate has reduced to 7.9% due mainly to the sale of Oldham referred to above.

Economic outlook

• The UK economy bounced back in the second quarter after a weak start to the year. However, at 0.4%, the recovery amounted to little more than a return to trend growth than making up for any ‘lost ground’.
• The recovery in real income growth has temporarily stalled as higher oil prices have pushed inflation higher. However, wage growth data surprised on the upside and improving household finances should help support spending, offset by the rebuilding of savings from very low levels.
• As expected, the Bank of England (BoE) increased interest rates by 25 basis points (bp) to 0.75% at the August meeting of the monetary policy committee. The BoE has highlighted rising unit labour costs (ULC) as a reason for more monetary tightening; it effectively thinks the ‘speed limit’ of the economy is much lower than in the past.
• Aberdeen Standard Investments (ASI) is of the view that the relationship between ULC and inflation is not always robust and are forecasting just one further 25 bp hike in rates in 2019.
• The manager’s Brexit base case is that a ‘no deal’ scenario will be averted but there are a number of very different ways in which this could happen. Nevertheless, the risk of ‘no deal’ has risen and is uncomfortably high with less than six months until the UK leaves the EU.

Occupier trends

• The Industrial sector remains comfortably the strongest part of the market in terms of occupier sentiment and fundamentals. While monthly MSCI data suggests a slowing in the rate of rental growth in August, the managers see no visible change in rental tension, with vacancy rates remaining exceptionally low.
• London office markets remain broadly static with uncertainty around Brexit regularly cited as a factor for occupiers.
• The trend is slightly more positive in the ‘big six’ regional office markets, with the modest but steady upward trajectory of rents continuing and the vacancy rate being gradually eroded.
• The retail sector continues to face significant long-term structural challenges that the modest rates of rental decline in the MSCI indices do not yet reflect. There are very few expansionary retailers away from the value end of the market.

Investment trends

• Early data on investment volumes by value for the third quarter suggest the lowest quarterly total in two years and substantially less than during the same quarter in 2017.
• Total returns on the MSCI Monthly Index have continued to slow, with equivalent yields rising modestly in August. Market sentiment is muted but, with relatively low levels of leverage in the market and robust income streams, there is little pressure to sell.
• In a similar vein to last quarter, investor preference in the listed sector continues to be tilted towards the income-orientated sectors. Industrial and alternatives are trading at varying levels of net asset value (NAV) premiums, while retail real estate investment trusts (REITs) remain at large discounts to NAVs. The London office names are still trading at a discount to NAV, reflecting the current level of uncertainty in the market.

Performance outlook

• From a top-down perspective, the managers expect existing industrial investments to deliver considerably stronger returns than retail and offices over the next three years, but accessing the yield component of those returns through new purchases is unrealistic given competitive bidding. They expect retail returns to be negative over the next three years, with rents declining and yields rising, but that dynamic is not uniform across the sector.
• Although there are clear differences in the outlook for the various sectors of Industrial, Office and Retail, the managers believe it is important to maintain a disciplined approach at asset level to invest in good quality assets that meet occupier needs.
   

Dividends

The Company paid total dividends in respect of the quarter ended 30 June 2018 of 1.19p per Ordinary Share, with a payment date of 31 August 2018.

Net Asset analysis as at 30 September 2018 (unaudited)

	£m	% of net assets
Office	135.2	36.4
Retail	50.0	13.5
Industrial	260.4	70.2
Other	33.4	9.0
Total Property Portfolio	479.0	129.1
Adjustment for lease incentives	-3.5	-1.0
Fair value of Property Portfolio	475.5	128.1
Cash	7.3	2.0
Other Assets	8.2	2.2
Total Assets	491.0	132.3
Current liabilities	-10.5	-2.8
Non-current liabilities (bank loans & swap)	-109.5	-29.5
Total Net Assets	371.0	100.0

Breakdown in valuation movements over the period 1 Jul 18 to 30 Sep 18

	Portfolio Value as at 30 Sep 2018 (£m)	Exposure as at 30 Sep 2018 (%)	Like for Like Capital Value Shift (excl transactions & CAPEX)	Capital Value Shift (incl transactions (£m)
			(%)
External valuation at 30 Jun 2018				458.0
Retail	50.0	10.5	-1.5	-0.8
South East Retail		2.5	-1.5	-0.2
Rest of UK Retail		0.0	0.0	0.0
Retail Warehouses		8.0	-1.5	-0.6
Offices	135.2	28.2	1.6	2.2
London City Offices		2.7	4.4	0.6
London West End Offices		2.9	1.1	0.2
South East Offices		18.5	1.6	1.4
Rest of UK Offices		4.1	0.0	0.0
Industrial	260.4	54.4	2.3	19.0
South East Industrial		15.3	1.4	1.0
Rest of UK Industrial		39.1	2.7	18.0
Other Commercial	33.4	6.9	1.8	0.6
External valuation at 30 Sep 2018	479.0	100.0	1.7	479.0

Top 10 Properties

	30 Sep 18 (£m)
Denby 242, Denby	15-20
Symphony, Rotherham	15-20
Chester House, Farnborough	15-20
The Pinnacle, Reading	10-15
Hollywood Green, London	10-15
New Palace Place, London	10-15
Timbmet, Shellingford	10-15
Marsh Way, Rainham	10-15
15 Basinghall Street, London	10-15
Atos,Birmingham	10-15

Top 10 tenants

Name	Passing Rent	% of passing rent
BAE Systems plc	1,257,640	4.8%
Technocargo Logistics Limited	1,242,250	4.7%
The Symphony Group PLC	1,080,000	4.1%
Timbmet Limited	799,683	3.0%
Bong UK Limited	756,620	2.9%
ATOS IT Services Ltd	750,000	2.8%
Ricoh UK Limited	696,995	2.6%
CEVA Logistics Limited	633,385	2.4%
GW Atkins	625,000	2.4%
Thyssenkrupp Materials (UK)Ltd	590,000	2.2%
Total	8,431,573	31.9%

Regional Split

South East	39.3%
East Midlands	17.1%
North West	12.4%
West Midlands	9.8%
North East	7.5%
Scotland	4.6%
South West	3.7%
London West End	2.9%
City of London	2.7%

The Board is not aware of any other significant events or transactions which have occurred between 30 September 2018 and the date of publication of this statement which would have a material impact on the financial position of the Company.

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 Investment Manager’s website which can be found at: www.slipit.co.uk

For further information:-

Jason Baggaley – Real Estate Fund Manager,  Standard Life Investments

Tel [phone] or [e-mail]

Graeme McDonald  - Real Estate Finance Manager, Standard Life Investments

Tel [phone] or [e-mail]

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Ltd

Trafalgar Court

Les Banques

St Peter Port

GY1 3QL

Tel: [phone]

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