UK Commercial Property REIT Ltd - Half Year Results

Guernsey:  19 September 2019

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

INTERIM RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2019

UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM) which is managed and advised by Aberdeen Standard Investments and owns a diversified portfolio of high quality income-producing UK commercial property announces its interim results for the half year ended 30 June 2019.

Financial Highlights – Positive returns delivered with low gearing

• NAV total return of 1.9% (30 June 2018: 12.2%) achieved with low relative net gearing of 16.2% as property portfolio continued to outperform benchmark.
• 19% increase in EPRA Earnings per share to 1.70p compared to the same period last year, as income accretive acquisitions and successful asset management boosted earnings, equating to dividend cover of 92% for the six months.
• Debt refinancing in February 2019 achieved the following:
• Increased maturity profile of debt from 4.1 years to 8.5 years
• Increased flexibility of debt through revolving credit facility
• Increased quantum of debt available by £50 million
• Decreased cost from 2.89% to 2.78%
• Up to £90 million available for investment being the unutilised portion of the Company’s low cost, flexible, revolving credit facility.

Portfolio Highlights – Continued portfolio outperformance delivered by a reversionary portfolio which is overweight to favoured industrial sector

• Portfolio total return of 2.1% ahead of MSCI IPD benchmark total return of 1.2% as strategic overweight position in industrial sector (now 48% of portfolio by value) and successful asset management initiatives continued to drive performance.
• £5.2 million of annualised income, after rent free periods, secured through a number of successful asset management initiatives that boosted earnings and captured longer term, secure income.
• High occupancy rate of 92.5% with over half of remaining vacancy in well located industrial properties.
• Net initial yield on portfolio of 4.2% with reversionary yield of 5.2% highlighting opportunity to grow earnings by capturing future reversion.
• 99% of rent collected within 21 days underlining the continued strength of the tenant base

Commenting on the results, Andrew Wilson, Chair of UKCM, said:

“The Company’s strategy to create a diverse commercial portfolio continues to produce sustainable, high quality rental income, and has once again outperformed the benchmark in the first half of this year. A successful debt refinancing in February provides greater flexibility and firepower whilst the refreshed investment policy enables further potential investment into alternative sectors. With a high quality portfolio of assets located throughout the UK, a strong balance sheet and the lowest gearing amongst the Company’s peer group, UKCM is well positioned to add value to its property portfolio and enhance returns for its shareholders.” 

Will Fulton, Lead Manager of UKCM at Aberdeen Standard Investments added:

“Successful asset management initiatives and high tenant occupancy across the portfolio has created value while providing reliable income to shareholders, ensuring positive results for UKCM during the period. Our portfolio’s strategic weighting towards industrial is now up to 48% and we continue to reduce our exposure to the retail sector. Following the change in our investment policy earlier this year, we are now looking to explore attractive investment opportunities in alternative sectors, while upholding our ability to recycle capital into high quality assets that are well positioned to deliver growing and sustainable income.”

For further information:

Will Fulton/Graeme McDonald, Aberdeen Standard Investments
Tel: [phone] 245 3151

Richard Sunderland /Claire Turvey/Eve Kirmatzis, FTI Consulting
Tel: [phone]

PERFORMANCE SUMMARY

CAPITAL VALUES AND GEARING		30 June 2019	31 December 2018	% Change
Total assets less current liabilities (excl Bank loan & swap) £’000		1,468,879	1,462,982	0.4
Net asset value £’000		1,211,335	1,212,619	(0.1)
Net asset value per share (p)		93.2	93.3	(0.1)
Ordinary share price (p)		88.5	83.2	6.4
Discount to net asset value (%)		(5.0)	(10.8)	n/a
Gearing (%):  Net*                         Gross**		16.2 17.7	14.6 17.1	n/a n/a
TOTAL RETURN	6 month % return	1 year % return	3 year % return	5 year % return
NAV †	1.9	2.5	21.7	47.1
Share Price †	8.3	4.7	39.2	34.3
UKCM Property portfolio	2.1	3.3	23.3	50.1
MSCI IPD Balanced Monthly and Quarterly Funds Benchmark	1.2	3.9	20.5	51.3
FTSE All-Share Real Estate Investment Trusts Index	9.7	(5.2)	13.6	24.5
FTSE All-Share Index	13.0	0.6	29.5	35.8
EARNINGS AND DIVIDENDS		30 June 2019	30 June 2018
EPRA Earnings per share (p)		1.70	1.43
Dividends declared per ordinary share (p)		1.84	1.84
Dividend Yield (%) ***		4.2	4.2
IPD Benchmark Yield (%)		4.7	4.7
FTSE All-Share Real Estate Investment Trusts Index Yield (%)		4.5	3.9
FTSE All-Share Index Yield (%)		4.1	3.6

*        Calculated as net borrowings (gross borrowings less cash) divided by total assets less cash and current liabilities.
**  Calculated as gross borrowings divided by total assets less current liabilities.
†    Assumes re-investment of dividends excluding transaction costs.
***                Based on an annual dividend of 3.68p and the share price at 30 June.

Sources: Aberdeen Standard Investments, MSCI Investment Property Databank (“IPD”)

Chair’s Statement

In my final statement as your Chair I am pleased to report that UK Commercial Property REIT Limited (“UKCM”) continues to make significant progress against a background of political and economic uncertainty. The Company delivered a NAV total return of 1.9% in the six months to June 2019. This performance was driven by a £1.46 billion property portfolio which continues to outperform its benchmark primarily as a result of its industrial weighting and following a number of successful asset management initiatives. UKCM also delivered double digit percentage growth in its EPRA earnings, assisted largely by the positive contribution from the high quality industrial portfolio acquired by the Company in December 2018. As referenced in its Annual Report, the Company also completed a successful debt refinancing in the first quarter of this year that increased the flexibility of the Company’s overall debt profile. Finally, UKCM also received shareholder approval to expand its investment policy, providing flexibility to consider appropriate opportunities from a wider universe of alternative real estate sectors that have evolved and matured since the Company was formed.

Portfolio Performance & Activity

The property portfolio generated a total return of 2.1% in the six month period, well in excess of the 1.2% total return delivered by the Company’s benchmark. This outperformance was driven by a 5.2% total return from the Company’s industrial assets (benchmark return: 3.4%) which now represent 48% by value of the total portfolio.  A major contributor to this return was the pre-letting of a 180,000 square feet industrial unit in Wembley, North London to an international e-commerce provider. The lease is for 10 years and is index-linked. The letting secured long term income, increased capital value and removed a potentially significant void. The Company’s office portfolio also outperformed. It generated a total return of 3.0% compared to the benchmark return of 2.1%, boosted by another successful asset management initiative at our holding in Hemel Hempstead. The Company was not immune to the ongoing travails of the retail market, with the use of company voluntary arrangements, the impact of online retail on high street performance and the increasingly negative sentiment to this sector regardless of individual property fundamentals. These factors contributed to a total return of -2.4% (benchmark: -2.2%). It should, however, be noted that the Company’s retail portfolio is predominantly in well located, high demand areas demonstrated by a number of lettings undertaken in this sector over the period. Most notable was a new 20 year index-linked lease with Aldi, for a 27,000 sq.ft. unit at Great Lodge Retail Park, Tunbridge Wells, which was formerly sub-let by B&Q to Toys  R Us. As well as securing longer term income from a high quality tenant and thereby increasing the capital value of this asset in the second quarter, UKCM also negotiated a substantial surrender premium from B&Q, further boosting earnings in the period.

Looking back on the Company’s track record, it is pleasing to see that of the leases due for expiry in the 12 months to 30 June 2019, 81% of rental income was renewed with the existing tenants or let to new tenants thereby avoiding void periods.

At a time when investment activity in the market is muted, the key driver of performance will be through successful asset management initiatives. The examples above are a selection of those which demonstrate UKCM’s ongoing ability to extract latent value from such initiatives across all sectors. Over half the Company’s low 7.5% vacancy (as at 30 June 2019) is in well located industrial units that should provide opportunities to secure longer term rental income.

Corporate Performance

The 1.9% NAV total return is a solid return in an environment where there has been a decline in capital values for some assets and demonstrates the relative benefit of UKCM’s low gearing compared to other more highly leveraged vehicles. The share price total return for the period was 8.3%, as the discount at which the Company’s shares trade versus their net asset value narrowed from 10.8% at the end of December 2018 to 5.0% at 30 June 2019.

Over a five year term, the Company has performed well with a NAV total return of 47.1% and share price total return of 34.3%, both ahead of the FTSE All-Share REIT index of 24.5%. In addition, UKCM’s returns are ahead of the Investment Association Open Ended Funds UK Direct Property sector return of 29.6% over the same period.

Financial Resources

UKCM continues to be in a strong financial position with a NAV of over £1.1 billion and contracted annual rent of £71.3 million. This position has been further enhanced by the debt refinancing completed in February 2019 which achieved the following:

• Increased the maturity profile of the Company’s debt from 4.5 years to 8.1 years at end of June 2019;
• Increased flexibility of debt with 43% of the Company’s total debt facilities (£150 million) now in the form of a variable rate revolving credit facility (“RCF”);
• Increased resources available by securing additional debt of £50 million;
• Decreased the cost of the Company’s debt from 2.89% to 2.78% as at 30 June.

The Company currently has net gearing of 16.2% (gross gearing 17.7%) and remains one of the lowest geared companies in the REIT sector, which should position the Company well in the current property cycle. In addition, UKCM still has up to £90 million of low cost, flexible firepower being the undrawn element of the RCF, which can be used to take advantage of opportunities both at a portfolio and corporate level should they arise.

Earnings & Dividends

EPRA earnings per share grew by 19% to 1.70p for the six months compared to the same period last year. This was boosted by the £85.4 million Midlands industrial portfolio acquisition in December 2018 and the various earnings-accretive asset management initiatives successfully undertaken. This equates to dividend cover of 92% for the six months compared to 82% for the whole of 2018. As I highlighted in the 2018 annual report, one of the key objectives of the Board is to create sustainable earnings growth and it is pleasing to see this metric on an upward trajectory. While there will inevitably be fluctuations in earnings due to portfolio investment activity, the Company’s proven track record through its asset management activities, financial resources and reversionary portfolio should combine to ensure continued earnings momentum in the medium term. It is also fortunate in having a committed manager in Aberdeen Standard Investments focussed on delivering performance for UKCM.

The Company paid and declared dividends totalling 1.84p per share in the six month period to 30 June 2019. This equates to an annual dividend yield of 4.2% based on the period end share price of 88.5p. In the current economic and political environment, this represents an attractive income yield, underpinned by a prime portfolio and a strong tenant base that pays 99% of its rent within 21 days. Also worthy of note is that 18% of rents are now fixed or inflation-linked, a figure which should grow once our new lettings referred to earlier come on-stream.

Outlook

The UK economy continues to stagnate as Brexit uncertainty holds back corporate investment, thereby negatively impacting GDP growth. Our investment manager is forecasting GDP growth of 1.4% in both 2019 and 2020 in its base case, although it should be highlighted downside risks exist and leading indicators have weakened in recent months.

Given the macroeconomic environment, the UK commercial property market is holding up well with positive total returns still forecast. While investment volumes are considerably down compared to previous years, occupancy is generally high, apart from the much-publicised problems in the retail sector. Conversely, the industrial sector benefits from this trend as retailers move more of their business online, increasing the need for storage and distribution space. The property market continues to be underpinned by strong fundamentals: relatively high yields compared to other asset classes, limited development, high occupancy rates and, in most cases, controlled leverage.

The Board and I believe that against such a backdrop, UKCM is strategically well-positioned both at a portfolio and corporate level. The Company has a prime portfolio that is diversified by both sector and geography, but importantly is overweight in the industrial sector, which is anticipated to be the strongest driver of returns over the next three years. In addition, the portfolio is underweight to the retail sector, which it is anticipated will continue to have challenges. In terms of occupancy levels, UKCM has a proven track record of delivering successful asset management initiatives. Coupled with the fact that over half of the Company’s vacancies are in the industrial sector, this represents an opportunity to increase earnings in a portfolio that is reversionary in nature.

From a corporate perspective, the Company is financially strong with prudent, low cost, flexible gearing and significant financial resources available for future opportunities that can now be sourced from a wider pool of potential investments following the updating of the Company’s investment strategy to include additional real estate sectors. In addition, the Company’s earnings are also on an upward trajectory over the medium term as cash has been invested in assets that should generate long term, secure income. This is crucial given that sustainable income will be the main component of returns in the current phase of the property cycle.

I believe that UKCM, which continues to be one of the largest diversified REITs in the UK, is delivering on its strategy and should continue to do so with a Board of Directors and an Investment Manager who are committed to maximising shareholder value.

I would also like to take this opportunity to thank all our shareholders, advisors, other stakeholders and my fellow Directors for all their invaluable support during my tenure at UK Commercial Property REIT since its formation in 2006.  As I prepare to step down, I firmly believe your company is very well placed for the future and in very capable hands.

Andrew Wilson
Chair
18 September 2019

Manager’s Review

Market Commentary

Although UK GDP recorded robust growth in Q1, inventory building was key to this, as companies stockpiled resources ahead of the anticipated disruption to supply chains caused by a potential “cliff edge” withdrawal from the EU at the end of March. The eventual six-month extension to the Article 50 process averted this, but UK GDP was estimated to have fallen by -0.2% in Q2, amid the unwinding of stockpiling activity. As long as questions remain around the Brexit process, we expect business investment to remain subdued.

In spite of a relatively tight labour market, accommodative monetary policy and high corporate profit margins, inflation remains stubbornly low. Although the Bank of England has given hawkish signals, we expect interest rates to remain lower for longer if they are to support the backdrop of decelerating growth, particularly until greater clarity on the UK’s future relationship with the EU emerges. Indeed, we have taken very modest tightening cycles in the UK and the Eurozone out of our forecasts entirely, with the US Federal Reserve expected to cut interest rates twice this year and monetary policy easing also expected in most major economies. Low inflation globally, slowing growth and trade war uncertainty, on top of those more UK- specific risks, are pointing toward a longer period of ultra-low interest rates.

Commercial Property

According to MSCI IPD, UK real estate continued to deliver a positive total return of 1.2% for the first six months of 2019. While retail returns have been negative as expected, and have borne the brunt of the capital decline, growth in the industrial sector has moderated after a period of record capital value gains but remains positive, resulting in a 3.4% total return within MSCI IPD’s index over the six month period.

The second quarter has seen a fall in transaction activity to levels last seen in 2012. Overseas investors have been net sellers of the UK office market with Chinese capital controls now appearing to have a significant effect on global real estate markets. Although New York has perhaps borne the brunt of Chinese disinvestment, London is not immune, and there are indications that other global investors are displaying more caution towards London too, which could see London office pricing soften in the second half of the year.

Despite this, take-up in the office sector remains robust and central London take-up has recovered, following a muted period around the EU referendum, and is now back close to the high watermark set in 2015. However this is largely driven by flexible office providers; traditional take-up has been broadly flatlining since early 2016. The now roughly 20% of take-up accounted for by flexible office providers does not actually absorb supply, as it must all be re-let into the market and, importantly, at higher densities of occupation.

Regionally, office headline rents are steadily rising in the big six office markets, boosted by the trend towards consolidation among some of the largest corporate occupiers, as well as the public sector’s shift towards large regional hubs. Vacancy rates have been steadily falling in these markets since 2017, with high net absorption pushing rents on and virtually no new construction in the last two years. While supply has tightened, the economic backdrop is expected to negatively affect demand going forward and, therefore, rents. A similar dynamic has been playing out in office markets in the South East, although vacancy has not fallen as dramatically – indeed, demand has gravitated towards those sub-markets with critical mass and good infrastructure, such as Reading.

The retail sector has a very shallow pool of buyers tending to be opportunistic in nature with a large amount of stock being quietly marketed. The lack of demand in the occupier market and uncertainty about where rental values will settle mean investors are, in many retail sub-sectors, demanding discounts to valuation. The share price discount to net asset value for listed stocks with a high retail weighting provides an indication of sentiment towards this sector which is catch all in nature and often ignores the underlying fundamentals of individual assets.

Furthermore, a wave of company voluntary arrangements (CVAs) in retail has put negative pressure on rental values in the sector, and on risk premia requirements, and so also on certain valuations.

Industrial demand, however, remains especially high in London and the South East, while logistics has had another strong start to the year with a number of significant lettings of speculatively developed space in core markets.

Portfolio Performance

It is pleasing to report outperformance for the first half, with a total return from the Company’s property portfolio of 2.1% versus 1.2% for its MSCI IPD benchmark. The table below breaks down this return by sector for the six month period to 30 June 2019; all valuations are undertaken by the Company’s external valuer, CBRE Ltd.

	Exposure		Total Return		Income Return		Capital Growth
			UKCM	Benchmark	UKCM	Benchmark	UKCM	Benchmark
			%	%	%	%	%	%
Office	16%	£234m	3.0	2.1	2.1	2.0	0.8	0.1
Industrials	48%	£701m	5.2	3.4	1.5	2.1	3.7	1.3
Retail	25%	£366m	-2.4	-2.2	3.0	2.7	-5.2	-4.7
Alternatives	11%	£158m	-1.3	2.7	2.5	2.2	-3.8	0.5
Total	100%	£1,459m	2.1	1.2	2.1	2.3	0.0	-1.1

Source: MSCI/IPD, Aberdeen Standard Investments
Assumes reinvestment of income in capital gain/loss

The main drivers of outperformance arose from a strategic overweight position to the industrial (including logistics distribution) sector which, from summer 2017, became the Company’s largest sector exposure; the Company benefited from both the scale of its weighting in this sector and the relative outperformance of its industrial assets. Meanwhile the Company’s retail and alternative* exposure acted as a brake on outperformance with the alternatives portfolio, historically weighted to leisure with an element of ex-growth rent (over- renting), posting negative capital growth. A similar result arose in retail where, despite the Company’s largest exposure to out of town retail warehouses outperforming its benchmark peer assets, it posted a relative decline when adding returns from the single shopping centre asset and south east shops.

The Company’s income profile continues to provide a stable and reliable element of the portfolio return, delivering 2.1% for the six month period against relatively constant portfolio occupancy over the period of 92%; positively over half of the remaining vacancy rests in well located industrial assets.

* The term commercial property generally refers to buildings or land intended to generate a profit, either from capital gain or rental income; over recent years the sectors understood to fall within this definition have broadened  to include additional sectors such as healthcare, student housing, hotels, car parks, pubs, petroleum and automotive, and the commercially-managed private residential rental sector, amongst others. Over the last five years these additional sectors have come to be regarded as mainstream and are commonly referred to in the property industry as “alternative sectors”.

Industrial

Of particular note, and turbo-charging the period’s industrial performance, was the Company’s new pre-letting of its distribution warehouse at Neasden, Wembley, to an international company for ten years. This will secure £2.7 million per annum in rental income, after completion of landlords’ works expected in the last quarter of this year, representing an approximate 30% increase from the rent payable up to March 2018 (after which the previous tenant was granted a temporary lease extension at a higher rent, £2.35 million per annum). This investment delivered a total return of 27% over the first six months of the year and was the best performing asset within the Company’s ownership for the period.

As anticipated the Company’s industrial portfolio delivered the strongest performance during the period where active management accelerated total returns to 5.2% against 3.4% for the benchmark. This performance was achieved despite this portfolio holding the Company’s largest vacancy, XDock377 logistics warehouse located at Magna Park, Lutterworth, one of the UK’s premier national distribution spots. Reinvigorated to a high specification in February 2019, the warehouse accounts for 40% of the Company’s total 7.5% vacancy measured by rental value. Interest from occupiers has been good and leasing remains a case of matching the warehouse to a particular requirement.

The Company’s portfolio has a strategic mix of ‘south-east / regional’ and ‘urban / non-urban’ strategic distribution in ratios of approximately 60:40 and 55:45 respectively; this balance of higher yielding ‘regional/ non-urban’ and stronger growth ‘south-east/ urban’, combined with opportunities for active asset management as demonstrated above, continues to position the Company well.

Office

The Company’s office portfolio also out-performed its benchmark, recording a total return of 3.0% v 2.1%; in fact all office sub- sectors within the portfolio out-performed, with the one exception of the Company’s last, low yielding London West End asset. Question marks over the prospects of the central London office market, as a result of political uncertainty and the large amount of space leased by WeWork (who by the nature of their business are a somewhat artificial tenant requiring ‘real’ occupiers to fill their space thus muddying potential vacancy rates), has led to the Company’s strategically underweight position in central London offices. It has only one investment in each of the West End and City markets accounting for a combined 5% of its total portfolio, both are fully let. Vacancy in the office portfolio sits at a relatively modest 7% and is focused in Birmingham and Reading, both locations experiencing significant infrastructure and public realm improvement with a subsequent rise in tenant demand.

Retail

Despite delivering the highest income return for the Company, 3.0% for the six month period versus the benchmark’s 2.7%, retail produced the weakest total return of the four principal commercial property sectors, broadly in line with the benchmark, recording -2.4% versus -2.2% respectively. When  analysing  attribution, two of the Company’s assets were the principal culprits for this performance. The Company’s one remaining shopping centre investment in Swindon, where an asset management plan has been completed to improve the attractiveness and liquidity of the asset. The other is one of the Company’s larger retail parks, Junction 27, Leeds, which, despite being adjacent to the draw of a large and successful regional Ikea store and being fully let, experienced a sentiment driven decline in rental value and softening yield.

Following a number of retail asset sales in recent years, the Company continues to have a strategically underweight position to the retail sector which represents 25% of its portfolio.

Alternatives

Within the alternatives sector, two leisure assets offset some of the strong industrial performance over the period. While still producing good income at 2.5% for the first six months (benchmark 2.2%) the assets, in Kingston-upon-Thames and Swindon, came under pressure from a combination of some over-renting, a number of restaurant CVAs and a resultant softening of yield. Overall performance was lacklustre at -1.3% v 2.7% for the benchmark. In isolation, the Company’s newer hotel investment in Newcastle-upon-Tyne saw both good capital and income returns.

Investment Activity

While the Company continues to look for suitable investment opportunities, it remains prudent in its approach and no purchases or disposals were undertaken in the period. Having completed an asset management plan the Company was able to sell its one remaining shopping centre, The Parade, Swindon. While the Company continues to look for suitable investment opportunities, it remains prudent in its approach and no purchases were undertaken in the period.

Successful debt refinancing further strengthens Balance Sheet

As the Chair has noted, the Company successfully restructured its debt facilities in February 2019 providing shareholders with greater ‘firepower’, flexibility, weighted maturity profile, and all at a lower cost whilst retaining one of the lowest gearing ratios in the Company’s peer group and the quoted REIT sector.

Asset management and leasing momentum underpinning performance

During the first half of the year the Company continued its drive to strengthen income streams, extend lease lengths and add value to the portfolio. A total of £5.2 million of annual income was secured after rent free periods and incentives from eighteen new leases and nine lease renewals/rent reviews. The Company’s portfolio now has 18% of its rent secured from leases with either inflation linked or fixed uplifts in rent.

Furthermore, it was pleasing to see that all open market rent reviews agreed during the period, with one exception, saw increases and settlements ahead of rental value.

Overall, occupancy of the portfolio remained relatively constant at 92% as at 30 June 2019, with over half the remaining vacancy in well located industrial assets with good prospects to increase occupancy.

Asset management highlights within the period included;

Pre-letting the entire 180,000 sq ft Wembley logistics distribution centre at Central Way, Neasden, ahead of the previous tenant, Marks & Spencer, moving out at the end of March 2019. The Company exchanged contracts for a new 10 year index-linked lease with an international business at a rent of £2.7 million per annum capturing and exceeding the property’s reversionary rental value. The new occupier is expected to take occupation in October 2019 following a comprehensive refurbishment by the Company, with work well underway on site.

After landlord works, completion of leases at St George’s Retail Park, Leicester, to Home Bargains securing £200,000 per annum under a new 15 year lease where they replaced Wickes on lease expiry, and four new 10 year leases to Wren Living, Tapi Carpets, Costa Coffee & Laura Ashley, generating £658,000 per annum after lease incentives. The new terrace and Costa ‘pod’ unit, together with reconfiguration of the park’s entrance to improve accessibility, greatly enhances shoppers’ experience.

81/85 George Street, Edinburgh, is now 100% occupied. This followed the letting of the third floor office suite on a 10 year lease, with a break option at year five, to a global information technology company at a rent of £304,399 per annum, in line with estimated rental value.

Reletting of an ex-Carpetright unit at Junction 27 Retail Park, Leeds, a prime retail destination adjacent to a large Ikea store, to Natuzzi for a 10 year term at a rent of £225,450 per annum in line with both ERV and the previous tenant’s rent.

Cineworld, Glasgow - Comic Enterprises, trading as The Glee Club, signed a new 15 year lease at a rent of £100,000 per annum, completing the asset management plan for this asset which is now 100% let on indexed leases with an average weighted lease length of over 30 years to earliest termination.

At the logistics Cargo Centre, Newton’s Court, Dartford a lease renewal completed with Veerstyle Limited which has entered into a new unbroken 10 year lease at a rent of £575,237 per annum. This represents a 31% increase over the previous rent passing of £440,000 per annum and in line with the ERV for the unit.

A new letting to Aldi took place on Great Lodge Retail Park, Tunbridge Wells, which took occupation of a 27,000 sq ft unit that was formerly occupied by Toys R Us under a sublease from B&Q. The Company negotiated a partial surrender of the space from B&Q, obtaining a substantial surrender premium in doing so, and simultaneously let the space to Aldi on a new 20 year lease, with a rent of £500,000 per annum after lease incentives, and incorporating five yearly rent reviews geared to RPI indexation with a collar and cap of 1% and 3% compounded annually. In contrast to the general retail warehouse market it was pleasing to see a capital value increase at this property as a result.

On the multi let M8 Interlink Estate, Glasgow, SPL Powerlines took occupation of No. 7 Kirkshaws Road on a new 10 year lease with a tenant only break option in year 5 at a rent of £88,416 per annum in line with ERV.

An important lease renewal took place with Hertfordshire County Council at the Apsley One office in Hemel Hempstead, where a new 10 year reversionary lease was entered into at an improved level of rent of £825,000 per annum. This showed an uplift of 36% from the previous rent of £607,068 per annum, 19% ahead of rental value. Liquidity of this asset is considerably improved as a result.

At the Company’s multi let industrial estate in Sunbury a rent review was settled with Trans Global Freight Management Ltd. This was secured at a new annual rent of £704,000 per annum, 16% ahead of ERV at the review date, and an uplift of £192,150 per annum on the previous passing rent.

Rent Collection, Voids and Leasing Tone

Tenant covenants are monitored on a quarterly basis. The Company collected rent efficiently with the last 12 months’ statistics showing 99% of rent was collected within 21 days of the due date, indicative of the quality of the Company’s tenant profile.

Environmental Social Governance (ESG)

The Company was proud to receive the GRESB European Sector Leader award in 2018 following a 9% annual improvement in its ESG KPIs and an EPRA Gold Award for improved reporting. Highlights included a 12% reduction in greenhouse gas emissions intensity and a 99% diversion of waste away from landfill. The Company is undertaking an ongoing feasibility into the use of Solar Photovoltaic Cells on the roofs of various industrial and retail properties and investigating the potential for biodiversity projects.

Investment Outlook

The UK economy continues to be affected by political and macroeconomic uncertainty which looks likely to persist in the near term, holding back growth. We have revised our GDP growth expectations downwards to 1.4% in both 2019 and 2020 in its base case, although downside risks exist and leading indicators have weakened in recent months.

Occupier markets are, overall, holding up relatively well with office demand being supported by the rapid expansion of flexible office providers and, in the regions, by corporate and public sector consolidation. The polarisation of retail is an ongoing trend and weaker locations are under increasing pressure, however, the twin engines of urbanisation and the rise of e-commerce continue to propel the industrial sector.

Whilst the investment market has slowed this year, and with political uncertainty causing many to adopt a cautious approach to investment, there remains considerable capital with potential for deployment attracted to UK real estate’s income yield and, retail sector aside, good occupational fundamentals.

Portfolio Strategy

Your Company aims to deliver an attractive level of income, together with the potential for capital and income growth, through investment in a diversified UK commercial property portfolio. Our strategy to achieve this combines investment, sales, and proactive asset management, including disciplined investment in existing stock where accretive.

Whilst we have had major successes in extending leases, removing risk, and reletting space our occupancy has remained similar over the last six months and our portfolio focus remains firmly on further increasing occupancy and generating income.

Having undertaken a number of portfolio transactions in 2018, and after refinancing and rearranging its debt, we have access to cash of £90 million from the Company’s revolving credit facility for new investment, after allowing for dividend and existing capital expenditure commitments.

Repositioning undertaken from 2015 has intentionally led to a strategic overweight position in the industrial/logistics sector, the Company’s largest exposure, which has outperformed through a mix of picking well located assets and successful asset management initiatives. Whilst the Company has successfully been reducing its retail exposure since 2015 we will continue to consider opportunities to make further disposals in the right circumstances. There is a delicate balance between declining value risk and what is becoming a better yielding sector – it is important to understand on an asset by asset basis the accurate rental value trajectory and have an appreciation of any ‘bonus’ value from a potential underlying use.

When looking to deploy cash resources we continue our focus on sustainable income streams that would be accretive to recurring dividend cover. We will consider funding the construction of ‘pre-let’ development property, where planning and leasing risk has been removed and we may benefit from an edge on pricing through our experience operating in this field. With the advantage of an enhanced investment policy allowing us to invest in the growing alternatives sector, we actively monitor opportunities for investments we believe will produce sustainable income and exhibit growth potential within the better yielding sub- sectors, and not necessarily through long leases. We are also increasingly alert to exploring opportunistic pricing through potential vendor distress in assets situated in vibrant economies with strong demographics; with political uncertainty seemingly nearing a crescendo as the path to Brexit evolves, we believe interesting opportunities may be available if, for example, owners require to increase liquidity quickly.

The Company is in good shape with, we believe, a sustainable income stream and potential to grow earnings, a good portfolio allocation weighted towards urban and regional industrial distribution with flexibility to expand into the growing alternatives sector, low gearing and a strong balance sheet with capital available to deploy.

Will Fulton
Fund Manager
18 September 2019

HALF YEARLY CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE HALF YEAR ENDED 30 JUNE 2019

		Half Year Ended 30 June 2019 (unaudited)	Half Year Ended 30 June 2018 (unaudited)	Year Ended 31 December (audited) 2018
	Notes	£’000	£’000	£’000
Revenue
Rental income		35,777	32,851	65,936
Service charge income		2,430	2,721	5,950
Gains on investment properties8	2	558	31,090	18,947
Interest income		152	263	510
Total income		38,917	66,925	91,343
Expenditure
Investment management fee2		(4,405)	(4,780)	(9,567)
Direct property expenses3		(2,381)	(1,515)	(3,569)
Service charge expenses		(2,430)	(2,721)	(5,950)
Other expenses3		(2,888)	(3,646)	(5,446)
Total expenditure		(12,104)	(12,662)	(24,532)
Operating profit before finance costs		26,813	54,263	66,811
Finance costs
Finance costs		(4,186)	(4,145)	(7,976)
Loss on derecognition of interest rate swap		(703)	-	-
		(4,889)	(4,145)	(7,976)
Net profit from ordinary activities before taxation		21,924	50,118	58,835
Taxation on profit on ordinary activities	9	-	(5,830)	(5,830)
Net profit for the period	4	21,924	44,288	53,005
Other comprehensive income to be reclassified to Profit or Loss
Net change in fair value of swap reclassified to profit and loss		703	-	-
(Loss)/Gain arising on effective portion of interest rate swap		(1)	972	1,388
Other comprehensive income		702	972	1,388
Total comprehensive income for the period		22,626	45,260	54,393
Basic and diluted earnings per share	3	1.69p	3.41p	4.08p
EPRA earnings per share		1.70p	1.43p	3.03p

HALF YEARLY CONDENSED CONSOLIDATED BALANCE SHEET
AS AT 30 JUNE 2019

	Notes	30 June 2019 (unaudited) £’000	30 June 2018 (unaudited) £’000	Year ended 31 December 2018 (audited) £’000
Non-current assets
Investment properties	2	1,404,363	1,403,690	1,430,851
Interest rate swap		-	-	166
		1,404,363	1,403,690	1,431,017
Current assets
Investment properties held for sale		36,275	-	-
Trade and other receivables		26,617	19,499	23,765
Cash and cash equivalents		26,851	84,080	43,505
		89,743	103,579	67,270
Total assets		1,494,106	1,507,269	1,498,287
Current liabilities
Trade and other payables		(25,227)	(29,252)	(35,139)
Interest rate swap		-	(867)	(868)
		(25,227)	(30,119)	(36,007)
Non-current Liabilities
Bank loan		(257,544)	(249,503)	(249,661)
Interest rate swap		-	(251)	-
		(257,544)	(249,754)	(249,661)
Total liabilities		(282,771)	(279,873)	(285,668)
Net assets	6	1,211,335	1,227,396	1,212,619
Represented by:
Share capital		539,872	539,872	539,872
Special distributable reserve		567,614	573,208	570,158
Capital reserve		103,849	115,434	103,291
Revenue reserve		-	-	-
Interest rate swap reserve		-	(1,118)	(702)
Equity shareholders’ funds		1,211,335	1,227,396	1,212,619
Net asset value per share		93.2p	94.5p	93.3p
EPRA Net asset value per share		93.2p	94.6p	93.4p

HALF YEARLY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE HALF YEAR ENDED 30 JUNE 2019

	Notes	Share Capital £’000	Special Distributable Reserve £’000	Capital Reserve £’000	Revenue Reserve £’000	Interest Rate Swap Reserve £’000	Equity Shareholders’ funds £’000
At 1 January 2019		539,872	570,158	103,291	-	(702)	1,212,619
Net profit for the period		-	-	-	21,924	-	21,924
Other comprehensive income		-	-	-	-	702	702
Total comprehensive income		-	-	-	21,924	702	22,626
Dividends Paid	7	-	-	-	(23,910)	-	(23,910)
Transfer in respect of gains on investment property		-	-	558	(558)	-	-
Transfer from special distributable reserve		-	(2,544)	-	2,544	-	-
At 30 June 2019		539,872	567,614	103,849	-	-	1,211,335
	Notes	Share Capital £’000	Special Distributable Reserve £’000	Capital Reserve £’000	Revenue Reserve £’000	Interest Rate Swap Reserve £’000	Equity Shareholders’ funds £’000
At 1 January 2018		539,872	583,920	84,344	-	(2,090)	1,206,046
Net profit for the period		-	-	-	44,288	-	44,288
Other comprehensive income		-	-	-	-	972	972
Total comprehensive income		-	-	-	44,288	972	45,260
Dividends Paid		-	-	-	(23,910)	-	(23,910)
Transfer in respect of gains on investment property		-	-	31,090	(31,090)	-	-
Transfer from special distributable reserve		-	(10,712)	-	10,712	-	-
At 30 June 2018		539,872	573,208	115,434	-	(1,118)	1,227,396
	Notes	Share Capital £’000	Special Distributable Reserve £’000	Capital Reserve £’000	Revenue Reserve £’000	Interest Rate Swap Reserve £’000	Equity Shareholders’ funds £’000
At 1 January 2018		539,872	583,920	84,344	-	(2,090)	1,206,046
Net profit for the year		-	-	-	53,005	-	53,005
Other comprehensive income		-	-	-	-	1,388	1,388
Total comprehensive income		-	-	-	53,005	1,388	54,393
Dividends Paid		-	-	-	(47,820)	-	(47,820)
Transfer in respect of gains on investment property		-	-	18,947	(18,947)	-	-
Transfer from special distributable reserve		-	(13,762)	-	13,762	-	-
At 31 December 2018		539,872	570,158	103,291	-	(702)	1,212,619

HALF YEARLY CONDENSED CONSOLIDATED CASH FLOW STATEMENT
FOR THE HALF YEAR ENDED 30 JUNE 2019

	Notes		30 June 2019 (unaudited) £’000	30 June 2018 (unaudited) £’000	Year ended 31 December 2018 (audited)       £’000
Cash flows from operating activities
Net profit for the period before taxation			21,924	50,118	58,835
Adjustments for:
Gains on investment properties	2		(558)	(31,090)	(18,947)
Movement in lease incentives	2		(3,718)	(1,328)	2,408
Movement in provision for bad debts			(74)	(545)	71
Decrease/(Increase) in operating trade and other receivables			940	(981)	(7,996)
(Decrease)/Increase in operating trade and other payables			(8,731)	4,543	4,571
Finance costs			4,186	3,737	7,976
Loss on derecognition of interest rate swap			703	-	-
Cash generated by operations			14,672	24,454	46,918
Tax paid			(1,778)	-	(1,010)
Net cash inflow from operating activities			12,894	24,454	45,908
Cash flows from investing activities
Purchase of investment properties	2		-	(46,572)	(156,030)
Sale of investment properties	2		1,156	75,481	171,928
Capital expenditure	2		(10,386)	(14,198)	(40,490)
Net cash (outflow)/inflow from investing activities			(9,230)	14,711	(24,592)
Cash flows from financing activities
Net proceeds from utilisation of bank loan			7,989	-	-
Dividends paid	7		(23,910)	(23,910)	(43,008)
Bank loan interest paid			(3,510)	(2,983)	(6,215)
Payments under interest rate swap arrangement			(184)	(635)	(1,031)
Swap breakage costs			(703)	-	-
Net cash outflow from financing activities			(20,318)	(27,528)	(50,254)
Net (decrease)/increase in cash and cash equivalents			(16,654)	(11,637)	(28,938)
Opening cash and cash equivalents			43,505	72,443	72,443
Closing cash and cash equivalents			26,851	84,080	43,505
Represented by:
Cash at bank			16,968	20,536	16,363
Money market funds			9,883	63,544	27,142
			26,851	84,080	43,505

The accompanying notes are an integral part of this statement.

NOTES TO THE ACCOUNTS

1.    ACCOUNTING POLICIES

The condensed consolidated financial statements have been prepared in accordance with International Financial Reporting Standard (‘IFRS’) IAS 34 ‘Interim Financial Reporting’ and, except as described below, the accounting policies set out in the statutory accounts of the Group for the year ended 31 December 2018.

The condensed consolidated financial statements do not include all of the information required for a complete set of IFRS financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2018, which were prepared under full IFRS requirements.

2.    INVESTMENT PROPERTIES

Freehold and Leasehold Properties	£’000
Opening valuation	1,430,851
Capital expenditure	10,386
Gain on revaluation to fair value	3,474
Disposal at prior year valuation	(355)
Adjustment for lease incentives	(3,718)
Total fair value at 30 June 2019	1,440,638
Less: reclassified as held for sale	(36,275)
Fair value as at 30 June 2019	1,404,363
Gain on Investment Properties at Fair Value Comprise
Valuation Gains	3,474
Movement in provision for lease incentives	(3,718)
Gain on disposal	802
	558

3.    BASIC AND DILUTED EARNINGS PER SHARE

The earnings per ordinary share are based on the net profit for the period of £21,924,000 (30 June 2018 net profit of £44,288,000) and 1,299,412,465 (30 June 2018: 1,299,412,465) Ordinary Shares, being the weighted average number of shares in issue during the period.

4.    EARNINGS

Earnings for the period to 30 June 2019 should not be taken as a guide to the results for the year to 31 December 2019.

5.    SHARES

As at 30 June 2019 the total number of shares in issues is 1,299,412,465 (30 June 2018: 1,299,412,465).

6.    NET ASSET VALUE

The net asset value per ordinary share is based on net assets of £1,211,335,000 (30 June 2018: £1,227,396,000) and 1,299,412,465 (30 June 2018: 1,299,412,465) ordinary shares.

7.    DIVIDENDS

PERIOD TO 30 JUNE 2019	Rate (pence per share)	£’000
2018 Fourth interim of 0.92p (PID: 0.775p, Ordinary dividend: 0.145p) paid  28 February 2019 (2017 Fourth Interim: 0.92p)	0.92	11,955
2019 First interim of 0.92p (PID: 0.92p) paid  31 May 2019 (2018 First Interim: 0.92p)	0.92	11,955
		23,910

8.    RELATED PARTY TRANSACTIONS

No Director has an interest in any transactions which are or were unusual in their nature or significant to the nature of the Group.

Aberdeen Standard Fund Managers Limited received fees for their services as investment managers. The total management fee charged to the Statement of Comprehensive Income during the period was £4,405,000 (30 June 2018: £4,780,000, which was received by Standard Life Investments (Corporate Funds) Limited) of which £2,217,000 (30 June 2018: £2,405,000) remained payable at the period end. In the prior period, the investment manager also received an administration fee of £50,000.

The Directors of the Company are deemed as key management personnel and received fees for their services. Total fees for the period were £184,000 (30 June 2018: £139,000) of which £Nil (30 June 2018: £Nil) was payable at the period end.

The Group invests in the Aberdeen Standard Investments Liquidity Fund which is managed by Aberdeen Standard Investments Limited. As at 30 June 2019 the Group had invested £9.8 million in the Fund (30 June 2018: £63.5 million). No additional fees are payable to Aberdeen Standard Investments as a result of this investment.

9.    TAXATION

TAXATION ON PROFIT ON ORDINARY ACTIVITIES COMPRISES	£’000
Net profit from ordinary activities before tax	21,924
UK corporation tax at a rate of 19 per cent	4,166
Effects of:
UK REIT exemption on rental profits and gains	(4,166)
Total tax charge	-

The Group operates as a UK REIT therefore, the income profits of the Group’s UK property rental business are exempt from corporation tax as are any gains it makes from the disposal of its properties, provided they are not held for trading or sold within three years of completion of development. The Group is otherwise subject to UK corporation tax at the prevailing rate.

As the principal company of the REIT, the Company is required to distribute at least 90% of the income profits of the Group’s UK property rental business. There are a number of other conditions that also are required to be met by the Company and the Group to maintain REIT tax status. These conditions were met in the period and the Board intends to conduct the Group’s affairs such that these conditions continue to be met for the foreseeable future.

10.  FINANCIAL INSTRUMENTS AND INVESTMENT PROPERTIES

The Group’s investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for income and capital growth from investing in a diversified UK commercial property portfolio.

Consistent with that objective, the Group holds UK commercial property investments. The Group’s financial instruments consist of cash, receivables and payables that arise directly from its operations and loan facilities.

The main risks arising from the Group’s financial instruments are credit risk, liquidity risk, market risk and interest rate risk. The Board reviews and agrees policies for managing its risk exposure. These policies are set out in the statutory accounts of the Group for the year ended   and remained unchanged during the period.

Fair value hierarchy

The following table shows an analysis of the fair values of investment properties recognised in the balance sheet by level of the fair value hierarchy:

Level 1:  Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the

measurement date.

Level 2                : Use of a model with inputs (other than quoted prices included in level 1) that are directly or indirectly observable market data.

Level 3: Use of a model with inputs that are not based on observable market data.

30 June 2019	Level 1 £’000	Level 2 £’000	Level 3 £’000	Total fair value £’000
Investment properties	-	-	1,440,638	1,440,638

The lowest level of input is the underlying yields on each property which is an input not based on observable market data.

The fair value of investment properties is calculated using unobservable inputs as described in the annual report and accounts for the year ended 31 December 2018.

The following table shows an analysis of the fair value of bank loans recognised in the balance sheet by level of the fair value hierarchy:

30 June 2019	Level 1 £’000	Level 2 £’000	Level 3 £’000	Total fair value £’000
Loan Facilities	-	270,660	-	270,660

The lowest level of input is the interest rate applicable to each borrowing as at the balance sheet date which is a directly observable input.

The fair value of the bank loans is estimated by discounting expected future cash flows using the current interest rates applicable to each loan.

30 June 2019	Level 1 £’000	Level 2 £’000	Level 3 £’000	Total fair value £’000
Trade and other receivables	-	26,617	-	26,617
Trade and other payables	-	(25,227)	-	(25,227)

The table above shows an analysis of the fair values of financial instruments and trade receivables and payables recognised at amortised cost in the balance sheet by level of the fair value hierarchy.

The carrying amount of trade and other receivables and payables is equal to their fair value, due to the short-term maturities of these instruments. Expected maturities are estimated to be the same as contractual maturities.

There have been no transfers between the levels of fair value hierarchy during the period.

11.  FINANCING

The Company has fully utilised the £100 million facility, which is due to mature in April 2027, with Barings Real Estate Advisers.

The Company has fully utilised the £100 million facility, which is due to mature in February 2031, with Barings Real Estate Advisers.

The Company has in place a £150 million revolving credit facility with Barclays Bank Plc of which £60 million (30  June 2018: £Nil) was utilised at the period end.

12.  SUBSIDIARY UNDERTAKINGS

The Company owns 100 per cent of the issued ordinary share capital of UK Commercial Property Finance Holdings Limited (UKCFH), a company incorporated in Guernsey, whose principal business is to hold and manage investment properties for rental income.

UKCFH owns 100 per cent of the issued ordinary share capital of UK Commercial Property Holdings Limited (UKCPH), a company incorporated in Guernsey, whose principal business is to hold and manage  investment properties for rental income. UKCFH owns 100 per cent of the issued share capital of UK Commercial Property GP Limited, (GP), a company incorporated in Guernsey, whose principal business  is to hold and manage investment properties for rental income. UKCFH also owns 100 per cent of the  issued share capital of UK Commercial Property Nominee Limited, a company incorporated in Guernsey,  whose principal business is that of a nominee company.

The Company owns 100 per cent of the issued share capital of UK Commercial Property Estates Holdings Limited (UKCPEH), a company incorporated in Guernsey, whose principal business is to hold and manage investment properties for rental income. UKCPEH Limited owns 100 per cent of the issued share capital of UK Commercial Property Estates Limited, a company incorporated in Guernsey, whose principal business is to hold and manage investment properties for rental income. UKCPEH also owns 100 per cent of Brixton Radlett Property Limited and UK Commercial Property Estates (Reading) Limited, companies incorporated in UK, whose principal business is to hold and manage investment properties for rental income.

UKCPT Limited Partnership, (GLP), is a Guernsey limited partnership. UKCPH and GP, have a partnership interest of 99 and 1 per cent respectively in the GLP. The GP is the general partner and UKCPH is a limited partner of the GLP.

In addition, the Group wholly owns four Jersey Property Unit Trusts (JPUTs) namely Junction 27 Retail Unit Trust, St Georges Leicester Unit Trust, Kew Retail Park Unit Trust, and Rotunda Kingston Property Unit Trust. The principal business of the Unit Trusts is that of investment in property.

13. POST BALANCE SHEET EVENTS

The Company has no post balance sheet events.

Principal Risks and Uncertainties

The Group’s assets consist of direct investments in UK

The Group’s assets consist of direct investments in UK commercial property. Its principal risks are therefore related to the UK commercial property market in general, but also the particular circumstances of the properties in which it is invested and their tenants. Other risks faced by the Group include those relating to strategy, investment & asset management, macroeconomics & finance, operations, regulation and shareholder engagement. These risks, and the way in which they are mitigated and managed, are described in more detail under the heading Principal Risks and Uncertainties within the Report of the Directors in the Company’s Annual Report for the year ended 31 December 2018 on pages 31 to 37. The Group’s principal risks and uncertainties have not changed materially since the date of that report and are not expected to change materially for the remaining six months of the Group’s financial year.

Statement of Directors’ Responsibilities in Respect of the Half Yearly Financial Report to 30 June 2019

We confirm that to the best of our knowledge:

The condensed set of half yearly financial statements have been prepared in accordance with IAS 34 “Interim Financial Reporting”, and give a true and fair view of the assets, liabilities, financial position and return of the Company.

The half yearly Management Report includes a fair value review of the information required by:

(a)   DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b)   DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the company during that period; and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board

Andrew Wilson
Chair
18 September 2019

End of announcement

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