Net Asset Value

31 July 2018

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

LEI: 549300HHFBWZRKC7RW84

Unaudited Net Asset Value as at 30 June 2018

Key Highlights

Solid Performance

• Net asset value (“NAV”) per ordinary share was 90.1p (Mar 18 – 89.4p), a rise of 0.8%, resulting in a NAV total return, including dividends, of 2.1% for Q2 2018;

• The portfolio valuation increased by 1.5% on a like for like basis, whilst the IPD/MSCI Monthly Index rose by 0.9% over the same period.

Investment activity

• Purchase of a Data Centre in Birmingham, let to a major operator for a term of 20 years, subject to a tenant only lease break in year 14 with capped RPI linked rental increases at an initial yield of 5.75%.
• Purchase of a multi let office and retail unit in the City of London, close to Bank and Moorgate stations. The purchase price of £12.15m represents an initial yield of 7% with a rental guarantee top up, and 4.7% without the top up.
• Post the period end 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%.

Strong balance sheet with prudent gearing

• LTV* of 19.0% and uncommitted cash of £10.3m at the quarter end with RCF of £35m also still available for investment in future opportunities.

Premium rating

• Continued strong demand for the Company’s shares with 1.25m shares issued in the quarter raising proceeds of £1.191m. As at 27 July 2018 the share price was 94.2p - a premium to the 30 June NAV of 4.6%.

Attractive dividend yield

• Dividend yield of 5.1% based on a quarterly dividend of 1.19p as at 27 July 2018 compares favourably to the yield on the FTSE All-Share REIT Index (3.9%) and the FTSE All Share Index (3.6%) 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 June 2018 was 90.1p. 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 June 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 Apr 2018 to 30 June 2018.

			Per  Share (p)				Attributable Assets (£m)		Comment
Net assets as at 31 Mar 2018			89.4				360.2
Unrealised increase in valuation of property portfolio			1.6				6.3		Mainly relates to like for like increase of 1.5% in property portfolio
CAPEX & purchase costs in the quarter			-0.6				-2.1		Predominantly  acquisition costs plus CAPEX on ongoing asset management initiatives
Net income in the quarter after dividend			-0.2				-1.0		Dividend cover for the quarter of 79%. Recent acquisitions and utilisation of uncommitted cash resources of £10m plus £35m RCF will allow the Company to move back towards a covered dividend.
Interest rate swaps mark to market revaluation			-0.1				-0.4		Increase in swap liabilities in the quarter
Share issues			0.0				1.2		NAV accretive issue of 1.25m shares in the quarter raising £1.19m
Net assets as at 30 Jun 2018			90.1				364.2
	European Public Real Estate Association (“EPRA”)*			30 Jun 2018				31 Mar 2018
	EPRA Net Asset Value			£365.0m				£360.7m
	EPRA Net Asset Value per share			90.3p				89.5p

The Net Asset Value per share is calculated using 404,365,419 shares of 1p each being the number in issue on 30 Jun 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

During the first half of 2018 we have seen continued tenant demand across the portfolio, but also an increasingly long period from initial interest to completed lease – hardly surprising given the political and economic uncertainty we face at the moment, but frustrating none the less.

The focus over the period has been to invest the higher than normal cash balance and to improve dividend cover. We remain disciplined in acquiring new investments; however, by just after the quarter end, we had deployed the majority of the available cash which will benefit the revenue account over the second half of the year.

While voids have increased to 7.2% we have good interest in a number of our existing vacancies. One of our largest voids is at an office in Epsom which became vacant at lease expiry for us to refurbish after which the previous tenant will take a new lease on part of the building (anticipated November this year). We also have two proposals out to other parties on the remainder of the space. Our new purchase in the City also has void accommodation, where we received a rental guarantee as a lump sum deducted from the purchase price.
 

There has been much attention given to the retail sector in the market and although the Company has managed to avoid any tenants going into a company voluntary arrangement (“CVA”) we have seen two smaller units suffer from tenants going into administration – although in both cases we have interest from good quality retailers in the space.  We remain comfortable with our low exposure to the retail sector and were delighted to increase our exposure at the end of the quarter to the “other” or alternative sector with the purchase of a data centre in Birmingham. The property is let for 20 years (with a tenant right to break in 14 years) and the lease is subject to annual rental increases in line with RPI, collared and capped at 1 and 3%.

We also completed the purchase of an office in the heart of the City of London. This might seem contrary to our general outlook for that sub-sector, however the property receives 20% of its rent from two retail units and is located in a prime position close to Bank underground station, with asset management opportunities from two vacant floors where the Company received a rental guarantee. The entry price reflected a 7% yield on the topped up rent. The final purchase which completed just after the quarter end was a sale and leaseback on an industrial facility close to Kettering. The 20 year lease has index linked increases in rent every 5 years, with the purchase reflecting an attractive initial yield of 7.15%.

 

Market commentary

• The weakness of the UK economy in Q1 appears to have been a largely weather-related phenomenon, rather than a more fundamental slowing, with the construction and retail sectors showing signs of recovery in Q2. 
• Real income growth should start to provide a modest tailwind to GDP growth. Business investment continues to be held back by elevated uncertainty over the UK’s future trading relationship with the EU.
• The rise in oil prices will push the energy component of CPI inflation higher. However, base effects mean that inflation is still expected to fall over the course of the year.
• There is an expectation that the Bank of England will increase the Bank rate by 25bps in August, as the bounce in data reassures the Bank the Q1 slowdown was largely temporary.
• Difficulties in the retail sector have dominated the headlines over the last few months. This is now being reflected in retail rents which are falling across the board according to MSCI’s Monthly index. News that half-year profits at John Lewis would be “close to zero” was further evidence of the mounting challenges in the industry.
• Industrial demand remains buoyant and, in the supply,-starved South East this has pushed rents 7% higher over the year to June, according to MSCI. Demand is broad-based, with the continued expansion of trade counters and urban logistics uses being a particular feature. Regional rents rose by a more modest 2.3% over the period with some pockets of more balanced supply and demand.
• London office rents are broadly static and take-up has been propped up by flexible office providers who do not drive net absorption. Take-up in the regional office markets has slowed somewhat over the first half of 2018, although grade ‘A’ stock levels are low in many markets, maintaining some rental tension.     

• The industrial sector has seen continued strong capital growth – 20.3% for the year to June, according to MSCI – which we expect to continue through the rest of 2018 given prices achieved are far outstripping valuations.
• Demand for retail assets across the spectrum remained weak, with very little interest for larger lot sizes, which continues to weigh on the transaction volumes of larger retail parks and shopping centres. But it is the latter seeing the most distress, with yields moving out in 23 of the last 24 months to May.
• Activity in the listed sector broadly mirrors the trends we are seeing in the direct market. Industrial stocks are trading at a premium to NAV which is indicative of optimism for sustained capital growth. London office names are still trading at a discount to NAV, but a narrower one, as the expectation has shifted from a market correction to one of stagnation. Negative sentiment around growth prospects means Retail REITs remain at large discounts to NAV.

Investment outlook

• Investor sentiment and activity continues to illustrate that the hierarchy of sector preference remains largely unchanged. The industrial sector remains the favoured sector call as investors seek to take advantage of the structural shift towards online retailing.
• The alternative sectors remain another sector call favoured by many investors. Typically targeting these sectors for their long, stable inflation-linked leases, alternative sectors remain highly sought-after as we move into an environment of predominantly income-led returns. However, the sub-sectors are diverse and the risks associated with these sectors equally so.
• Our five-year total return forecast for all property is below market consensus. We do not see inward yield shift contributing positively to total returns going forward. Rather, returns will be driven by income and, as such, a key focus will be appropriate management of income risk at the asset and portfolio level. The focus on income is reflected in our projected sub sector returns which have become more divergent in the short term, with industrials and income-focussed sectors, including PRS, expected to be the strongest performing areas of the market.

Dividends

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

Net Asset analysis as at 30 Jun 2018 (unaudited)

	£m	% of net assets
Office	133.1	36.6
Retail	65.0	17.8
Industrial	241.3	66.3
Other	18.6	5.1
Total Property Portfolio	458.0	125.8
Adjustment for lease incentives	-3.5	-1.0
Fair value of Property Portfolio	454.5	124.8
Cash	23.2	6.4
Other Assets	5.9	1.6
Total Assets	483.6	132.8
Current liabilities	-8.7	-2.4
Non-current liabilities (bank loans & swap)	-110.7	-30.4
Total Net Assets	364.2	100.0

Breakdown in valuation movements over the period 1 Apr 18 to 30 Jun 18

	Portfolio Value as at 30 Jun 2018 (£m)	Exposure as at 30 Jun 2018 (%)	Like for Like Capital Value Shift (excl transactions & CAPEX)	Capital Value Shift (incl transactions (£m)
			(%)
External valuation at 31 Mar 18				440.5
Retail	65.0	14.2	0.2	0.2
South East Retail		5.7	3.3	0.9
Rest of UK Retail		0.0	0.0	0.0
Retail Warehouses		8.5	-1.8	-0.7
Offices	133.1	29.1	0.5	-0.4
London City Offices		2.7	0.0	12.2
London West End Offices		3.0	0.0	0.0
South East Offices		19.1	0.6	-12.8
Rest of UK Offices		4.3	0.8	0.2
Industrial	241.3	52.7	2.3	5.4
South East Industrial		15.8	1.6	1.1
Rest of UK Industrial		36.9	2.6	4.3
Other Commercial	18.6	4.0	1.6	12.3
External valuation at 30 Jun 2018	458.0	100.0	1.5	458.0

Top 10 Properties

	30 Jun 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
Howard Town Retail Park, High Peak	10-15
Marsh Way, Rainham	10-15
Atos,Birmingham	10-15

Top 10 tenants

Name	Passing Rent	% of passing rent
BAE Systems plc	1,257,640	4.9%
Technocargo Logistics Limited	1,242,250	4.9%
The Symphony Group PLC	1,080,000	4.2%
Timbmet Limited	799,683	3.1%
Bong UK Limited	756,620	3.0%
Euro Car Parts Limited	736,355	2.9%
Ricoh UK Limited	696,995	2.7%
CEVA Logistics Limited	633,385	2.5%
Thyssenkrupp Materials (UK)Ltd	590,000	2.3%
Public Sector	559,148	2.2%
Total	8,352,076	32.7%
Total Passing Rent	25,605,667

Regional Split

South East	40.6%
East Midlands	16.0%
North West	12.5%
West Midlands	10.0%
North East	7.8%
South West	3.7%
Scotland	3.7%
London West End	3.0%
City of London	2.7%

The Board is not aware of any other significant events or transactions which have occurred between 30 Jun 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] [e-mail]

Graeme McDonald  - Real Estate Finance Manager, Standard Life Investments
Tel [phone] [e-mail]

The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Ltd
Trafalgar Court
Les Banques
St Peter Port
GY1 3QL
Tel: [phone]