Half-yearly Report
20 August 2014
UK Commercial Property Trust Limited
("UKCPT" or the "Company")
Half Year Results
UK Commercial Property Trust Limited (LSE: UKCM), the largest UK focused,
Guernsey based, commercial property trust, announces its Interim results for
the half year ended 30 June 2014.
Financial Highlights
* NAV per share of 78.1p (31 December 2013: 73.1p), a rise of 6.8% mainly due
to a 6.0% like-for-like increase in the capital value of the property
portfolio, which is now £1.1billion;
* NAV total return of 10.1% in the six month period to 30 June 2014, ahead of
the IPD benchmark (8.3%) and the FTSE All-Share Index (1.6%) and in-line
with the FTSE REITs Index (10.2%);
* Strong share price performance with a total return of 9.0% in the period
resulting in the Company's shares continuing to trade at a premium toNAV
(4.5%);
* Consistent longer term outperformance with 5 year share price total return
ahead of the IPD benchmark;
* Issue of 40,755,022 treasury shares raising proceeds of £32 million which
has been used for acquisitions;
* Gross gearing of 19.1% continues to be the lowest in the Company's peer
group;
* Attractive dividend yield of 4.5%, underpinned by quality portfolio of
diversified properties and above that of the FTSE REIT Index (3.3%) and the
FTSE All-Share Index (3.3%).
Property Highlights
* Purchase of Regent Circus, Swindon for £40.5 million in August 2014,
increasing the Company's exposure in its favoured leisure sector and
generating an equivalent yield of 5.3% from a strong tenant base that is
94% pre-let;
* Good progress made at Aberdeen Gateway, the Company's pre-let industrial
development in Aberdeen, with two properties due to be complete by end of
August and the third unit due to be completed in December generating, after
rent free periods, an additional annual income of £2.9 million;
* Successful asset management activity in the period generating valuation
increases and an additional £1.8 million of annualised income during the
first six months of the year including:
- Securing a change of use from offices to residential over the Company's
St.James's holding at No. 6 Arlington Street, London;
- Letting the former Comet unit at Junction 27, Birstall, Leeds, generating £
450,000 per annum after rent free periods, improving the tenant mix and
extending the unexpired lease term of the asset;
- Entering into a contractual commitment with a new tenant at The Parade,
Swindon which will create a new anchor store within the shopping centre during
the Spring of 2015;
- New lettings at The Rotunda, Kingston upon Thames and Kensington High Street,
London securing £355,000 per annum after rent free periods for the Company over
the next 15 years;
* A void rate of 3.7% at 30 June 2014 compared to a benchmark figure of 7.5%
plus strong rent collection rate of 99% after 28 days, affirming the prime
nature of the Company's portfolio and testament to successful asset
management activity.
Commenting on the results, Christopher Hill, Chairman of UKCPT, said:
"During the first half of 2014 your Company produced another strong
performance, delivering a 10.1% NAV total return which was ahead of the IPD
benchmark and driven primarily by strong like-for-like capital growth. Our
decision to re-base the dividend in February and the premium at which our
shares have continued to trade against NAV, have enabled the Company to issue
equity for the first time since 2010. This provided the Investment Manager with
resources which have already been deployed to enhance the portfolio though
selective acquisitions, in line with the Company's strategy to acquire prime
assets in income orientated sectors where the potential exists for both income
and capital growth.
"The UK is currently experiencing a sustained recovery coupled with improving
business confidence that is now resulting in the expansion of most sectors of
the economy and has resulted in considerable yield compression over the last 12
months. We believe this trend will continue throughout 2014 and increasingly
extend beyond London, playing to the strong weighting of the Company's
portfolio to the UK regions. These market factors, combined with the strong
financial footing the Company now enjoys and the ability of the Investment
Manager to identify and purchase prime assets, mean that the Company is in an
excellent position to continue to grow and deliver positive returns for its
shareholders."
Robert Boag, Senior Investment Director at Ignis Asset Management (UKCPT's
Investment Manager), added:
"So far, 2014 has witnessed a continued strengthening of the Company's
portfolio and our successful strategy application and asset management skills
across the portfolio have been rewarded. The change in dividend policy will
offer us greater flexibility in achieving our portfolio strategy and provides a
strong platform for us to continue to pursue income accretive asset management
initiatives and acquisitions, which we're confident we can deliver in this
improving market. However, the key to outperformance remains the careful
management of portfolio income and discipline on capital expenditure. Combined
with focused acquisitions, this will help us provide investors with a real and
sustainable return over the medium term."
For further information:
Ignis Investment Services Limited: 0141 222 8000
Robert Boag/Graeme McDonald
FTI Consulting: 020 3727 1000
Richard Sunderland/Claire Turvey/Clare Glynn
UKCPT@fticonsulting.com
PERFORMANCE SUMMARY
Capital Values & 30 June 2014 31 December % Change
2013
Total assets less 1,201,832 1,111,924 8.1
current liabilities
(excl Bank Loan and
Swap) (£'000)
Net asset value per 78.10 73.10 6.8
share (p)
Ordinary Share Price 81.60 77.00 6.0
(p)
Premium to net asset 4.5 5.3 -
value (%)
Gearing (%): Gross* 19.1 20.7 -
Net** 12.0 14.5 -
Total Return % 6 months 1 year 3 years 5 years
NAV*** 10.1 21.3 25.3 68.9
Share Price*** 9.0 13.9 22.4 71.2
Investment Property 8.3 16.3 26.6 71.1
Databank (IPD)
Balanced Monthly &
Quarterly Funds
Benchmark
FTSE Real Estate 10.2 23.9 34.7 128.7
Investment Trusts
Index
FTSE All-Share Index 1.6 13.1 29.2 96.7
Earnings & Dividends 30 June 2014 30 June 2013
Dividends declared 2.2325 2.625
per ordinary share
(p)
Dividend Yield (%)*** 4.5 6.9
*
IPD Benchmark Yield 5.6 6.2
(%)
FTSE All-Share Index 3.3 3.5
Yield (%)
FTSE Real Estate 3.3 3.7
Investment Trusts
Index Yield (%)
European Public Real Estate Association ("EPRA") NAV at 30 June 2014 (excluding
swap liabilities) - 78.6p (31 Dec 2013 - 73.7p)
* Calculated as gross borrowings (excl. SWAP valuation) divided by total assets
less current liabilities (excl borrowingsand swaps).
** Calculated as net borrowings (gross borrowings less cash excl swap
valuations) divided by total assets less current liabilities and cash (excl
swaps).
*** Assumes re-investment of dividends excluding transaction costs.
**** Based on an annual dividend of 3.68p.
Sources: IgnisFund Managers Limited, Investment Property Databank (IPD)
Chairman's Statement
Chairman's Statement
I am pleased to report that your Company continued to deliver strong
performance in the first half of 2014.
The Company delivered a Net Asset Value ("NAV") total return of 10.1% for the
six months to 30 June 2014, ahead of the IPD benchmark total return. This
performance was driven by strong capital growth in the portfolio of 6% on a
like-for-like basis and has resulted in the portfolio now being valued at over
£1.1billion. The Company's share price total return was 9.0% over the same
period.
The decision to re-base the dividend in February of this year and the continued
premium at which the Company's shares trade to the NAV, enabled the Company to
issue equity for the first time since 2010. This provided the Investment
Manager with resources which have already been deployed to enhance the
portfolio through selective acquisitions, in line with the Company's strategy
to acquire prime assets in income orientated sectors where the potential exists
for both income and capital growth.
Economic Background
The UK's economic recovery continued to gather momentum in H1 2014 with most
commentators now forecasting GDP growth for the whole year to exceed 3%.
Encouragingly, the increase in output has been generated across all major
sectors with services, production (including manufacturing) and construction
all continuing to expand. The revival in business investment should also ensure
that the momentum of the current upturn proves sustainable. There remains
concern, however, about the modest rises in wage growth, which continues to lag
behind inflation, and about some of the regional imbalances within the UK,
particularly in terms of house price growth and job creation. The Bank of
England is well aware of these issues and the anticipated increase in interest
rates is expected to occur gradually.
Commercial Property Market
The UK commercial property market delivered a high level of investment
performance over the first half of 2014 as investors continued to target an
asset class that remains very much in favour. The IPD Benchmark generated a
total return of 8.3% in this period, whereas the FTSE All-Share Index reported
a total return of 1.6%, with 10-year Gilts providing 4.5%. Property performance
was driven by yield compression and, to a lesser extent, rental growth which
pushed valuations higher. One theme to highlight over the period was that,
whilst London and the core South East markets continued to be the best
performing locations, the broader UK market is now contributing to the
impressive returns that commercial property is producing.
Significant Property Transactions
In the 2013 Annual Report, I made reference to the financing of an industrial
pre-let development at the Aberdeen Gateway Business Park of up to £
48.3million. I am pleased to report that the development at the two sites,
where we have an aggregate £17.9million forward commitment to purchase, is well
advanced and is expected to complete by the end of Q3 2014. The forward funding
element for the largest site, Site A, is also on target and should be completed
as anticipated in December 2014. Upon completion, these assets will enhance the
income generating ability of the Company and should also offer the potential
for capital growth, as Aberdeen has proved one of the best performing UK
property markets across the short, medium and longer terms.
Following the period end, the Company exchanged contracts for the purchase of
Regent Circus in Swindon for a price of £40.48million. This newly completed
97,000 sq.ft. leisure and supermarket scheme is 94% pre-let to tenants with
good covenants and provides an equivalent yield of 5.3% with fixed uplifts on
the leisure income plus an average lease length of 20 years. This purchase
increases the Company's weighting in leisure, one of our favoured sectors, and
is in line with our investment strategy as outlined above.
Over the last 18 months, including the purchases above, the Company has
acquired assets in excess of £100million, demonstrating the Investment
Manager's ability to identify and acquire prime assets to enhance future
returns for shareholders, even in a particularly aggressive market environment.
Whilst competition will remain fierce for quality assets, the Investment
Manager will continue to evaluate the market and identify assets that suit the
Company's portfolio strategy while undertaking an orderly disposal of assets
that do not fit into this approach.
Borrowing
As at 30 June 2014, the Company's gross gearing was 19.1%, comfortably the
lowest in the Company's peer group and with an attractive blended interest rate
of 3.85% based on current margins. The Company also had cash resources of £
97.4million at that date which will be used to finance Regent Circus with the
remainder largelyallocated to the Aberdeen Gateway commitment referred to
above.
The £80million facility with Lloyds expires in June 2015 and the Board and the
Investment Manager are currently considering options in relation to this
facility.
Dividends
The Company declared and paid the following dividends during the period:
Payment Date (2014) Dividend per share (p)
4th interim for prior period Feb 1.3125
1st interim May 0.9200
Total 2.2325
A second interim dividend of 0.92p was declared on 16 July 2014 and is payable
on 29 August 2014.
On 4 February 2014, the Company announced a revised dividend policy, rebasing
the dividend to a more sustainable level of 0.92p per quarter. This revised
dividend policy will help underpin the portfolio strategy and facilitate
further investment in assets such as Regent Circus. Based on the new dividend
level and the period end share price, the yield on the Company's shares is an
attractive 4.5%, underpinned by a prime portfolio of commercial property and
comparing favourably with other asset classes and quoted property companies.
Treasury Share Issuance
The Company issued 40,755,022 shares held in treasury in May 2014 raising £
32million, which has been used to finance in part the purchase of Regent Circus
and the ongoing commitments at Aberdeen Gateway, further demonstrating the
ability of the Investment Manager to invest in an efficient manner. This was an
encouraging development and is the first issue of equity since 2010. Having
adjusted the dividend to a sustainable level, the Company now has the
flexibility to consider a wider selection of NAV accretive property
acquisitions financed from a greater range of options.
Investment Manager
On 26 March 2014, Phoenix Group Holdings announced that it had agreed terms
with Standard Life plc for the sale of Ignis Asset Management ("Ignis"). The
purchase was completed on 1 July following FCA approval. The Board announced
that it had consented to the change of control of Ignis following assurances
received from Standard Life regarding the retention of the Company's management
and administration team to ensure continuity for its ongoing success.
Alternative Investment Fund Managers Limited Directive ("AIFMD")
The Company entered into a new Investment Management Agreement with Ignis on 18
July 2014. This appointed Ignis as the Alternative Investment Fund Manager of
the Company, meaning that shareholders will receive the full protection offered
under AIFMD. In addition, the fee payable to the manager will be reduced to
0.65% of total assets.
Board Governance
As recommended by the AIC Code of Corporate Governance and the UK Corporate
Governance Code, I am pleased to announce the Board has appointed Mr Andrew
Wilson as the Senior Independent Director.
Outlook
The UK is currently experiencing a sustained recovery coupled with improving
business confidence that is now resulting in the expansion of most sectors of
the economy. With business investment also increasing, the economy should
continue to grow in the second half of 2014 and beyond. However, in a global
economy, there are always potential risks and the current unrest in the Ukraine
and the Middle East is a disturbing reminder of this. Closer to home, the scale
and extent of interest rate rises is a balancing act for the Bank of England,
which needs to time the tightening of policy without damaging the prospects for
elements of the population with high levels of debt but uncertain prospects for
significant income growth.
The UK property market has now seen considerable yield compression over the
last twelve months with a resultant boost to capital values. This trend will
continue throughout 2014 and increasingly extend beyond London. This will be of
great benefit to the Company's portfolio, which has a strong presence in the UK
regions. The portfolio will also be boosted by its holdings in targeted sectors
that are now delivering strong investment performance including retail
warehousing and leisure.
These market factors, combined with the strong financial footing the Company
enjoys following the dividend rebasing and the ability of the Investment
Manager to identify and purchase prime assets, means that the Company is in an
excellent position to continue to grow and deliver positive returns for its
shareholders.
Christopher M.W. Hill
Chairman
20 August 2014
Manager's Review
For the half year ended 30 June 2014
Economic Review
The UK economy continues to maintain momentum with annualised GDP growth
standing at 3.1% to the end of June 2014 and GDP now ahead of its peak before
the last recession. Further confidence can be gained from the increasing
contribution that business investment makes to this growth, overtaking
household spending for the first time in two years and providing further signs
of the ongoing rebalancing of the economy. The continued revival in business
investment supports the perception of the strength and sustainability of the
current upturn but key risks and imbalances in the economy remain. Whilst the
strengthening of sterling has been a corollary of the improving economy, it has
adversely impacted on UK exports and any substantial expansion to the economy
from Eurozone trade is unlikely in the short term as the Eurozone continues to
struggle with financial austerity and a weakened financial system.
In the UK, while the increase in house prices at a national level has been
significant, it has masked a divergent regional picture where strong
performance in London has boosted the national average and raised fears of a
housing bubble in the capital. The unemployment rate fell further from 7.2% to
6.8%, although again this figure masks the degree of under employment,
self-employment and low paying jobs, all of which undermine wage growth. This
increasing self-employed workforce has to date failed to make any impact on the
slack in productivity and for that reason the Bank of England has recently
reinforced its view that increases in interest rates will be gradual and
moderate.
Commercial Property
Commercial property recorded an All Property total return of 8.3% over the
period. This figure was driven by a combination of a relatively steady income
return of 2.8% plus a capital return of 5.4%, continuing the capital value
appreciation seen over the second half of 2013. All property rental value
growth remained modest but positive over the period (0.6%), with growth in the
office and industrial sectors off-setting mild rental value decline in the
retail sector.
Over the period positive total returns were recorded across all the main
sectors with the office and industrial sectors significantly outperforming the
retail sector, driven by capital growth based on yield compression. Capital
growth is no longer confined to London, with improvement in capital values now
being seen across a broader range of markets: South East offices, industrials
and retail warehouses are all continuing to produce superior levels of growth.
The divergence in performance between prime and secondary assets continues to
reduce across most market segments.
Year to date, the commercial property market has witnessed £23.5billion of
investment compared to £20.6billion for the same period in 2013 according to
Property Data. Property continues to be the focus for many investors and UK
Institutions have been the biggest net investors into the market over the past
year. Whilst investment in London is high on an absolute and relative measure,
with £10.3billion invested in Q2, mainly in office and still dominated by
overseas investors, there has been a growing shift on investors' focus into
regional investment over the last six months with £5billion invested in that
area in the second quarter.
Portfolio Performance
The table below sets out the components of total return of the Company and
benchmark in each sector for the six month period to 30 June 2014.
Total Return Income Return Capital Growth
Fund Benchmark Fund Benchmark Fund Benchmark
% % % % % %
Industrial 10.4 10.4 3.2 3.1 7.1 7.1
Office 11.0 10.4 3.0 2.5 7.8 7.6
Retail 7.4 6.5 3.1 2.8 4.1 3.6
Other Commercial 10.9 6.5 3.0 2.6 7.7 3.8
(incl Leisure)
Total 9.1 8.3 3.1 2.8 5.8 5.4
Source: IPD (assumes reinvestment of income in capital gain/loss)
As has been the case for some years, the Company's strong income profile
provides a stable and reliable element of the portfolio return, recording a
3.1% contribution over the period. However, following on from the last six
months of 2013, the portfolio also delivered strong capital performance in the
period, increasing 6% on a like-for-like basis and now valued at £1,122
million. This resulted in a portfolio total return of 9.1% which compares
favourably to the IPD benchmark total return of 8.3%. One encouraging area to
highlight is the positive performance of the Company's retail portfolio, which
is beginning to generate above benchmark returns for the first time in a number
of years.
Longer term measures also show the strength of the Company's portfolio, with
the fund ranked in the 38th percentile over five years.
Industrial
The Company`s strategy to increase its exposure to the industrial sector over
the last couple of years has been rewarded with an improvement in overall
returns from this sector during the period. With a total return of 10.4%, the
Company`s industrial portfolio was one of the major contributors to performance
over the first half of the year and this improvement in value will absorb the
acquisition costs of the three properties that will be acquired under forward
commitment and funding contracts this year on the Aberdeen Gateway site.
Generally, the market continues to recognise the strong income characteristics
of the industrial sector and, with a scarcity of stock, investment demand,
particularly for London and South East investments, remains strong. This has
benefited the Company's South East industrials which performed particularly
well during the period, aided by successful asset management at Dolphin
Industrial Estate in Sunbury, further details of which are provided in the
asset management section.
The prime characteristics of the Company`s industrial portfolio of long average
lease length, low voids and strong covenant base, which are also reflected in
the Company`s acquisition in Aberdeen, should support continued good
performance from this element of the Company's portfolio for the foreseeable
future. In addition, there are opportunities through asset management to
improve income and value.
Office
Whilst the rental growth in the office sector continues to provide the greatest
divergence across regions and quality, with London continuing to dominate, the
last six months has witnessed a definite increase in investment demand for
regional offices. This is particularly true in the case of UK institutions,
many of whom have been attracted by the higher initial yield available when
compared to the ultra-competitive Central London market.
Given the prime nature of the Company`s regional office portfolio, which is
100% let, the Company has benefited from this improving investment market, with
capital values rising sharply in the Company's regional office locations and
returns being amplified by the strong income characteristics of this
sub-sector. Overall returns for the regional office portfolio for the period
were 9.7% compared to the benchmark of 8.3%.
Following the repositioning of the Company's South East office portfolio as a
result of the sale of Charter Place, Uxbridge and Raynes Park, Bushey Road last
year (both buildings characterised by voids and large capital expenditure
requirements), strong performance has been delivered from the Company's
holdings in the office sector in the period with total returns of 11.0% against
the benchmark of 10.4%.
In Central London, investment demand from overseas investors and UK
Institutions linked to strong rental growth prospects, particularly in the Soho
sub-market where almost 75% of the portfolio is located, continue to increase
values in the portfolio. Rental income is also expected to improve further as a
result of some key lease events over the next 12-18 months.
Retail
The Company`s high street shops and retail warehouses witnessed strong
increases in capital values over the six months at 6.3% and 4.7% respectively.
Shopping centres also improved in value over the first half of the year albeit
more marginally at 0.7%. Overall, while retail generated the weakest total
returns of 7.4%, it is encouraging that the returns are above benchmark (6.5%)
and all retail sub-sectors are providing positive returns.
Market sentiment and investor appetite, particularly from overseas investors,
UK institutions and REITs, have improved over the past six months at the prime
and good secondary end of the market. While there have been some positive
signals from the retail occupational market with greater engagement from
occupiers, this is a capital driven phenomenon which is not based solely on
property fundamentals, as rental growth in all but the best locations is still
subdued. As such, this market is where risk still remains for the uninformed
investor.
The prime quality of the Company's retail warehouse portfolio, linked to
specific asset management activity at Junction 27, Leeds, assisted performance.
Additionally, the Company's Central London high street retail holdings on
Kensington High Street and Kings Road, delivered good performance, thanks in
part to successful asset management activity.
The ongoing strategy for the Company's shopping centres is to maintain and,
where possible, improve the net operating income for each centre, which should
enable these assets to add value in improving markets.
Leisure
Investment demand within the leisure sector strengthened during the first half
of the year, driving up capital values of the Company`s single leisure asset,
The Rotunda, Kingston upon Thames, by 7.7%. Combined with an income return of
3.0%, this produced the largest total return for the portfolio over the half
year at 10.9% against the benchmark of 6.5%. This sector remains very popular
with investors and also with both new and established occupiers, many of whom
will enter into long leases often incorporating RPI rental increases.
Income
The annualised contracted rent of the portfolio as at 30 June 2014 was £68.4
million, a slight reduction from the £68.5 million as at 31 December 2013.
Successful asset management initiatives coupled with new lettings, rent review
settlements and lease engineering, secured £1.8million of added income over the
first half of the year. Reductions in income came from lease expiries where
occupiers vacated, break options that were exercised and retail tenant
administrations (albeit at a much reduced level), all of which reduced income
by £1.9million p.a.
Investment Activity
In line with the strategy to increase exposure to the industrial sector, the
Company completed the purchase of 265,000 sq. ft. of business space at Aberdeen
Gateway Business Park, Aberdeen on forward commitment and funding contracts in
January. Construction of the three buildings is well advanced and the programme
remains on budget and on schedule. All conditions in the contract agreements
are expected to be satisfied by December when, after allowing for a short
period of rent free periods, £3.0million in annual rent will be added to the
Company's income stream. Under the terms of the purchase, the total commitment
will not exceed £48.3million and will generate an initial yield of 6.0%.
In August 2014 the Company exchanged contracts to acquire Regent Circus,
Swindon, a new, purpose built supermarket and cinema anchored family orientated
leisure scheme for £40.48million. On completion, the development will be let on
long leases with an average lease length of 20 years to occupiers with a sound
covenant base, including Morrisons and Cineworld, generating £2.1million p.a.
after rent free periods.
There were no sales during the period.
Asset Management Activity
Strong asset management skills remain an important feature of the Company`s
investment management team. This characteristic, allied to the prime nature and
sound property fundamentals of many of the Company`s properties, resulted in a
number of lettings and re-gear initiatives that improved income by £1.8million
in the period and added value across the portfolio in an improving market.
Within the Company's leisure asset, The Rotunda, Kingston upon Thames, a new
letting to Five Guys Burgers & Fries Ltd was progressed following the demise of
the former tenant. The introduction of Five Guys into The Rotunda has proven a
great success securing a base rent of £155,000 p.a., rising to at least £
193,500 p.a. at the first rent review in five years. The new lease is for a 20
year term and Five Guys has undertaken significant investment in the property
as part of itsfit out.
On Kensington High Street, London, having engineered vacant possession of the
former Rohan unit, the Company secured Yo! Sushi under a 20 year lease at a
rent of £200,000 p.a. The introduction of this increasingly important A3 use
has improved tenant mix and will provide more choice for shoppers.
During the first half of the year the Company finalised contracts with Betta
Living and Multi York to take occupation of the former Comet store at Junction
27 in Leeds. Both occupiers entered into 15 year leases, with 5 yearly rent
reviews and a combined rent of £450,000 p.a. Following sub division works,
tenant mix, income and average weighted unexpired lease lengths at the property
were all improved.
Within one of the Company's regional office holdings at Colmore Row, Birmingham
a lease renewal completed, securing occupation and maintaining income at levels
in excess of estimated rental value over a longer period of time.
Evidence of our asset management capability was further demonstrated at Dolphin
Industrial Estate, Sunbury where letting activity and lease re-gears resulted
in additional income, longer lease lengths and improvements to the property
fabric. This has provided a platform for improved capital value with higher
occupancy levels and has secured long term tenant occupation within the estate.
The quality of the underlying property portfolio and the emerging evidence of
improving rental levels in selected locations are demonstrated with the healthy
rent review uplifts achieved at The Rotunda, Kingston upon Thames and at the
Ocado Distribution facility in Hatfield. Across the portfolio, 13 rent reviews
were settled during the half year providing an additional rent of £195,000 p.a.
At the Pride Hill Centre, Shrewsbury, the relocation of HMV facilitated the
introduction of the value retailer Poundworld to the centre. This improved the
net operating income by over £40,000 p.a. and increased the average weighted
unexpired lease length to 6 years and 3 months.
We continue to liaise with Shropshire Council and other relevant parties on the
New Riverside proposals. Our principal aim is, however, to rebuild the income
from the holding over the short to medium term, with a continued focus on lease
expiries, to ensure that income is protected and maintained. We remain
confident in the many qualities of Shrewsbury, particularly as the wider
economy and consumer spending improves.
Voids and Rent Collection
Improving market sentiment and successful asset management initiatives ensured
that the Company`s void position decreased over the period. As at 30 June 2014,
voids, as percentage of ERV, stood at 3.7% compared to 4.4% on 31 December
2013. Adjusting for tenant failure through administrations, the void rate
increases to 4.3% compared to 6.2% as at 31 December 2013. Both of these
measures are below the benchmark void rate of 7.5%.
There are clear signs that the occupier markets, across all sectors, are
improving. Further evidence of the Company`s strong covenant base can be found
in the average rent collection efficiency over the past 12 months which shows
that 99% has been collected within 28 days.
Market Outlook and Fund Strategy
The investment outlook appears to be positive, characterised by an improving
economic climate which is increasingly recognised as being robust and durable.
Allied to this is a greater level of investor confidence and improving debt
conditions which has helped to form the foundation for continued improvement in
returns across prime and many secondary markets.
Competition for limited investment opportunities has driven yields lower with
many investors reassessing the implied risk premium underlying investment
purchases as market conditions improve.
Ignis`s current forecast for all property total returns in 2014 stands at
16.0%, with the three-year annualised forecast for all property total returns
at 10.7% p.a. These forecasts anticipate capital growth to be front-loaded as
the impact of yield compression is expected to be greatest in 2014. The current
rate of yield compression, coupled with the scale of money coming into the
market, means the 2014 total return figure could potentially be even higher
than the current expectation.
Offices are expected to deliver the highest performance of the broad sectors,
followed by leisure and then industrial and retail, with the latter two sectors
delivering similar levels of performance over the medium term. The superior
returns of offices (Ignis forecasts 13.5% p.a. for 2014-2016) are no longer
solely a Central London feature although we anticipate this segment to remain
among the top performing markets driven by substantial rental value growth.The
sector is also boosted by opportunities in some of the major Outer London,
South East and wider UK markets at the present time. Investor confidence in
these markets is boosted by improving occupational market characteristics,
limited development pipelines and severe shortage of investment product. The
key issue for many regional city markets will be liquidity.
The leisure sector is increasingly becoming a core element of a number of
investor strategies as it offers diversification amongst other key
characteristics such as long leases, strong national covenants and a stable, if
not reversionary, rent with, in many cases, a degree of fixed uplifts/
indexation. With a number of new and existing leisure operators in expansionary
mode, the sector can offer above average real rental growth in selected
locations and, for all these reasons, it remains a sector favoured by the
Company. Ignis forecasts 10.7% p.a. total return for the sector in 2014-2016.
Industrial markets are forecast to deliver total returns of 9.9% p.a. over
2014-2016. Whilst the sector retains a clear yield premium over the wider
market, its magnitude has reduced substantially over the course of the last
year. The increased interest in the sector, together with the weight of capital
and improving occupational picture, is now creating a funding market for
"Design and Build" and general speculative development in the best locations,
with UK institutions at the forefront. Distribution warehouses remain firmly in
favour with a wide range of investors.
The evolution of retail property markets persists as online penetration
continues in its various forms. Deals on high streets will continue to be
focused on London, towns with a wealthy catchment and regional centres. Some
investors, often aided by improved debt lending, are moving up the risk curve
by targeting the better located shopping centres/retail warehouses, in some
cases with vacant units. Ignis forecasts 9.6% p.a. total return for the retail
sector for 2014-2016.
Commercial property is likely to remain in favour across a wide range of
investors and markets which move beyond or away from fundamental drivers will
offer opportunities for both buying and selling. The major risk remains that
the weight of money brings forward the investment performance that the asset
class can sustain over the medium term and, as a consequence, pricing may
increase to levels in certain sectors and locations that are beyond the
fundamental drivers of value. The Company is alive to this risk and to the
opportunities that this presents. In terms of acquisitions, it will maintain a
disciplined approach, focusing on assets which offer long term sustainable
returns to complement the already strong and diversified portfolio.
Combined with focused acquisitions, the key to out-performance remains the
careful management of portfolio income and discipline on capital expenditure in
order to help provide investors with a real return that is sustainable over the
medium term.
The recent change in dividend policy offers greater flexibility in realising
the Company's portfolio strategy, providing a strong platform to pursue income
accretive asset management initiatives and acquisitions which can be achieved
in this improving market.
Robert Boag
Senior Investment Director
20 August 2014
Half Yearly Condensed Consolidated
Income Statement
For the half year ended 30 June 2014
Notes Half year Half year For year
ended 30 ended 30 ended 31
June 2014 June 2013 December
(unaudited) (unaudited) 2013
£'000 £'000 (audited)
£'000
Income
Rental income 35,567 35,768 72,191
Gains/ (losses) on investment 2 61,032 (5,415) 48,395
properties
Interest revenue receivable 175 249 491
Total income 96,774 30,602 121,077
Expenditure
Investment management fee 8 (4,043) (3,670) (7,456)
Direct operating expenses of let (1,396) (2,131) (4,693)
property
Valuation and other professional (1,077) (988) (1,986)
fees
Directors fees 8 (99) (96) (183)
Administration fees 8 (85) (83) (168)
Other expenses (117) (1,057) (1,290)
Total expenditure (6,817) (8,025) (15,776)
Net operating profitbefore 89,957 22,577 105,301
finance costs
Net finance costs
Finance costs (4,576) (4,579) (9,229)
Net profit from ordinary 85,381 17,998 96,072
activities before taxation
Taxation on profit on ordinary - - -
activities
Net profitfor the period 85,381 17,998 96,072
Other comprehensive income:
Gain arising on effective 11 1,253 5,351 9,715
portion of interest rate swap
Net comprehensive gainfor the 86,634 23,349 105,787
period
Earnings per share (p) 3 7.07p 1.50p 8.02p
Half Yearly Condensed Consolidated
Balance Sheet
As at 30 June 2014
Notes 30 June 2014 30 June 31 December
(unaudited) 2013 2013
£'000 (unaudited) (audited)
£'000 £'000
Non-current assets 2 1,115,853 1,019,741 1,042,728
Investment properties
1,115,853 1,019,741 1,042,728
Current assets
Trade and other 9,449 7,760 8,902
receivables
Cash and cash equivalents 97,400 59,600 80,734
106,849 67,360 89,636
Total assets 1,222,702 1,087,101 1,132,364
Current liabilities
Trade and other payables (20,870) (22,009) (20,440)
Interest rate swaps 11 (4,111) (4,579) (4,438)
Bank loan (79,952) - -
Long term liabilities
Bank loans (148,778) (229,064) (229,252)
Interest rate swaps 11 (1,555) (6,704) (2,481)
Total liabilities (255,266) (262,356) (256,611)
Net assets 967,436 824,745 875,753
Represented by:
Share capital 489,961 482,703 482,703
Treasury shares (421) (25,264) (25,264)
Special distributable 597,366 607,235 600,069
reserve
Capital reserve (113,804) (228,646) (174,836)
Interest rate swap reserve (5,666) (11,283) (6,919)
Revenue reserve - - -
Equity Shareholders' funds 967,436 824,745 875,753
Net asset value per share 6 78.1p 68.9p 73.1p
Half Yearly Condensed Consolidated Statement of
Changes in Equity
For the half year ended 30 June 2014
Special Interest
Share Treasury distributable Capital Revenue rate swap
capital shares reserve reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Half year ended 30
June 2014
(unaudited)
At 1 January 2014 482,703 (25,264) 600,069 (174,836) - (6,919) 875,753
Issue of treasury 7,258 24,843 - - (321) - 31,780
shares
Net profit for the - - - - 85,381 - 85,381
period
Other comprehensive - - - - - 1,253 1,253
income
Dividends paid - - - - (26,731) - (26,731)
Transfer in respect - - - 61,032 (61,032) - -
of gains on
investment
properties
Transfer from - - (2,703) - 2,703 - -
special
distributable
reserve
At 30 June 2014 489,961 (421) 597,366 (113,804) - (5,666) 967,436
Half year ended 30
June 2013
(unaudited)
At 1 January 2013 482,703 (25,264) 615,252 (223,231) - (16,634) 832,826
Net profit for the - - - - 17,998 - 17,998
period
Other comprehensive - - - - - 5,351 5,351
income
Dividends paid - - - - (31,430) - (31,430)
Transfer in respect - - - (5,415) 5,415 - -
of losses on
investment
properties
Transfer from - - (8,017) - 8,017 - -
special
distributable
reserve
At 30 June 2013 482,703 (25,264) 607,235 (228,646) - (11,283) 824,745
For the year ended
31 December 2013
(audited)
At 1 January 2013 482,703 (25,264) 615,252 (223,231) - (16,634) 832,826
Net profit for the - - - - 96,072 - 96,072
year
Other comprehensive - - - - - 9,715 9,715
income
Dividends paid - - - - (62,860) - (62,860)
Transfer in respect - - - 48,395 (48,395) - -
of gains on
investment
properties
Transfer from - - (15,183) - 15,183 - -
special
distributable
reserve
At 31 December 2013 482,703 (25,264) 600,069 (174,836) - (6,919) 875,753
Half Yearly Condensed Consolidated
Cash Flow Statement
For the half year ended 30 June 2014
Half year ended Half year For year
30 June 2014 ended 30 ended 31
(unaudited) June 2014 December
£'000 (unaudited) 2013
£'000 (audited)
£'000
Cash flows from operating activities
Net operating profit for the period 85,381 17,998 96,072
before taxation
Adjustments for:
(Gains)/losses on investment properties (61,032) 5,415 (48,395)
(Increase)/decrease in operating trade (547) 264 (878)
and other receivables
Decrease in operating trade and other (255) (342) (1,908)
payables
Net finance costs 4,576 4,579 9,229
Net cash inflow from operating 28,123 27,914 54,120
activities
Cash flows from investing activities
Purchase of investment properties (10,479) (18,648) (18,648)
Sale of investment properties - 10,450 44,200
Capital expenditure (1,614) (1,426) (4,353)
Net cash (outflow)/inflow from (12,093) (9,624) 21,199
investing activities
Cash flows from financing activities
Net proceeds form issue of treasury 31,780 - -
shares
Dividends paid (26,731) (31,430) (62,860)
Bank loan interest paid (2,106) (2,041) (4,156)
Payments under interest rate swap (2,307) (2,281) (4,631)
arrangement
Net cash inflow/(outflow) from 636 (35,752) (71,647)
financing activities
Net increase/(decrease) in cash and 16,666 (17,462) 3,672
cash equivalents
Cash balance brought forward 80,734 77,062 77,062
Closing cash and cash equivalents 97,400 59,600 80,734
Represented by:
Cash at Bank 21,920 23,214 21,639
Short term deposits - 20,212 20,301
Money market funds 75,480 16,174 38,794
97,400 59,600 80,734
Notes to the Accounts
For the half year ended 30 June 2014
1. 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 2013. 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 2013, which were prepared under full
IFRS requirements.
2. Investment properties
Freehold and leasehold properties Half year ended
30 June 2014
£'000
Opening valuation 1,042,728
Purchases at cost 10,479
Sale proceeds -
Capital expenditure 1,614
Loss on revaluation to fair value 61,032
Fair value at 30 June 2014 1,115,853
The market value provided by CBRE Limited at the period end was £1,122,375,000
however an adjustment has been made for lease incentives of £6,522,000 that are
already accounted for as an asset.
3. The earnings per Ordinary Share are based on the net profit for the period
of £85,381,000 (30 June 2013: £17,998,000) and 1,208,004,134 (30 June 2013:
1,197,348,858) Ordinary Shares, being the weighted average number of shares
in issue during the period.
4. Earnings for the period to 30 June 2014 should not be taken as a guide to
the results for the year to 31 December 2014.
5. As at 30 June 2014 the total number of shares in issue is 1,238,103,880 (30
June 2013: 1,197,348,858).
6. The net asset value per ordinary share is based on net assets of £
967,436,000 (30 June 2013: £824,745,000) and 1,238,103,880 (2013:
1,197,348,858) ordinary shares.
7. Dividends
Period to 30 June 2014
Rate £'000
(pence)
Dividend for the period 1 October 2013 to
31 December 2013, paid 28 February 2014 1.3125 15,715
Dividend for the period 1 January 2014 to
31 March 2014, paid 31 May 2014 0.92 11,016
26,731
A dividend of 0.92p per share for the period 1 April 2014 to 30 June 2014 is
payable on 29 August 2014.
Under International Financial Reporting Standards, these unaudited financial
statements do not reflect this dividend.
8. No Director has an interest in any transactions which are, or were, unusual
in their nature or significance to the Group. The Directors of the Company
received fees for their services totaling £99,000 (30 June 2013: £96,000)
for the six months ended 30 June 2014, none of which was payable at the
period end (30 June 2013: Nil).
Ignis Investment Services Limited received fees for its services as Investment
Managers. The total charge to the Income Statement during the period for these
fees was £4,128,000 (30 June 2013: £3,753,000) of which £85,000 was
administration fees (30 June 2013: £83,000). £2,117,000 (30 June 2013: £
1,878,000) of this total charge remained payable at the period end.
9. Financial instruments and investment properties
Fair values
The fair value of financial assets and liabilities is not materially different
from the carrying value in the annual financial statements.
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:
30 June 2014 Level 1 Level 2 Level 3 Total
fair
value
£'000 £'000 £'000 £'000
Investment properties - - 1,115,853 1,115,853
The lowest level of input are the underlying yields on each property which is
an input not based on observable market data.
30 June 2014 Level 1 Level 2 Level 3 Total
fair
value
£'000 £'000 £'000 £'000
Bank loans - 229,698 - 229,698
The lowest level of input is the interest rate payable on each borrowing which
is a directly observable input.
The following table shows an analysis of the fair values of financial
instruments recognised in the balance sheet by level of the fair value
hierarchy:
30 June 2014 Level 1 Level 2 Level 3 Total
fair
value
£'000 £'000 £'000 £'000
Interest rate swap - (5,666) - (5,666)
The lowest level of input is the three month LIBOR yield curve which is a
directly observable input.
There were no transfers between levels of the fair value hierarchy during the
six months ended 30 June 2014. Explanation 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.
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
2013.
Sensitivity of measurement to variance of significant unobservable inputs:
A decrease in the estimated annual rent will decrease the fair value.
An increase in the discount rates and the capitalisation rates will decrease
the fair value.
There are interrelationships between these rates as they are partially
determined by the market rate conditions.
The fair value of the derivative interest rate swap contract is estimated by
discounting expected future cash flows usingcurrent market interest rates and
yield curves over the remaining term of the instrument.
The fair value of the bank loans are estimated by discounting expected future
cash flows using the current interest ratesapplicable to each loan.
10. The Group has entered into a forward funding commitment and two forward
commitments to purchase three pre-let assets at Aberdeen Gateway Business
Park for a total commitment of up to £48.3 million. Under the forward
funding commitment consideration is payable in instalments as construction
progresses. Consideration for the two assets purchased under forward
commitment agreements is payable on completion. As at 15 August 2014, a
total of £19.5 million has been paid in relation to these commitments.
11. Financing
The Company has fully utilised all of the £80 million facility in place with
Lloyds Banking Group plc which expires in June 2015 and hence is included in
current liabilities.
The Company has in place interest rate swaps with Lloyds Banking Group plc
totalling £80 million. The fair value liability in respect of these interest
rate swaps as at 30 June 2014 is £1,413,000 (June 2013: £3,013,000).
The Company has fully utilised all of the £150 million facility in place with
Barclays Bank plc which expires in May 2018.
The Company has in place interest rate swaps with Barclays Bank plc totalling £
150 million. The fair value liability in respect of these interest rate swaps
as at 30 June 2014 is £4,253,000 (June 2013: £8,270,000).
12. The Group results consolidate those of the Company, UK Commercial Property
Holdings Limited, UK Commercial Property GP Limited, UKCPT Limited
Partnership, UK Commercial Property Nominee Limited, UK Commercial Property
Estates Holdings Limited and UK Commercial Property Estates Limited.
The Company owns 100% of the issued share capital of UK Commercial Property
Holdings Limited, a company incorporated in Guernsey whose principal business
is that of an investment and property company.
The Company owns 100% of the issued share capital of UK Commercial Property GP
Limited, a company incorporated in Guernsey whose principal business is that of
an investment and property company.
UKCPT Limited Partnership is a Guernsey limited partnership, whose principal
business is that of an investment and property entity. UK Commercial Property
Holdings Limited and UK Commercial Property GP Limited, have a partnership
interest of 99% and 1% respectively in this limited partnership. UK Commercial
Property GP Limited is the general partner and UK Commercial Property Holdings
Limited is a limited partner of this partnership.
The Company owns 100% 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% of the issued share capital of UK Commercial Property
Estates Holdings Limited, (formerly known as SCP Group Limited). This Company
is incorporated in Guernsey whose principal business is that of a holding
company. UK Commercial Property Estates Holdings Limited owns 100% of the
issued share capital of UK Commercial Property Estates Limited, a company
incorporated in Guernsey whose principal business is that of an investment and
property company
The Half Yearly Financial Report will be available in due course at the
Company's website address, www.ukcpt.co.uk.
Principal Risks and Uncertainties
The Company'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 Company include
economic, strategic, regulatory, management and control, financial and operational.
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 2013. At the end of the period, there was a change of control of the
Investment Manager resulting from the acquisition of Ignis Asset Management
Limited by Standard Life Investments (Holdings) Limited. Following detailed
discussions between the Company's directors and representatives of Standard
Life Investments, the Board consented to this change of control, having received
assurances regarding the retention of the team involved in the management and
administration of the Company. The continuity which this provides mitigates the
risk associated with the change of control. Other than this, the Company'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 Company's financial year.
Statement of Directors' Responsibilities in
Respect of the Half Yearly Financial Report to 30 June 2014
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 principalrisks and uncertainties for the remaining six
months of the year; and
(b) DTR4.2.8R of the Disclosure and Transparency Rules, being related
partytransactions 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
Christopher M.W. Hill
Chairman
20 August 2014
End of announcement
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