14 February 2019
UK Commercial Property REIT Limited (“UKCM†or “the Companyâ€)
LEI: 213800JN4FQ1A9G8EU25
Net Asset Value at 31 December 2018 and proposed extension of investment policy
UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM), announces its unaudited quarterly Net Asset Value (“NAVâ€) as at 31 December 2018. The Company owns a diversified portfolio of high quality income producing UK commercial property and is advised by Aberdeen Standard Investments (“ASIâ€)^.
NAV
Strong balance sheet providing flexibility
*Net gearing - Gross borrowing less cash divided by total assets (excluding cash) less current liabilities
**Gross gearing - Gross borrowings divided by total assets less current liabilities
Delivering on strategy of producing sustainable income streams
The Company continues its strategy of recycling capital into good quality assets in favoured sectors, which are earnings accretive and offer growth potential, as follows:
Asset management and leasing momentum underpinning performance
Expanded Investment Policy
Andrew Wilson, Chairman of UKCM, commented: “2018 has been a significant year of progression for UKCM that has seen REIT conversion and also further positive momentum behind the repositioning of the portfolio. Strategic acquisitions and disposals have continued this year, recycling capital into high quality holdings that deliver sustainable long term rental income. Additionally, successful asset management initiatives extracting latent rental and capital values together with operational results underpin the performance of the business. Although of course there is more work to be done, we are pleased with the results that have been delivered this year and, with a proposal to expand our potential investment universe across a wider range of asset types and new debt facilities, we look forward to being able to continue on this path in 2019.â€
Will Fulton, Lead Manager of UKCM at Aberdeen Standard Investments, said: “Over the year we have had significant asset management success, particularly in leasing space where we have created value and improved the Company’s ability to produce high quality income streams, often exceeding ERVs, and increasing the proportion of index linked rents whilst extending lease terms. We have also continued to make strategic sales, recycling capital into assets which we believe offer better opportunities to grow value and income.
Looking forward we believe it is important to ‘move with the times’ in maintaining a well-diversified portfolio of UK commercial real estate to meet our objective; since the Company’s inception in 2006 the real estate landscape has changed with many sectors, previously in their infancy, having matured and become mainstream, commonly referred to as Alternative sectors by the industry. The growth in these additional sectors can largely be attributed to the favourable structural changes driving them including demographic, urbanisation, technology trends, the stability of income returns and diversification benefits they can provide. We believe that the ability to selectively add them to the Company's portfolio is an important additional weapon in our armoury to potentially enhance future returns.â€
Breakdown of NAV movement
Set out below is a breakdown of the change to the unaudited net asset value per share calculated under International Financial Reporting Standards ("IFRS") over the period from 30 September to 31 December 2018
UK Commercial Property REIT Limited | Per Share (p) | Attributable Assets (£m) | Comment |
Net assets as at 30 September 2018 | 94.3 | 1,225.3 | |
Unrealised increase in valuation of property portfolio | 0.1 | 1.4 | Predominantly like for like increase of 0.2% in property portfolio. |
Gain on Sale | 0.1 | 1.2 | Gain on sales at High Street, Exeter and Great Marlborough Street, London |
Capital expenditure during the period | -1.1 | -14.7 | Principally relates to acquisition costs associated with acquisition of distribution warehouse portfolio, the development of Maldron Hotel, Newcastle, refurbishment of XDock 377 at Lutterworth and ongoing pre-let asset management initiatives at St. George's Retail Park, Leicester and Ventura Park, Radlett. |
Income earned for the period | 1.4 | 18.0 | Equates to dividend cover of 82% in the calendar year with significant resources still available for income-accretive investment. |
Expenses for the period | -0.6 | -6.7 | |
Dividend paid on 31 November 2018 | -0.9 | -12.0 | |
Interest rate swaps mark to market revaluation | 0.0 | 0.1 | No material movement in the quarter |
Net assets as at 31 December 2018 | 93.3 | 1,212.6 |
The EPRA NAV per share (excluding swap liability) is 93.4p (30 September 2018: 94.4p) with EPRA earnings per share for the quarter being 0.86p (30 September 2018: 0.75p).
Sector analysis
Portfolio Value as at 31 Dec 2018 (£m) | Exposure as at 31 Dec 2018 (%) | Like for Like Capital Value Shift (excl sales, purchases and capex) | Capital Value Shift (including sales & purchases) (£m) | |
(%) | ||||
Valuation as of 30 Sep 2018 | 1,452.5 | |||
Industrial | 670.5 | 46.4 | 3.1 | 102.9 |
South East | 28.3 | 3.3 | 13.1 | |
Rest of UK | 18.1 | 2.6 | 89.8 | |
Retail | 384.9 | 26.7 | -5.1 | -43.0 |
High St – South East | 2.7 | -1.9 | -0.7 | |
High St- Rest of UK | 3.0 | -1.6 | -23.0 | |
Shopping Centres | 3.0 | -4.7 | -2.1 | |
Retail Warehouse | 18.0 | -6.2 | -17.2 | |
Offices | 231.9 | 16.0 | 2.0 | -68.7 |
City | 2.6 | 11.9 | 4.0 | |
West End | 2.0 | 0.0 | -73.2 | |
South East | 4.9 | 0.0 | 0.0 | |
Rest of UK | 6.5 | 0.5 | 0.5 | |
Leisure/Other | 157.9 | 10.9 | 0.9 | 1.5 |
External valuation at 31 Dec 2018 | 1,445.2 | 100.0 | 0.2 | 1,445.2 |
Net Asset Value analysis as at 31 December 2018 (unaudited)
£m | % of net assets | |
Industrial | 670.5 | 55.3 |
Retail | 384.9 | 31.7 |
Offices | 231.9 | 19.1 |
Leisure/Other | 157.9 | 13.0 |
Total Property Portfolio | 1,445.2 | 119.1 |
Adjustment for lease incentives | -14.3 | -1.2 |
Fair value of Property Portfolio | 1,430.9 | 117.9 |
Cash | 43.5 | 3.6 |
Other Assets | 22.0 | 1.8 |
Total Assets | 1,496.4 | 123.3 |
Current liabilities | -34.2 | -2.7 |
Non-current liabilities (bank loans & swap) | -249.6 | -20.6 |
Total Net Assets | 1,212.6 | 100.0 |
The NAV per share is based on the external valuation of the Company’s direct property portfolio. It includes all current period income and is calculated after the deduction of all dividends paid prior to 31 December 2018. It does not include provision for any unpaid dividends relating to periods prior to 31 December 2018, i.e. the proposed dividend for the period to 31 December 2018.
The NAV per share at 31 December 2018 is based on 1,299,412,465 shares of 25p each, being the total number of shares in issue at that time.
Economic and Property Market Review
UK economic growth has been fairly uneven this year. After a weak, weather-affected start to the year, third quarter growth was well above trend at 0.6%. However, this appears to be a temporary spike rather than a decisive strengthening of the economy, with indicators in the fourth quarter turning down sharply.
The ongoing uncertainty surrounding Brexit negotiations appears to be restraining business investment and household spending. With trend growth estimated to be lower, the output gap largely closed, and a relatively weak global backdrop, it is hard to see a substantial acceleration in economic growth.
Occupational markets continue to behave quite differently across sectors, with structural forces being the key drivers. The familiar pattern of falling retail rents, modest upticks in office rents and robust growth in industrials is little changed. The risk of more serious declines in the retail sector is affecting investor sentiment.
The industrial sector continues to be the stand-out performer in the UK real estate market. Although MSCI IPD data suggests that rental growth is beginning to moderate, with vacancy rates remaining exceptionally low and interest in available space healthy, the necessary drivers are still in place to support further rental growth for the sector.
The structural challenges facing the retail sector are now beginning to be reflected in MSCI IPD data with the majority of retail experiencing declining rental values. With few retailers expanding, aside from the value operators, this rental trend is expected to continue through 2019.
‘All Property’ capital values experienced a small decline in Q4 2018, according to the MSCI IPD Monthly Index, with declines in retail offsetting growth in the industrial sector. It is our observation that towards the end of the year the investor pool reduced and became more selective and, whilst not all investment activity during the final quarter has been recorded as yet, the number of deals is down on the recent quarterly average. Despite this, total investment volumes in 2018 reached £61 billion, only £5 billion less than 2017 and substantially more than the 2016 total of £52 billion.
The listed sector has seen discounts to NAVs widen over the quarter, which in part reflects the wider equity market sell-off experienced over the fourth quarter, but it is also a function of slowing NAV growth rates in the second half of this year. The hierarchy of preferred sectors remains largely unchanged with industrials and income-focussed real estate stocks remaining the top picks, and wide discounts for the major retail specialists.
Market Outlook
Uncertainty around the near-term political outlook makes it difficult to predict an economic outcome with strong conviction. In the property market this uncertainty is reducing liquidity and visibility of pricing in many areas of the market. With the exception of highly sought after and expensive long term income, those with capital to invest may be able to access good-quality real estate at prices that are attractive in the long term. As ever, it is vitally important to assess asset-level risk and income prospects to identify such opportunities.
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 Company’s website which can be found at: www.ukcpreit.com
For further information please contact:
Will Fulton / Graeme McDonald, Aberdeen Standard Investments
Tel: 0131 245 2799 / 0131 245 3151
Edward Gibson-Watt / Oliver Kenyon, J.P. Morgan Cazenove
Tel: 020 7742 4000
Richard Sunderland / Claire Turvey / Eve Kirmatzis, FTI Consulting
Tel: 020 3727 1000
The above information is unaudited and has been calculated by Aberdeen Standard Investments^.
^Aberdeen Standard Investments is a brand of the investment businesses of Aberdeen Asset Management and Standard Life Investments. The Company is managed and advised by Standard Life Investments (Corporate Funds) Limited (the Company’s appointed AIFM).