Net Asset Value and Interim Management Statement

RNS Number : 6873F

UK Commercial Property Trust Ltd

03 May 2011

 



3 May 2011

UK Commercial Property Trust Limited

("UKCPT" or the "Company")

Net Asset Value and Interim Management Statement

For the three month period from 1 January 2011 to 31 March 2011

UK Commercial Property Trust Limited (LSE: UKCM), the largest UK focused commercial property trust and 7^th Largest quoted property company by market capitalisation, today provides its Interim Management Statement for the three months to 31 March 2011 and unaudited quarterly Net Asset Valuation ("NAV") as at 31 March 2011.

Financial Highlights

§ NAV per share* as at 31 March 2011 was 77.0p, which is unchanged from 31 December 2010. Further details on the movement in the NAV per share are shown in the table on the following page.

§ The Company intends to declare a first interim dividend, in respect of the period from 1 January 2011 to 31 March 2011, of 1.3125p per Ordinary Share, with expected ex-dividend and payment dates of 11 May 2011 and 31 May 2011 respectively.

§ The total adjusted NAV per share, after deducting the above 1.3125p interim dividend, is 75.7p, which is unchanged from the equivalent NAV per share as at 31 December 2010.

§ Three year share price total return of 29.5% to 31 March 2011 compared to a sector average of 20.3% (Source: AIC)

Property Highlights

§ Portfolio value as at 31 March 2011 was £955.1 million, a 0.70% increase from the 31 December 2010 valuation on a like-for-like basis, having benefited from a 1.12% capital value uplift in the Company`s retail holdings. Notable performance from Retail Warehouses and West End with capital value uplifts of 1.47% and 2.32% respectively.

§ Adjusted annualised Net Rental Income as at 31 March 2011 was £64.2 million (compared to £61.5 million on 31 December 2010) boosted by retail acquisitions and ongoing asset management.

§ St Georges (Open A1) Retail Park, Leicester purchased for £49.9 million and providing day one income of £3.1 million p.a. Net initial yield after costs of 6.16%.

§ Two lettings completed in BHS Development at The Parade Swindon. 45,000sq ft department store to BHS plc at commencing rent of £725,000 p.a. on 35 year Lease and 8,500sq ft unit to River Island at commencing rent of £230,000 p.a. on 10 year Lease.

Christopher Hill, Chairman of UKCPT, commented:

"UKCPT has performed well during the first quarter, against an economic backdrop of continuing uncertainty. We have benefited from the prime nature of the portfolio and its bias towards the South East region of the UK and the retail sector, which have outperformed during this period.

"We completed the purchase of the St. Georges Retail Park in Leicester in this quarter, and will continue to consider further acquisitions of high quality assets where we believe we can apply our specialist asset management skills to grow value. As announced, we now have the capacity to increase our gearing, allowing us to take advantage of opportunities to enhance returns for shareholders."

*The net asset value per share is calculated under International Financial Reporting Standards ("IFRS") and is unaudited.  It includes all current period income and is calculated after the deduction of all dividends paid prior to 31 March 2011.  It does not include provision for any unpaid dividends for the periods prior to 31 March 2011, including the dividend for the period to 31 March 2011.

At the start of the period, the Company had 1,197,348,858 Ordinary Shares of 25p each in issue (excluding 41,445,142 shares held in treasury).

The NAV per share at 31 March 2011 is based on 1,197,348,858 shares of 25p each, being the total number of shares in issue at that time (excluding 41,445,142 shares held in treasury).

Breakdown of NAV movement

Set out below is a breakdown of the change to the unaudited net asset value per share calculated under IFRS over the period from 1 January 2011 to 31 March 2011.

UK Commercial Property Trust Limited	Per  Share (p)	Attributable Assets (£m)
Net assets as at 1 January 2011	77.0	922.0
Unrealised increase in valuation of property portfolio	0.5	6.5
Capital expenditure during the period	(0.0)	(0.2)
Income earned for the period	1.4	15.8
Expenses for the period	(0.3)	(3.0)
Dividends paid on 28 February 2011	(1.3)	(15.7)
Interest rate swap mark to market revaluation	0.0	0.5
Fair value adjustment - rent free periods	(0.3)	(3.7)
Net assets as at 31 March 2011	77.0	922.2

UK Commercial Property Trust Limited
Net Asset Analysis	31 Mar 2011 £m	31 Mar 2011       %	31 Dec 2010 £m
Property Portfolio
Retail	561.4	60.9	505.7
Office	259.1	28.1	258.3
Industrial	134.6	14.6	134.8
Total Property	955.1	103.6	898.8
Net Current Assets	10.0	1.0	66.7
Net Long Term Liabilities	(42.9)	(4.6)	(43.5)
Total Net Assets as at 31 March 2011	922.2	100.0	922.0

Total Expense Ratio ("TER")

The total expense ratio of the Company for the period ended 31 March 2011, based on average total assets less current liabilities and on the basis of annualised expenses, was 0.85%, identical to that of the period to 31 December 2010 (for the purposes of this calculation, "expenses" includes the costs of running the Group, including the investment management fee, administration fees, Directors' fees, insurance costs, Board costs, registrar costs and any irrecoverable VAT, but excludes capital expenditure and refurbishment and irrecoverable property running costs).

Market Review

The economy experienced many contrasting themes over the first quarter of 2011 with optimistic business surveys, strong industrial production and relative resilience in the labour markets being undermined by weakness in consumer markets and falls in construction output.

The recent fall in retail sales is a sign that consumers are reining in their spending in the face of limited wage growth and continued pressure on disposable incomes from high inflation. The spike in the oil price, influenced by political uncertainty in the Middle East and North Africa, has resulted in inflation persisting at higher levels than the 2% target, although there has been a small drop in the last quarter, and it seems likely that it will remain so in the near term.  Although the probability of an increase in interest rates grew in the light of this inflationary pressure, weak consumer markets and spare capacity within the economy are still an over-riding concern. Given this, the run of economic data to be released over the next few weeks will be the determining factor in whether the Bank of England Monetary Policy Committee follows the European Central Bank with an increase in interest rates. 

In terms of the property market, the first few months of 2011 have been relatively steady and subdued.  IPD reported a 0.6% increase in the monthly index with rental values flat over the period providing a total return of 2.3%, a modest increase over the 2.2% recorded in Q4 2010.

What has been different this quarter, however, is the emergence of the retail sector as the best performer, with shopping centre performance outstripping that of Central London Offices, which has been the best performer over the last 18 months. The outperformance of the retail sector has been driven by strong investment demand and consequent improvement in yields for shopping centres and, to a lesser extent, retail warehouses.  High Street shops remain the weakest performer in this sector, but are still enjoying relatively healthy capital growth.

Although sentiment is positive towards the shopping centres, rental performance within that sector remains the weakest of all the retail sub sectors on an annualised basis.  The retail occupier has experienced mixed fortunes over the quarter with weaker sales, ongoing discounting and profit warnings announced by HMV, JJB, DSG and Oddbins, contrasting with the announcement of the proposed expansion by Debenhams, Tesco, (Onestop convenience chain) and Greggs. For as long as this uncertainty remains, landlords must continue to be flexible and remain focussed on the retention of income.

In the office sector, Central London still continues to dominate and its performance has offset poorer returns elsewhere in the country. However there are now signs that the City and West End markets are diverging in their performance. In the City, the global events of the last few months, both natural and political, are inhibiting the willingness of certain parties to transact. The level of take up in the City in Q1 has been much more subdued and is therefore leading to a pause in rental growth.  The West End, on the other hand, remains relatively buoyant and deal flow continues, particularly from the telecommunications, media and technology sector, with continued and strengthening appetite for Grade A accommodation.

In the rest of the UK, although public sector cutbacks still undermine the prospects of a sector wide recovery beyond Central and Greater London, there is a continued shortage of quality Grade A accommodation. Manchester, Edinburgh and Leeds market commentators are all reporting continued letting activity at the prime end and, for as long as this is the case, the prospects of rental growth in quality Grade A accommodation remain good over the next 12-18 months.

Overall, prime yields have stabilised with capital values influenced by ERV growth.  Central London properties are viewed as being too expensive and many investors are diverting their interest to other global cities.  Investment demand does, however, remain strong with some of this demand now focusing on short term leases where there is the opportunity to add value on rental growth over the coming years.

As for the regions, there is little prime product coming to the market, although there is still likely to be healthy demand for such a product. 

Industrial property has also seen capital growth over the quarter with continued investor demand for South East Industrial multi let estates.

Prime warehouse rents have remained stable over the quarter but the trend is increasing as restricted availability of suitable prime stock also remains a feature of this market, particularly following the record take up of large warehouse space in 2010.  That said, any ongoing demand is still dictated by lease events and network optimisation, particularly from retailers. 

Institutions remain the most active in industrial markets, with strong institutional interest in a number of industrial portfolios that have been openly marketed in the last few months, all the subject of competitive bidding.

Portfolio Review

For the first quarter of 2011 UKCPT saw a like-for-like increase of 0.7% in the value of its property portfolio with a valuation of £955.1million.

The Company`s retail properties showed the strongest performance over the quarter with a 1.1% capital uplift. The greatest contribution came from the Company`s retail warehouse properties with a 1.5% increase.  This partly reflects the continued strong investment demand that has been a feature of that market, particularly for prime bulky goods and Open A1 parks.

The continued investor focus for Central London offices continues to drive performance in the Company`s holdings in that sector with a 2.3% valuation uplift. However, overall performance in the Company's office portfolio was undermined by the fall in value in its South East offices of 0.9% and, to a lesser extent, regional offices, which showed a fall of 0.4%. Overall Office values increased 0.3% for the quarter

The capital value of the Company`s industrial holdings decreased marginally over the quarter, by 0.2%. This was due to the fall in value of one of the Company`s shorter income distribution warehouses, with all other values in the Company`s industrial holdings remaining stable.

Income increased over the quarter following the acquisition of St Georges Retail Park, Leicester (£3.1 million annual rent) with the portfolio's current income yield now at 6.8% (6.5% after acquisition costs). This is referred to in greater detail later in this statement.

Two significant lettings were completed at The Parade, Swindon, with the handover to BHS of its new 45,000 sq ft department store on a new 35 year FRI lease at a commencing rent of £725,000 p.a. after a rent free period. River Island also opened its new 8,500 sq ft store at a rent of £230,000 p.a. after a rent free period. Four units within the development, totalling 8,600 sq ft continue to be marketed and the Company hopes to announce further letting activity shortly.

Elsewhere there were new lettings in the Darwin and Pride Hill shopping centres in Shrewsbury totalling £69,400 p.a. as well as letting of the recently refurbished 1st Floor at No 6 Arlington St, London at £172,600 p.a. equating to £62.50per sq ft.

Notwithstanding that positive letting activity, the expiry of a number of seasonal short term lettings and some lease surrenders has resulted in the Company's void position increasing slightly to 3.93% of net income (excluding pre-lets). This still compares favourably to the monthly IPD equivalent which is 10.1%.

The Company completed the acquisition of St Georges Retail Park, Leicester (Open A1 with Food) for £49.9 million (6.2% net initial yield after costs) on 11th February.  A planning application for a new 72,500 sq ft Tesco store to be built on the site has since been submitted and a decision is expected later in the year.

There were no asset sales over the quarter.

The Company's cash position as at the report date was £19.6 million (pre-dividend distribution commitment of £15.7 million). The Company also has an unused debt facility of a further £38 million.

Outlook

Whilst investment volumes are in line with the same period last year and there are some signs of increased flows of investment stock from the banks and administrators, there is still a lack of prime product for sale. The late and extended Easter break has been blamed by some for the delay in bringing stock to the market, with many hoping to see increased activity in May and June.

Investor appetite for prime property remains strong, particularly from the institutions and REITs, and should ensure that prime yields remain stable. However a cautious attitude surrounds secondary property, particularly in the retail sector, given the challenges that still exist in the retail occupational market.

With rental growth still evident in only some parts of the market it is investor sentiment towards the potential for future rental growth in the near term that is the key to pricing. Some vendors are testing the market with unrealistic views on rental growth and therefore value. Should this continue then there may be the risk of stagnation in some sectors of the market as a gap may start to appear between buyers' and sellers' expectations.

UK Commercial Property Trust Limited	Exposure % as at 31 March 2011	Capital Value Shift (%)	£m
External Valuation at  1 January 2011			898.75
Sub-sector Analysis
Retail	58.79	1.12	5.68
High St - South East High St- Rest of UK	9.79           4.46	0.43 1.55	0.40 0.65
Shopping Centres	17.01	0.96	1.55
Retail Warehouses	27.53	1.47	3.08
Offices	27.13	0.34	0.88
West End	8.86	2.32	1.92
South East	6.75	(0.92)	(0.60)
Rest of UK	11.52	(0.39)	(0.44)
Industrial	14.09	(0.20)	(0.28)
South East	9.18	(0.31)	(0.28)
Rest of UK	4.91	0.00	0.00
Adjustments for Acquisitions(St Georges Retail Park Leicester)			50.1
External valuation at 31 December 2010	100.00	0.70	955.13

 Material Events

On 4 April 2011 the Company announced a proposed change to its investment policy with a proposal to increase the maximum level of gearing from 10% to 25%. An EGM was held on 28 April 2011 where this change was approved by shareholders.

The Board is not aware of any further significant events or transactions which have occurred between 31 March 2011 and the date of publication of this statement which would have a material impact on the financial position of the Company.

Enquiries

The Company Secretary, Northern Trust International Fund Administration Services (Guernsey) Limited

Tel: [phone]

Robert Boag/Graeme McDonald, Ignis Investment Services Limited

Tel: [phone]

Stephanie Highett/Richard Sunderland/Will Henderson/Olivia Goodall, Financial Dynamics,

Tel: [phone]

Important Note

The above information is unaudited and has been calculated by Ignis Investment Services Limited.

 

END

 

 

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