Net Asset Value at 30 June 2020
6 August 2020
UK Commercial Property REIT Limited (“UKCM” or “the Company”)
LEI: 213800JN4FQ1A9G8EU25
Net Asset Value at 30 June 2020
STRONG BALANCE SHEET, LOW LEVERAGE AND DIVERSIFIED PORTFOLIO SUPPORT MAINTAINED DIVIDEND
Net Asset Value
- NAV per share of 83.9p (31 March 2020: 86.3p), resulting in a NAV total return of -2.3% in the period with continued low net gearing of 10.5%*.
- Like-for-like portfolio capital value decreased by 2.5% net of capital expenditure outperforming the MSCI monthly index which fell 3.6% over the period.
- Portfolio value of £1.22 billion (31 Mar 2020: £1.29 billion) following the successful City of London office sale referred to below.
*Net gearing - Gross borrowing less cash divided by total assets (excluding cash) less current liabilities
Positive Investment Activity
- Exchanged contracts and subsequently completed the £40 million sale of Eldon House, the Company’s only office asset in the City of London, to CLI-Dartriver within one of its European private investment programmes. UKCM acquired the property in 2015 for £27.8 million and had recently completed a programme of asset management, with full occupancy achieved.
Continued asset management
The lockdown of the UK as a result of the COVID-19 pandemic which commenced in March was unprecedented and significantly impacted business and the economy. In what has been and continues to be a muted period for business decision-making, the Company’s occupancy rate has held up well at 90%, marginally down from 92% at the end of the last quarter as a result of anticipated lease expiries, hindered by a slow re-letting market.
While ensuring the health and safety of all our stakeholders, the primary focus of the asset management team has been engaging with tenants on requests for rental assistance in a manner which is fair and, where possible, is balanced by a future benefit for the Company. From a tenant base of some 201 tenancies, UKCM received and actioned over 55 tenant requests. After a review of the state of affairs of the tenants in question, UKCM put in place a number of rent deferrals and monthly lease payment structures for around 57% of these requests where warranted. Such lease adjustments are designed to assist both the tenant and the Company; for example, a number have led to commercial re-gear agreements that create value for the Company through longer lease commitments whilst also assisting tenants through rent free periods during a period of cash flow difficulty.
Aside from managing COVID-19 related issues, the Company has successfully executed a number of ordinary course of business leasing transactions. These were all in the industrial sector, which continues to prove itself as the most resilient asset class, and include:
- Signing a new 10 year lease at the M8 Interlink industrial property on the edge of Glasgow to M. Markovitz at a rent of £150,000 per annum, 8% ahead of ERV. The lease is subject to a tenant break in year five, a nine month rent free period, and the completion of landlord works to the unit.
- A new 10 year reversionary lease from December 2020 with Gisela Graeme at Newton’s Court, business and industrial park in Dartford, at a minimum rent of £196,000 per annum. The current lease was due to expire in December 2020 and we have inserted a rent review at that point when we would expect to see a significant uplift in the passing rent. A six month rent free period was granted from March to September, which will assist the tenant through the COVID-19 lockdown period.
- A new five year reversionary lease from June 2020 was agreed with Inspired Gaming (UK) Ltd at the Company’s Ventura Park industrial / warehouse asset in Radlett at a rent of £327,624 per annum. The lease has a break option in year three and a lower annual rent of £246,000 for the first year payable in lieu of a three month rent free period.
Strong balance sheet with significant covenant headroom and flexibility
- Robust balance sheet with low gearing and significant financial resources of £194 million available, comprising uncommitted cash of £94 million, after allowing for future capital commitments and the August 2020 dividend, as well as £100 million available from UKCM’s low cost, revolving credit facility. Together, these resources provide the Company with significant liquidity and flexibility at both a corporate and portfolio level.
- At 10.5% as at 30 June 2020, the Company’s net gearing continues to be one of the lowest in its peer group and the wider REIT sector. The debt has an overall blended interest rate of 2.66% per annum with a weighted maturity of 7.7 years.
The Company has three facilities in place and set out below are the covenants as reported to the various lenders as at the end of June 2020, reflecting the rental collection position detailed below. In addition, as at 30 June 2020, the Company has over £390 million of unencumbered property which provides further significant headroom and flexibility with respect to the Company’s covenant package.
| Barclays RCF | Barings 2027 | Barings 2031 | |
| Actual ICR* | 415% (Limit 175%) | 278% (Limit 200%) | 291% (Limit 200%) |
| Forecast ICR | 513% (Limit 175%) | 392% (Limit 200%) | 414% (Limit 200%) |
| LTV | 13.3% (Limit 60%) | 50% (Limit 75%) | 41.8% (Limit 75%) |
Rent Collection
As at close of business on 3 August 2020, the Company had received payments reflecting 74% of rents due for the third quarter of the year (collectively the 24 June and 1 July English, and 28 May Scottish, quarterly billing dates) after allowing for agreed rent deferrals and including those tenants who have paid, by agreement, on a monthly basis. This is at approximately the same level as when the Company provided rent collection details for the previous quarter billed in March, within its first quarter NAV announcement. 77% of this second quarter billing has now been collected.
*Interest Cover Ratio
The table below sets out the rent collection, split between sectors:
| Sector | Paid as % of sector billing |
| Industrial | 86% |
| Office | 83% |
| Retail | 70% |
| Alternatives | 32% |
| TOTAL | 74% |
The Company has low tenant income concentration from its diverse tenant mix of 201 tenancies across 37 assets, with its top tenant, B&Q, accounting for 5.8% of contracted rental income.
The Investment Manager remains in close communication with tenants to understand and monitor their position as they manoeuvre through the current environment.
The Board has agreed to maintain the dividend of 0.46 pence per share for the next quarter, due in August 2020, highlighting the strength of the Company’s balance sheet and its current financial resources which have enabled the Company to continue paying a covered dividend throughout this period of uncertainty. Having reduced the dividend by 50% in April, the Board will continue to monitor the evolution of COVID-19 closely, together with its impact on the economy, rent receipts and recurring earnings, while balancing the income requirements of its shareholders, and keep its future dividend policy under review. The Board will have clear visibility of 2020 earnings at the time of the Q4 dividend announcement and this will provide the opportunity to review the total dividend distribution for 2020 and future dividend policy.
Ken McCullagh, Chair of UKCM, commented: “The last quarter was very much marked by the impact of the COVID-19 pandemic and the government implemented measures to combat both the virus and the effect on the economy. This had a profound effect on businesses of all types and for the real estate industry has led to the acceleration of many of the trends that were already prevalent or beginning to emerge. I am pleased to say that the Company entered the crisis in a strong position, with a healthy balance sheet and an overweight position in the resilient industrials and logistics sector, which we expect to hold us in good stead as we continue to emerge from the lockdown. It is too soon to have any certainty as to what lies ahead and the Board remains acutely aware of the changeable situation and recessionary environment. However, we take comfort from the fact that rent collection was maintained at around 70%, in line with what we saw at this stage in the last quarter, thanks to the considerable efforts of our manager. Occupancy has held up well, and our balance sheet remains robust. These factors, combined with our level of rent collection, have given us the confidence to recommend a dividend at the same level as announced for the previous quarter and which is fully covered by income.”
Will Fulton, Lead Manager of UKCM at Aberdeen Standard Investments, said: “Once again the primary focus of our activity throughout the quarter has been working with tenants most acutely affected by the impact of the lockdown to help them emerge from the crisis and continue to trade, while at the same time, where possible, ensuring that the Company is able to balance this with longer term benefits such as lease extensions. Concurrently, there have been areas where positive leasing momentum continued throughout, most notably, but not limited to, the industrial and logistics sectors where, over the past few years we have built up a significant portfolio in order to capitalise on the structural changes which are highly supportive of this asset class. As restrictions are lifted there is a sense of cautious optimism that life is returning towards a greater semblance of normality but we do not expect business activity to return to pre COVID-19 levels until next year at the earliest, presenting both challenges and opportunities which the Company is well placed to address.”
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 1 April 2020 to 30 June 2020:
| UK Commercial Property REIT Limited | Per Share (p) | Attributable Assets (£m) | Comment |
| Net assets as at 31 March 2020 | 86.3 | 1,121.2 | |
| Unrealised decrease in valuation of property portfolio | -2.4 | -31.8 | Like for like decrease of 2.4% in property portfolio |
| Loss on sale | -0.1 | -1.8 | Sale of Eldon House, London |
| Capex | -0.1 | -0.9 | Predominantly relates to student accommodation development at Exeter |
| Income earned for the period | 1.3 | 17.5 | Dividend covered by earnings in quarter |
| Expenses for the period | -0.6 | -7.7 | |
| Dividend paid on 29 May 2020 | -0.5 | -6.0 | |
| Net assets as at 30 June 2020 | 83.9 | 1,090.5 |
The EPRA NAV per share is 83.9p (31 March 2020: 86.3p) with EPRA earnings per share for the quarter being 0.75p (31 March 2020: 0.85p).
Sector Analysis
| Portfolio Value as at 30 Jun 20 (£m) | Exposure as at 30 Jun 20 (%) | Like for Like Capital Value Shift (excl sales, purchases & capex) | Capital Value Shift (including sales & purchases) (£m) | |
| (%) | ||||
| Valuation as at 31 Mar 20 | 1,290.9 | |||
| Industrial | 664.1 | 54.5 | -0.8 | -5.1 |
| South East | 34.0 | 0.0 | 0.0 | |
| Rest of UK | 20.5 | -2.0 | -5.1 | |
| Retail | 236.9 | 19.4 | -5.9 | -14.7 |
| High St – South East | 2.2 | -7.2 | -2.1 | |
| High St- Rest of UK | 2.4 | -4.9 | -1.5 | |
| Shopping Centres | 0.0 | 0.0 | 0.0 | |
| Retail Warehouse | 14.8 | -5.8 | -11.1 | |
| Offices | 177.7 | 14.6 | -1.5 | -44.3 |
| City | 0.0 | 0.0 | -41.5 | |
| West End | 2.4 | 0.0 | 0.0 | |
| South East | 4.8 | -1.8 | -1.1 | |
| Rest of UK | 7.4 | -1.8 | -1.7 | |
| Alternatives | 140.5 | 11.5 | -5.2 | -7.6 |
| External valuation at 30 Jun 20 | 1,219.2 | 100.0 | -2.4 | 1,219.2 |
The independent valuation as at 30 June 2020 issued by CBRE had the following Material Uncertainty clause applied to it (*56% of the Company’s portfolio market value is not subject to this Uncertainty Clause):-
“The outbreak of the Novel Coronavirus (COVID-19), declared by the
World Health Organisation as a “Global Pandemic” on the 11th March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries. Observable market activity – that provides the empirical data for us to have an adequate level of certainty in the valuation – is being impacted in the case of some properties, as set out in the schedule*. In the case of these properties, as at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Indeed, the current response to COVID-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement. Our valuation of these properties are therefore reported as being subject to ‘material valuation uncertainty’ as set out in VPS 3 and VPGA 10 of the RICS Valuation – Global Standards. Consequently, less certainty – and a higher degree of caution – should be attached to our valuation than would normally be the case. Given the unknown future impact that COVID-19 might have on the real estate market, we recommend that you keep the valuation of the whole portfolio under frequent review. For the avoidance of doubt, the inclusion of the ‘material valuation uncertainty’ declaration above does not mean that the valuation cannot be relied upon. Rather, the declaration has been included to ensure transparency of the fact that – in the current extraordinary circumstances – less certainty can be attached to the valuation than would otherwise be the case. The material uncertainty clause is to serve as a precaution and does not invalidate the valuation.”
Net Asset Value analysis as at 30 June 2020 (unaudited)
| £m | % of net assets | |
| Industrial | 664.1 | 60.9% |
| Retail | 236.9 | 21.7% |
| Offices | 177.7 | 16.3% |
| Alternatives | 140.5 | 12.9% |
| Total Property Portfolio | 1,219.2 | 111.8% |
| Adjustment for lease incentives | -20.1 | -1.8% |
| Fair value of Property Portfolio | 1,199.1 | 110.0% |
| Cash | 122.8 | 11.2% |
| Other Assets | 43.7 | 4.0% |
| Total Assets | 1,365.6 | 125.2% |
| Current liabilities | -27.5 | -2.5% |
| Non-current liabilities (bank loans ) | -247.6 | -22.7% |
| Total Net Assets | 1,090.5 | 100.0 |
The NAV per share is based on the external valuation of the Company’s direct property portfolio which included a material uncertainty clause as at 30 June 2020. It includes all current period income and is calculated after the deduction of all dividends paid prior to 30 June 2020.
The NAV per share at 30 June 2020 is based on 1,299,412,465 shares of 25p each, being the total number of shares in issue at that time.
Investment Manager’s Market Commentary
The last quarter has seen an unprecedented contraction in economic activity. The first estimate of UK GDP in the three months to May 2020 recorded a decline in output of 19.1%. Activity in May grew by just 1.8% from the previous month, as the easing of lockdown had a more modest impact that previously expected. The increase came after a record 20.4% decline in April.
While it is likely that April will prove to be the nadir for the economy, the shape and speed of recovery remain uncertain at present. All told, we are forecasting a 12.9% contraction in GDP for this calendar year and then a strong, but still partial, recovery of 11.8% growth in 2021.
As we’ve moved into summer and lockdown restrictions have been gradually relaxed, there is a degree of cautious optimism emerging. Non-essential retailers have reported strong trade since reopening in mid-June. However restructuring activity in retail, through the use of company voluntary arrangements and pre-pack administrations, continues largely unabated. With the government extending the moratorium on normal legal remedies available to landlords in respect of tenants not paying rent, for example forfeiture of leases, income from retail assets remains at an extraordinarily low ebb.
The future of offices is a hot topic and a wealth of survey evidence points to a structural rise in remote working. Job losses are set to depress demand and create ‘grey’ space for sub-letting to reduce costs in the short term.
In contrast, the logistics sector enjoyed record levels of take-up in Q2, completing an exceptional strong first half of 2020, with online retail forming the largest component. While there have been short-term deals relating to inventory management issues as a result of the lockdown, the majority of deals have been traditional leases.
Early indications of investment volumes in Q2 suggest a total of around £3 billion, which is on track to be the weakest quarter since Property Data’s records began in 2000. Activity has collapsed across the board, with physical inspections impossible for much of the quarter and constraint on international travel largely excluding overseas investors. The lack of foreign capital was most keenly felt in the office sector, as well as alternatives, with a notable absence of the large portfolio deals seen in recent quarters.
Our House view forecast for a theoretical balanced portfolio of “All Property” expects capital values to fall by more than 14% for this calendar year, with a total return of -9.5%. This would be the second weakest nominal return in the 40-year history of MSCI data. We continue to expect retail to drag the market down, with shopping centre returns forecast to be down 31% over the year. With the segment recording a -9.1% return in the first quarter and the occupier outlook deteriorating substantially since, there may be downside risk even still.
We continue to expect leisure and hotels to have a very difficult year, despite the recent approval of Travelodge’s company voluntary arrangement at least warding off imminent failure. We also now expect a more negative year for central London offices. The sector’s outlook remains subject to much debate but we expect a combination of a cyclical rise in unemployment and structural change to the use of offices to lead many occupiers to fundamentally reappraise their space requirement. “Grey” space available for sub-let is expected to weigh negatively on rents.
We continue to anticipate performance to diverge substantially across the risk spectrum in most segments. Challenges around rent collection will put even greater emphasis on the stability and durability of income.
On the other hand, in such an unprecedented crisis, with considerable potential for material structural change, a window of opportunity may emerge as lockdown eases to both buy and sell assets where investor sentiment does not match a disciplined view of pricing set against these structural changes and the market outlook.
Investment Outlook
The universe of assets where investors can have confidence in the robustness of income, and the stability of rental values and yields, has narrowed considerably and price transparency remains low. In several sectors, until pricing adjusts materially to reflect and potentially overshoot the increased risk to income and values, it is difficult to identify the opportunity and invest. This contrasts with a resurgent competitive tension for that narrower band of assets where investors can have confidence in the robustness of income, and the stability of rental and capital values, linked to a relative scarcity of genuinely good product.
Income in the private rented residential sector has historically been – and is once again – more resilient during periods of economic distress. While available stock is limited, for those less concerned by the lower yield profile, the durable, repeatable cash flows, and strong risk-adjusted returns, remain attractive for many in what is set to be a low return environment.
The structural shift to online shopping remains supportive of logistics, particularly in urban areas, and the supply chain disruption experienced through this crisis with the long-term potential for ‘de-globalisation’ could be a further driver of demand. Larger inventories to create a greater buffer within existing supply chains are the simplest near-term solution – and will require more warehousing for storage.
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 / Tom Elviss / Graeme McDonald, Aberdeen Standard Investments
Tel: 07801039483 / 07557800617 / 07717543309
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^.
Latest directors dealings
- 1 day ago Savannah Energy
- 1 day ago Buccaneer Energy PLC
- 1 day ago Savannah Energy
- 1 day ago Carclo
- 1 day ago Schroder Japan Growth Fund