Net Asset Value at 31 December 2020
4 February 2021
UK Commercial Property REIT Limited ("UKCM" or "the Company")
Net Asset Value at 31 December 2020
STRONG BALANCE SHEET, LOW LEVERAGE, POSITIVE INVESTMENT ACTIVITY AND DIVERSIFIED PORTFOLIO SUPPORT MAINTAINED DIVIDEND
Net Asset Value
· NAV per share of 86.7p (30 September 2020: 84.0p), resulting in a NAV total return of 3.8% in the period with continued low net gearing of 6.4%* (gross gearing 15.1%**).
· Like-for-like portfolio capital value increased by 2.9% net of capital expenditure outperforming the MSCI monthly index which increased 0.6% over the quarter.
· Portfolio value of £1.21 billion (30 Sep 2020: £1.22 billion) following the positive investment activity described below.
· Total rent currently collected for the COVID-affected 2020 billing year (being the four rounds of billing centred around March, June, September and December 2020), currently amounts to 83% of all rents due.
·
Rent collection for the first quarter of 2021 (collectively the 25 December and 1 January English, and 28 November Scottish, quarterly billing dates) stood at 84% after allowing for agreed rent deferrals and including those tenants who have paid, by agreement, on a monthly basis.
· Dividend maintained at 0.46 pence per share for the fourth quarter of 2020, due in February 2021. In addition, the Board intends to pay a 5th top-up 2020 dividend, in line with the REIT legislation to pay at least 90% of the 'property income' for the year. This will be determined and announced along with the full 2020 audited financial statements in April and is currently expected to be no less than 0.4p per share.
*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
Positive Investment Activity
· M8 Industrial Estate in Coatbridge sold for £25.4 million in December which was an opportunistic transaction 11% ahead of valuation which will also reduce short/medium term void risk.
· In December, £16.6 million acquisition of an ASDA supermarket in Torquay let for 15 years and benefitting from RPI linked rent reviews. The store is in a strong catchment with limited competition, driving high sales rates. Although this will marginally increase retail weighting, the supermarket segment is a resilient haven and this asset offers a durable and growing income stream to the Company.
· Following legal agreement in December for the land purchase and development funding of a 230 unit student residential scheme at Gilmore Place in central Edinburgh for £29.1 million, the land was acquired in January 2021 for £6.5 million leaving an additional capped funding commitment of £22.6 million. The scheme is located in a prime location for access to The University of Edinburgh and is scheduled for delivery to meet the 2022/2023 academic year. The University of Edinburgh has an outstanding global reputation being ranked in the top 30 universities in the world by The Times World University rankings 2020.
Asset management driving occupancy and value
The further lockdown of the UK Economy at the start of 2021 is likely to have a significant impact on the property market and the broader economy. Positively UKCM is in a resilient position with a 58% weighting to the favoured industrial sector and an occupancy rate of 94%. Unlike the first lockdown there is a more optimistic outlook with many businesses having now adapted to operating in restricted conditions and, most importantly, the rollout of the UK vaccination program offering real hope of a potential return to normality later in the year.
The asset management team continue to actively manage the portfolio to drive down the void rate and increase income. Notable transactions over the last quarter include:
· Completed new 3 year leases with DFS at units 3b and 3c Gatwick Gate, Crawley at a rent of £243,246 per annum and equating to £12.00 psf, which is in advance of the estimated rental value (ERV) of £11.50psf. This led to a re-appraisal of ERVs on the estate and subsequent 6% uplift in valuation. Interest in the remaining vacancy on the estate is good.
· Re-gearing Forward Trucking's lease at Unit 6a, Ventura Park, Radlett comprising a 10 year extension that takes the lease expiry to October 2033 (with a tenant only break option in October 2028) and a 38% increase in rent to £138,500 (£12 psf) per annum. This lease re-gear has extended the average weighted unexpired lease length on the estate, increased the quantum of income and has enhanced the valuation.
Strong balance sheet with significant covenant headroom and flexibility
· Robust balance sheet with low gearing and significant financial resources of £218 million available, comprising uncommitted cash of £68 million, after allowing for future capital commitments and the February 2021 dividend, as well as £150 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 6.4% as at 31 December 2020, the Company's net gearing continues to be one of the lowest in its peer group and the wider REIT sector. The drawn debt has an overall blended interest rate of 2.88% per annum with a weighted maturity of 8.2 years. Gross gearing as at 31 December 2020 was 15.1% (Sep 20: 18.7%)
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 December 2020, reflecting the rental collection position detailed below. In addition, as at 31 December 2020, the Company has over £418 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* |
325% (Limit 175%) |
349% (Limit 200%) |
312% (Limit 200%) |
|
Forecast ICR* |
771% (Limit 175%) |
394% (Limit 200%) |
367% (Limit 200%) |
|
LTV |
0% (Limit 60%) |
50% (Limit 75%) |
42.1% (Limit 75%) |
(*Interest Cover Ratio)
Rent Collection remains robust
As at close of business on 28 January 2021, the Company had received payments reflecting 84% of rents due for the first quarter of the year (collectively the 25 December and 1 January English, and 28 November Scottish, quarterly billing dates) after allowing for agreed rent deferrals and including those tenants who have paid, by agreement, on a monthly basis.
The table below sets out the quarter's rent collection, split between sectors:
|
|
% of Q1 2021 rent demanded |
% collected |
|
Industrial |
52% |
92% |
|
Office |
17% |
87% |
|
Retail |
19% |
79% |
|
Other |
12% |
53% |
|
Total |
100% |
84% |
The Company has a diverse tenant mix with a number of high quality tenants within its largest tenant exposure including COVID-19 resilient businesses such as, Ocado (5.4% of rent), Amazon (4.9%) and B&Q (3.3%).
Rent collection rates improved over the course of 2020 from 77% in March to 85% in September. The December quarter collection process continues and, with the third lockdown in place, tenant engagement will continue to be paramount to ensure that we can assist tenants where appropriate and maximise rent collection in what will be challenging times for a number of businesses. We have had some significant success in recovering unpaid rent and have received over £1 million in arrears from three major high street retailers who had not previously paid rent since the start of the pandemic.
Total rent currently collected for the COVID-affected 2020 billing year (being the four rounds of billing centred around March, June, September and December 2020), currently amounts to 83% of all rents due.
Dividends
The Board has agreed to maintain the dividend of 0.46 pence per share in respect of the final quarter of 2020, due in February 2021, 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. The Board will continue to monitor the evolution of COVID-19 and the roll-out of the vaccine closely, together with its impact on the economy, rent receipts and recurring earnings, while balancing the income requirements of its shareholders, and, given the recent lockdown measures in the UK and the continuing uncertainty, will keep its future dividend policy under review. The Board is also cognisant of the REIT rules which require the Company to pay out 90% of its 2020 property income within 12 months of the year end and will make an announcement in relation to the quantum and timing of a further interim top-up dividend once the full 2020 audited financial statements are available in April 2021. This top-up dividend is currently expected to be no less than 0.4p per share.
Ken McCullagh, Chair of UKCM, commented: "Against a very challenging backdrop of further COVID related lockdowns, the Company produced a robust performance in the final quarter which saw NAV and portfolio valuation growth as well as continued high occupancy and robust rent collection. During the period UKCM progressed the strategic repositioning of its portfolio towards modern economy property sectors, undertaking two acquisitions as well as disposals of assets where we believe the capital can be more effectively deployed elsewhere. Amongst other asset management initiatives, our investment manager has also secured a number of important new leases at above prevailing ERVs which have been accretive to the valuations. We remain acutely aware of the precarious nature of the economy and business environment due to the pandemic, however this performance, coupled with our low gearing and strong cash resources, does give us the confidence to continue to maintain the dividend for the quarter under review."
Will Fulton, Lead Manager of UKCM at Aberdeen Standard Investments, said : "Our continued focus on both working with those occupiers most impacted by the lockdowns, coupled with enabling those business that have either benefitted from or been able to effectively adapt their operations to this new environment, has supported the Company's own performance. Once again we have seen positive leasing momentum particularly in the industrial and logistics sectors where we have deliberately built up a strong position over the past few years to capture the rental and valuation growth of this in-demand sector. We will continue to look for opportunities to invest in modern economy, future fit, property sectors which are supported by structural changes in society while at the same time ensuring our investors continue to benefit from the geographic and sector diversification our portfolio affords."
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 2020 to 31 December 2020:
|
UK Commercial Property REIT Limited |
Per Share (p) |
Attributable Assets (£m) |
Comment |
|
Net assets as at 30 September 2020 |
84.0 |
1,091.0 |
|
|
Unrealised increase in valuation of property portfolio |
2.5 |
31.9 |
Predominantly like for like increase of 3.2% in property portfolio |
|
Gain on sale |
0.1 |
1.8 |
Gain on sale after costs relating to Great Lodge Retail Park, Tunbridge Wells and M8 Industrial Estate, Glasgow |
|
Capex |
-0.1 |
-0.8 |
Predominantly relates to student accommodation development at Exeter plus CAPEX at St,George's Retail Park, Leicester |
|
Income earned for the period |
1.2 |
15.9 |
Dividend covered by earnings in quarter |
|
Expenses for the period |
-0.5 |
-6.8 |
|
|
Dividend paid on 30 Nov 2020 |
-0.5 |
-6.0 |
|
|
Net assets as at 31 December 2020 |
86.7 |
1,127.0 |
|
The EPRA Net Tangible Assets per share is 86.7p (30 Sep 2020: 84.0p) with EPRA earnings per share for the quarter being 0.69p (30 Sep 2020: 0.41p).
Sector Analysis
|
|
Portfolio Value as at 31 Dec 2020 (£m) |
Exposure as at 31 Dec 2020 (%) |
Like for Like Capital Value Shift (excl sales, purchases & CAPEX) |
Capital Value Shift (including sales & purchases) (£m) |
|
|
(%) |
|||
|
Valuation as at 30 Sep 2020 |
|
|
|
1,222.0 |
|
|
|
|
|
|
|
Industrial |
697.1 |
57.7 |
7.0 |
22.8 |
|
South East |
|
37.4 |
7.2 |
30.5 |
|
Rest of UK |
|
20.3 |
6.6 |
-7.7 |
|
|
|
|
|
|
|
Retail |
204.3 |
16.9 |
-0.8 |
-30.5 |
|
High St - South East |
|
1.9 |
-11.4 |
-3.0 |
|
High St- Rest of UK |
|
3.7 |
0.0 |
16.6 |
|
Retail Warehouse |
|
11.3 |
1.0 |
-44.1 |
|
|
|
|
|
|
|
Offices |
169.6 |
14.1 |
-2.7 |
-4.8 |
|
West End |
|
2.4 |
0.0 |
0.0 |
|
South East |
|
4.6 |
-3.6 |
-2.1 |
|
Rest of UK |
|
7.1 |
-3.0 |
-2.7 |
|
|
|
|
|
|
|
Alternatives |
135.8 |
11.3 |
-1.9 |
-2.7 |
|
|
|
|
|
|
|
External valuation at 31 Dec 2020 |
1,206.8 |
100.0 |
3.2 |
1,206.8 |
The independent valuation as at 31 December 2020 carried out by CBRE did not have a Material Uncertainty clause applied to it.
Net Asset Value analysis as at 31 December 2020 (unaudited)
|
|
£m |
% of net assets |
|
Industrial |
697.1 |
61.9% |
|
Retail |
204.3 |
18.1% |
|
Offices |
169.6 |
15.0% |
|
Alternatives |
135.8 |
12.1% |
|
Total Property Portfolio |
1,206.8 |
107.1% |
|
Adjustment for lease incentives |
-24.0 |
-2.1% |
|
Fair value of Property Portfolio |
1,182.8 |
105.0% |
|
Cash |
122.7 |
10.9% |
|
Other Assets |
47.5 |
4.2% |
|
Total Assets |
1,353.0 |
120.1% |
|
Current liabilities |
-28.2 |
-2.5% |
|
Non-current liabilities (bank loans) |
-197.8 |
-17.6% |
|
Total Net Assets |
1,127.0 |
100.0% |
The NAV per share is based on the external valuation of the Company's direct property portfolio as at 31 December 2020. It includes all current period income and is calculated after the deduction of all dividends paid prior to 31 December 2020.
The NAV per share at 31 December 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
While activity in early December ticked up notably, it was curtailed by restrictions being re-tightened following the emergence of a new, more transmissible variant of Covid-19. The latest data available demonstrated that the UK economy shrank for the first time in six months in November, with GDP down 2.6% compared with October. This is the first contraction since April's lockdown and increases the likelihood that the UK economy will enter into a double-dip recession.
Trading for the consumer-facing retail, leisure and hospitality sectors remains challenging in the face of current restrictions. However, the Covid-19 impact on UK retail has not been homogenous across retail sub-sectors as illustrated by the resilience of supermarket trading. Kantar data illustrates that all UK supermarket groups benefitted from unprecedented Christmas demand in 2020. Take home grocery sales rose 11.4% year-on-year over the 12 weeks to December 27, despite higher online penetration than the previous year.
In offices, the occupational market remains weak, particularly in Central London where the availability rate has reached levels not seen since 2005. However, it is important to highlight a clear distinction by building quality. Grade A office space remains relatively well balanced in the capital, especially for larger floorplates but there has been a sharp increase in sub-let or so-called grey space coming to the market, accounting for close to 80% of the total.
With a sizeable increase in demand, 2020 broke all previous records for the UK logistics sector, with occupiers signing up to 50.1 million square feet of new space. The sector has been a key beneficiary of shuttered shops and the marked acceleration in online retailing. Although Amazon was by far the largest single occupier, accounting for a quarter of all leased space during 2020, it is interesting to note that take-up would have still broken new records even if Amazon was removed from the numbers, as the sector was buoyed by many businesses of all sizes increasing online sales or shoring up their supply chains.
Although investment volumes at £43 billion for 2020 were 25% lower than 2019, at close to £12.8 billion, the fourth quarter of 2020 saw a noticeable pick up when compared with the previous two quarters. Despite the occupational uncertainties, offices accounted for over 35% of total Q4 investment and the industrial sector 30%.
We are forecasting further capital declines across retail exposed to discretionary spend in 2021, with greater declines in rental values. The renewed lockdown, which is likely to last for most of Q1, will put further pressure on retailers, leisure operators and hospitality providers, reinforcing that view.
In offices, the occupational fundamentals have weakened substantially; availability has increased notably without any meaningful impact on rents thus far. We do not believe that situation is sustainable and are forecasting rental declines in Central London this year, with more modest declines in the main regional markets. However, we expect quality buildings in strong locations to hold up better through this adjustment period.
Industrials are set to be the best performing sector in 2021 for a fifth successive year resulting from the continued strong sentiment towards the positive structural drivers of the occupier market. In our view, those drivers are strongest for logistics units in urban areas.
Performance is expected to be dispersed across the risk spectrum, with the most reliable cash flows from the highest quality covenants and longest lease terms significantly outperforming assets carrying income risk. Rising vacancy and availability across consumer facing real estate and offices is set to see the most difficult to let buildings lose the most value in what is expected to be a weak demand environment for most of the year. We do not expect risk to be rewarded in 2021.
Investment Outlook
A renewed sense of optimism moving into 2021, with a no-deal Brexit averted, is likely to be tempered, at least initially, by the latest national lockdown as investors assess the potential damage to occupier markets. With liquidity likely to be impaired in the first quarter, 2021 looks set to be a year of two halves for the investment market. Provided vaccinations can be rolled out at sufficient scale in the first half of the year to materially supress the virus, we expect to see a recovery in activity in the second half 2021.
Investment strategies will continue to favour sectors with more defensive characteristics. Fundamentally, we prefer investing in areas where the structural drivers of demand are positively impacted by or largely insulated from the ongoing pandemic, including logistics and supermarkets.
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: 0131 528 4261
Edward Gibson-Watt / Harry Randall, J.P. Morgan Cazenove
Tel: 020 7742 4000
Richard Sunderland / Claire Turvey / Andrew Davis, FTI Consulting
Tel: 020 3727 1000
The above information is unaudited and has been calculated by Aberdeen Standard Investments^.
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