10 August
2022
UK Commercial Property REIT
Limited
(“UKCM” or “the Company”)
Net Asset Value at
30 June 2022
EARNINGS AND ASSET
MANAGEMENT LED VALUATION GROWTH SUPPORT FURTHER DIVIDEND
INCREASE
10 August
2022: UK Commercial Property REIT Limited (“UKCM” or the
“Company”) (FTSE 250, LSE: UKCM), which owns a £1.7 billion
portfolio of high quality and diversified real estate across the UK
today provides a net asset value (“NAV”) and trading update for the
second quarter of 2022.
Highlights
- 1.5% increase in NAV per share to 112.9p (31 March 2022: 111.2p) resulting in NAV total
return for the quarter of 2.3% (Q1: 9.8%). This brings NAV growth
for the first half of 2022 to 10.7% and first half NAV total return
to 12.3%.
- 1.4% increase in like-for-like portfolio capital value, net of
capital expenditure, to £1.71 billion, against the Company’s
benchmark, the MSCI UK Balanced Portfolios Quarterly Property
Index, which increased by 2.1% over the quarter. The portfolio has
outperformed its MSCI benchmark over 1, 3 and 5 years.
- Rent collection rates have normalised to pre-pandemic levels
with 99% received for the third quarter of 2022 and 99% for the
year to date.
- Quarterly dividend increased by a further 6.3% to 0.85p per
share, following the increases announced in both the fourth quarter
of 2021 and the first quarter of 2022. This brings the H1 2022
dividend increase to 13.3%.
- Additional special dividend of 1.92p per share payable in
August to reflect strong gains realised
- 9% increase in EPRA earnings per share for the quarter to 0.83p
(31 March 2022: 0.76p) giving
dividend cover for the quarter of 104%.
Ken McCullagh, Chair of UKCM,
commented: “We have delivered a strong set of results from our
portfolio during the first half of 2022 with further positive
leasing momentum by our asset management team driving rental growth
and an increase in portfolio valuation. Over the past few
years we have taken advantage of our ability to invest in a
diversified range of sectors to proactively manage our portfolio
towards income growth and security, with a focus on future fit and
operational asset classes. Of particular note we have built a
strong position in both urban and big box logistics, and the living
assets class, where we are invested in student housing and hotels -
in all of these the supply demand imbalance and societal changes
continue to be highly supportive of the occupational markets and
rental growth. While we are acutely aware of the broader
economic challenges ahead, including rising inflation and interest
rates, that could be negative on valuations, we believe that we are
well placed both in terms of the quality of our portfolio and the
strength of our lowly leveraged balance sheet, to continue to
deliver shareholder value through a growing level of income.
This confidence is reflected in the additional – and fully covered
- dividend increase we have announced today.
The Board, as noted in recent prior statements, is conscious of
the significant discount on the share price to NAV. The Board
is pleased to announce the payment of a special dividend of 1.92p
per share in August to return some of the strong gains
that have been realised over the last number of quarters from
capital allocation and asset management initiatives so that
all shareholders can benefit from the recent growth in net asset
value that is not currently reflected in the Company’s share
price. The Board believes this type of distribution could be
utilised in the future to reward shareholders, while
still also keeping the option of share buy-backs under
consideration.
With Will Fulton having returned
to the Manager full time, I would also like to take the opportunity
to thank Kerri Hunter, who stood in
for Will during his temporary absence, particularly for her efforts
in helping the abrdn team fully deploy our remaining cash resources
at the end of last year. We wish her well on her future
endeavours.”
Positive Investment Activity
As previously disclosed, in May, the Company committed to the
development of a high quality hotel in central Leeds which will complete mid-2024 with a
25-year franchise agreement in place with Hyatt Hotels, one of the
leading global hotel brands. UKCM is funding the development for a
total commitment of £62.7 million. The hotel will be operated under
a lease by Interstate Hotels & Resorts, a 50+ year old global
leader in hotel operation, with UKCM’s rental income based on the
income generated from the operation of the hotel. The acquisition
is in line with part of UKCM’s strategy to invest in operational
real estate sectors that are expected to deliver resilient rental
incomes.
The 140,000 sq ft hotel’s 305 rooms will be split between the
short stay Hyatt Place and the long stay Hyatt House brands. The
upscale hotel will provide meeting rooms, a gym and several food
and beverage options, including a rooftop bar with its own
dedicated entrance.
Outside the reporting period in July the Company disposed of its
68,400 sq ft central Birmingham
office, 9 Colmore Row, to Birmingham City Council at a price of
£26.48 million, ahead of the asset’s book cost and at a premium to
the latest valuation. In addition to securing a strong sale price,
the disposal is in line with the Company strategy of exiting risk
assets and those in need of capital expenditure which will not
enhance value.
Asset management driving rental
growth, occupancy and value
The Company has a very low void rate of 1.5% (2.4% at Q1 2022)
which provides good visibility of future income and clearly
demonstrates the asset management team’s ability to grow income,
with a strong focus on capturing the portfolio’s reversionary
potential whilst also driving value.
Notable transactions over the last quarter include:
- In June, a new tenant was secured for Unit 12, Newton’s Court,
Dartford following a comprehensive
refurbishment and environmental upgrade of the property. Paak
Logistics UK Limited has taken a new 15 year lease without break
over the 67,300 sq ft unit at a rent of £942,816 per annum,
representing a 27% premium to the ERV at the start of the year and
demonstrating the continued demand for high quality, well located
logistics space. This also sets a new headline rental tone for the
estate of £14psf per annum and the lease incorporates 5 yearly
upwardly only open market rent reviews. The achieved rent is
significantly ahead of the original underwritten rental level when
the refurbishment commenced demonstrating the potential within the
portfolio to capture strong rental growth. In line with the
Company’s ESG priorities the buildings EPC was improved from a
rating of D to A through the refurbishment works which included
using energy efficient materials and installing PV
panels.
- Also at Newton’s Court Dartford, Unit 6 was let to Rodenstock
UK Ltd on a new 10 year lease with a tenant only break option in
year 5 over the 6,650 sq ft unit which had recently fallen
vacant. The agreed annual rent is £89,775 per annum equating
to £13.50 psf per annum, which is 6% ahead of the unit’s previous
ERV at the start of the year. Overall Newton’s Court, Dartford has experienced 9% growth in market
rents in the first six months of the year.
- At Craven House, the Company’s 20,100 sq ft West End office,
the rent review from June 2021 was
settled 5% ahead of ERV at an increased rent equating to £54 per sq
ft. The prominent building is situated adjacent to Carnaby Street
and is let to film and television production company Molinaire
until June 2026.
- As previously disclosed, at St George’s Retail Park in
Leicester, Autoglass completed a
new 10 year lease in June, with a tenant break on the fifth
anniversary at a rent of £52,500 per annum in line with ERV. The
park is now fully let and boasts an attractive line-up of strong
tenants including Next, Home Bargains, DSG and Iceland.
Strong balance sheet with significant
covenant headroom and flexibility
- Robust and efficient balance sheet with low gearing and
financial resources of £24 million available to utilise from
current resources, including the post-period receipt from the sale
of Colmore Row, and allowing for future commitments and the
dividends payable in August 2022.
- At 13.7% the Company’s gearing continues to be one of the
lowest in the AIC peer group which averaged 20% at the end of June.
The drawn debt has an overall blended interest rate of 2.79% per
annum, of which 75% is fixed rate, with a weighted maturity of 5.4
years and banking covenants that are well covered.
Rent Collection has normalised
- Rent collection rates have normalised with payments received so
far for third quarter rents reflecting 99% of rents due as at close
of business on 30 July 2022,
(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.
The table below sets out the third quarter’s rent collection,
split between sectors:
|
% of
Q3 2022 rent demanded |
% collected |
Industrial |
54% |
99.8% |
Office |
18% |
98.2% |
Retail |
15% |
98.4% |
Other |
13% |
100% |
Total |
100% |
99.3% |
The Company has a diverse tenant mix with a number of high
quality occupiers, the largest five of which comprise resilient
businesses such as Ocado (6.0% of rent), Public Sector (5.0%)
Warner Brothers (4.4%), Amazon (4.2%) and Total (3.3%).
The second quarter dividend has been increased by a further 6.3%
to 0.85p per share. This follows a 6.7% increase for the prior
quarter and reflects the Board’s continued recognition of the
importance of income to shareholders. Dividend cover for the second
quarter of 2022 was 104%, compared to 101% for the first quarter of
2022 and the Board believes the further increase to be appropriate
and sustainable given the current level of investment and
development activity within the Company.
The Board, as noted in recent prior statements, is conscious of
the significant discount on the share price to NAV. The Board
is pleased to announce the payment of a special dividend of 1.92p
per share in August to return some of the strong gains
that have been realised over the last number of quarters from
capital allocation and asset management initiatives so that
all shareholders can benefit from the recent growth in net asset
value that is not currently reflected in the Company’s share
price. The Board believes this type of distribution could be
utilised in the future to reward shareholders, while
still also keeping the option of share buy-backs under
consideration.
Discount Policy / EGM
The Company’s discount control policy provides that if the
market price of the ordinary shares of 25
pence each in the Company (the “shares”) is more than 5 per
cent below the published NAV for a continuous period of 90 dealing
days or more, following the second anniversary of the Company’s
most recent continuation vote in relation to the discount control
policy, the Directors will convene an extraordinary general meeting
to be held within three months to consider an ordinary resolution
for the continuation of the Company. The most recent continuation
vote in relation to the share discount policy was held on
18 March 2020.
The closing market price of the shares had been more than 5 per
cent below the published NAV for more than 90 continuous days up to
29 July 2022. In accordance with the
discount control policy, the Board is therefore intending to
convene an extraordinary general meeting to consider a resolution
to approve the continuation of the Company.
The Investment Manager continues to improve earnings and
identify attractive opportunities for the Company's property
portfolio and the Board believes it is important for shareholders
to approve the continuation vote in order that the Investment
Manager may continue to pursue the investment strategy effectively.
Accordingly, the Company will, in due course, be publishing a
circular convening an extraordinary general meeting to consider
that continuation resolution and the Board will be recommending
shareholders vote in favour of the Company's continuation.
The Company has discussed the upcoming resolution with its
largest shareholder, Phoenix,
which currently holds in aggregate approximately 43.4 per cent of
the Company’s issued shares, and which has indicated it intends to
vote in favour of continuation.
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 31 March 2022 to 30 June
2022:
UK Commercial
Property REIT Limited |
Per
Share (p) |
Attributable Assets (£m) |
Comment |
Net assets as at 31
March 2022 |
111.2 |
1,444.9 |
|
Unrealised increase in
valuation of property portfolio |
3.4 |
44.2 |
Predominantly increase
in property portfolio |
Capex |
-1.7 |
-22.1 |
Predominantly relates
to capex for the ongoing student accommodation developments at
Exeter and Edinburgh, the industrial unit developments at Sussex
Junction and Leamington Spa and the purchase of land for
development at Sovereign Square, Leeds. |
Income earned for the
period |
1.3 |
16.5 |
Equates to
dividend cover of 104%. |
Expenses for the
period |
-0.5 |
-5.7 |
Dividend paid on May
2022 |
-0.8 |
-10.4 |
Net assets as at 30
June 2022 |
112.9 |
1,467.4 |
|
The EPRA Net Tangible Assets per share is 112.9p (31 March 2022: 111.2p) with EPRA earnings per
share for the quarter being 0.83p (31 March
2022: 0.76p).
Sector Analysis
|
Portfolio Value as at 30 Jun 22 (£m) |
Exposure as at 30 Jun 22 (%) |
Like
for Like Capital Value Shift (net of CAPEX) |
Capital Value Shift (including sales & purchases
& development spend) (£m) |
|
(%) |
Valuation as at 31
Mar 22 |
|
|
|
1,665.5 |
|
|
|
|
|
Industrial |
1,092.5 |
63.8 |
1.3 |
20.9 |
South East |
|
39.7 |
0.7 |
11.7 |
Rest of UK |
|
24.0 |
2.2 |
9.2 |
|
|
|
|
|
Retail |
212.7 |
12.5 |
5.5 |
11.1 |
High St – South
East |
|
0.9 |
0.0 |
0.0 |
High St- Rest of
UK |
|
1.1 |
0.0 |
0.0 |
Retail Warehouse |
|
10.5 |
6.6 |
11.1 |
|
|
|
|
|
Offices |
227.6 |
13.3 |
0.6 |
1.4 |
West End |
|
1.8 |
5.9 |
1.7 |
South East |
|
5.0 |
0.0 |
0.0 |
Rest of UK |
|
6.5 |
-0.3 |
-0.3 |
|
|
|
|
|
Alternatives |
178.2 |
10.4 |
-1.6 |
12.1 |
|
|
|
|
|
External valuation
at 30 Jun 22 |
1,711 |
100.0 |
1.4 |
1,711 |
The independent valuation as at 30 June
2022 was carried out by CBRE Ltd.
Net Asset Value analysis as at
30 June 2022 (unaudited)
|
£m |
% of
net assets |
Industrial |
1,092.5 |
74.5% |
Retail |
212.7 |
14.5% |
Offices |
227.6 |
15.5% |
Alternatives |
178.2 |
12.3% |
Total Property
Portfolio |
1,710.9 |
116.7% |
Adjustment for lease
incentives |
-32.4 |
-2.2% |
Fair value of
Property Portfolio |
1,678.5 |
114.5% |
Cash |
34.3 |
2.3% |
Other Assets |
56.2 |
3.8% |
Total
Assets |
1,768.9 |
120.7% |
Current
liabilities |
-35.0 |
-2.5% |
Non-current
liabilities (bank loans) |
-266.5 |
-18.2% |
Total Net
Assets |
1,467.4 |
100.0% |
The NAV per share is based on the external valuation of the
Company’s direct property portfolio as at 30
June 2022. It includes all current period income and is
calculated after the deduction of all dividends paid prior to
30 June 2022.
The NAV per share at 30 June 2022
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
and Sector Outlook
Having started on a very positive footing, with the UK economy
recovering well from the impact of Covid, this initial optimism was
soon curtailed with the advent of war in Ukraine impacting global markets and creating
further uncertainty. As with the pandemic, the focus was put
firmly back on supply chains, with rising prices providing further
headwinds for the UK, like all economies, with economic growth and
inflation firmly in the spotlight.
UK Gross Domestic Product (GDP) surprised to the upside in
May 2022 and grew by 0.5%, following
two consecutive monthly declines in April (-0.2%) and March 2022 (-0.1%). Consumer sentiment appeared
more dampened as wholesale and retail sales fell by 0.8% over May,
with the “cost-of-living crisis” placing pressure on household
disposable income levels. Looking forward the short-term risk to
the UK economy is that rising energy prices and associated
real-income squeeze will lead to a fall in activity and growth. The
medium-term risk is that monetary tightening by the Bank of
England to tackle underlying
pressures tips the economy into recession in late 2022/early
2023.
Overall the abrdn Research Institute (aRI) is forecasting a
peak-to-trough decline in the level of GDP of around 1.4% during
this sustained period of economic weakness over the next two years.
This should be sufficient to help blunt inflationary pressures over
the second-half of the inflation profile. Indeed, UK inflation, as
measured by the consumer price index (CPI), rose from 9.1% in May
to 9.4% in June, a level last seen in 1982. Inflation is likely to
keep increasing due to rising food and energy prices, with the
latter expected to move higher in October when Ofgem increases the
energy price cap. However, inflation is then expected to fall as
challenging base effects and slowing economic growth influence
headline inflation. aRI is currently forecasting UK CPI to end the
year at 8.5%, before falling to 5.2% and 1.7% in 2023 and 2024
respectively.
As a result, in an attempt to quell the inflation rate, the Bank
of England is expected to continue
to hike interest rates over the next few meetings, with the
terminal interest rate estimated to reach 2.25% later this year,
despite the predicted slowdown in activity. After a series of
front-loaded interest rate rises in 2022, the Bank of England is likely to pause its hiking cycle.
It may then reverse the increases, with a cutting cycle starting in
the fourth quarter of 2023 which could eventually take rates back
to the effective lower bound of 0.1% in 2024. However, the risks of
inflation remaining stubbornly high, and above the Bank of
England’s target rate of 2%, are skewed to the upside.
Commercial Property
UK real estate carried some of its positive performance momentum
from 2021 into the early part of 2022. However, this year will
likely be one defined by the proverbial ‘two halves’ as some of the
strong performance in the first half of the year is expected to be
unwound moving forward. With sentiment towards UK real estate
weakening, investment volumes have slowed as the market pauses for
breath and takes stock.
Over the first half of the year, performance remained very
positive and, at an all property level, the UK real estate market
delivered a total return of 9.6% over the first six months of 2022.
As expected, the industrial and logistics sector continued to drive
the market and posted a total return of 5.1% in the second quarter,
whilst over the same period the office sector once again provided
the weakest performance at 1.7%. The retail sector recorded another
strong quarter in Q2 and provided a total return of 3.8%, but much
of this positive performance was attributable to the retail
warehouse sector, which provided a robust total return of 5.2% in
the second quarter according to the MSCI monthly index.
Transaction volumes in the first half of 2022 remained very
robust and UK real estate recorded the strongest first half
investment volumes since 2015 according to Real Capital Analytics
(RCA). A total of £31.2 billion was transacted over this period;
however, approximately two thirds of the activity occurred in the
first quarter of 2022. Investment volumes were £10.2 billion in the
second quarter of 2022, which was lower than the Q2 10-year average
of £13.5 billion. The slowdown in investment activity towards the
end of the second quarter of 2022 can largely be attributed to the
emergence of a less accommodative monetary policy environment as
the Bank of England tries to bring
inflation back closer to its target rate of 2%. This has resulted
in slowing economic growth expectations, rising bond yields, and an
increased cost of capital for debt-backed real estate investors,
which has caused weaker sentiment towards UK real estate at this
time.
The industrial sector experienced a record year in 2021 in terms
of both performance and transaction volumes and carried this
momentum into 2022. However, with the weakening economic
environment, the sector has begun to slow and investor sentiment
has begun to cool somewhat. Whilst reflected in a slowing level of
transaction volumes, occupier markets have seen strong performance,
with leasing driven by the imbalance between supply and demand.
Amazon’s announcement in April 2022
that it was to reduce its operational estate surprised the market,
but we believe this statement was primarily focused on the US and,
more importantly, that occupational demand is and has proven to be
more multi-faceted and deeply diverse than being wholly reliant on
one operator or business segment. The industrial sector continues
to benefit from longer term thematic tailwinds and rental value
growth should remain positive in response to tight supply levels,
but return to a more normalised growth rate.
Polarisation within the office sector has been gathering pace as
both occupiers and investors continue to narrow their focus on best
in class office assets with strong environmental credentials. There
have been increased reports of positive letting activity in the
office sector over the second quarter of 2022. But, according to
CBRE, the central London vacancy
rate remains elevated at 9%. Secondary accommodation accounts for
approximately 70% of all available accommodation. Overall office
demand is expected to fall as a poorer economic outlook weighs on
job growth across the market, placing additional pressure on
occupational sentiment. However Grade A ‘future fit’ office assets,
in prime locations, are anticipated to be more resilient in this
weakening environment, whilst the outlook for secondary assets is
much more challenging.
The UK retail sector was showing tentative signs of green shoots
at the start of 2022, but momentum, particularly in the
occupational market, is expected to experience a marked slowdown as
the current cost-of-living crisis and slowing economic growth puts
pressure on consumer spending. This will be more acutely felt in
the consumer discretionary and fashion-led part of the market.
Essential, discount and convenience-led retail is expected to be
much more resilient in this environment, but not entirely immune to
the cost-of-living pressures facing UK households. Retail sales
volumes fell by 0.5% in May 2022 and,
in the three months to May 2022, by
1.3% when compared to the previous 3 months, continuing a downward
trend that began in summer 2021. Foodstore sales provided the
largest contribution to the fall in sales over May, as sales fell a
further 1.6%. This supports the view that consumers are seeking to
reduce their outgoings in the face of rising costs.
Strong demographics and structural tailwinds are expected to
continue to drive interest in the alternative sectors, particularly
in healthcare, Build-to-Rent and student housing over the
medium-to-long term. With the occupational pressures facing the
office and retail markets, investor allocation to alternative
sectors more generally is expected to grow. However, these sectors
are not immune to the weakening macro environment and a focus on
quality will be important to ensure performance remains
resilient.
Investment Outlook
Looking forward we expect some of the strong first half 2022
performance to be unwound over the second half and, given the
current market environment, our overall outlook for the next 12-18
months has been revised downwards.
In June 2022, the spread between
UK real estate and UK 10 year gilts reached the lowest level since
2008 as the UK 10 year yield peaked at 2.65% in response to
increasing inflation and interest rate expectations. Whilst the
yield has since fallen back from this level, we expect the yield on
UK gilts to remain at or above 2% in the near-term, meaning that a
smaller margin between gilts and UK real estate will likely remain
in the near term. On top of this, with rising debt costs driven by
tightening monetary policy, a number of leveraged players have
begun to step back from the market as the cost of debt outstrips
yields in several sectors making its use in these sectors
prohibitive. As a result we are now expecting some repricing across
the UK real estate market, driven predominantly by interest rates
‘re-rating’ and an increased cost of capital impacting yields.
Investors are anticipated to take a more risk off approach
towards UK real estate in the second half of this year and we
expect polarisation of investor focus to widen, as investors target
best in class assets which should provide more resilient returns in
a weakening environment, with greater scrutiny on the resilience of
income streams.
ESG considerations are expected to become even more integral to
investor decision making and asset underwriting. This trend was
expedited as a result of the Covid-19 pandemic, but with the
current energy crisis and pathway to net-zero, the case for
integrating ESG considerations across all UK real estate sectors
has never been greater. A greater emphasis on ESG requirements for
both acquisitions and developments is expected.
Whilst we expect a slowdown in the market in the near term, with
polarisation between best in class and secondary assets expected to
intensify, we also expect inflation to fall sharply into 2024 with
the Bank of England anticipated to
start reversing its interest rate hikes, with a cutting cycle
starting in 2023 and resulting in rates returning to 0.1% by 2024.
Consequently, we would expect the overall cost of debt to move
lower, in line with the UK policy rate, and become more widely
available as the economic environment and investor sentiment
towards UK real estate improves. UK government bond yields will
also move lower, in line with the expectation of a more
accommodative monetary policy environment. We therefore
expect a relatively short period of increasingly tight spreads over
the next 18-24 months, before UK real estate begins to look more
attractive to investors again. Opportunities within the market
should emerge once repricing has occurred and a rebound in real
estate performance is anticipated.
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 / Jamie Horton,
abrdn
Tel: 0131 528 4261
William
Simmonds, J.P. Morgan Cazenove
Tel: 020 7742 4000
Richard
Sunderland / Andrew Davis /
Emily Smart, FTI Consulting
Tel: 020 3727 1000
UKCM@fticonsulting.com
The above information is unaudited and
has been calculated by abrdn.