Guernsey: 30 September 2022
UK Commercial Property REIT
Limited
(“UKCM” or the “Company”)
LEI: 213800JN4FQ1A9G8EU25
INTERIM RESULTS
FOR THE HALF YEAR ENDED 30 JUNE
2022
UK Commercial Property REIT Limited (FTSE 250, LSE: UKCM) which
owns a £1.7 billion diversified portfolio of high-quality
income-producing UK commercial property and is managed and advised
by abrdn, announces its interim results for the half year ended
30 June 2022.
FINANCIAL REVIEW AS AT 30 JUNE 2022
- NAV TOTAL RETURN
Net Asset Value (“NAV”) total return of 12.3% (H1 2021: 6.0%)
primarily driven by valuation increases and the portfolio weighting
to the industrial sector.
- SHARE PRICE TOTAL RETURN
Share price total return of 2.3% (H1 2021: 13.4%).
- EPRA EARNING PER SHARE
EPRA earnings per share increased 36% to 1.58 pence per share (H1 2021: 1.16p)
- DIVIDEND
Quarterly dividend increased by a further 6.3% to 0.85 pence per share, following the uplifts
announced in both the fourth quarter of 2021 and the first quarter
of 2022. This brings the increase in the H1 2022 fully covered
dividend to 13.3%.
- GEARING
Low gearing of 13.7% (2021: 13.5%) as at 30
June 2022 remains one of the lowest in the Company’s peer
group.
PORTFOLIO REVIEW AS AT 30 JUNE
2022
- PORTFOLIO PERFORMANCE
Portfolio total return of 11.2% resulted in continued
outperformance of the Company’s MSCI benchmark, of 8.1%, driven by
the positive relative performance of the Company’s industrial
portfolio.
- PORTFOLIO VALUE
Portfolio is now valued at £1.71 billion. We believe that the
Company’s well-let portfolio of scale, which is heavily weighted
towards future-fit sectors and offers good prospects for rental
growth, is well placed to deliver positive relative performance
with good potential for future earnings growth.
- OCCUPANCY
Occupancy rate of 98.5%.
- RENT
19% increase in portfolio annualised rent and ERV growth of 9%.
Rent collection for the three billing periods in 2022 of 99% as at
31 August 2022.
- ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)
2040 net zero carbon target for all emissions.
Commenting on the results, Ken
McCullagh, Chair of UKCM, said: “UKCM has delivered
another strong set of results for the first six months of 2022,
with the team’s ability to invest into a diversified range of
sectors and proactively manage the portfolio towards income growth
and security ensuring that the Company continues to outperform its
benchmark. This performance has been driven by a disciplined
investment focus on future fit and operational asset classes that
look to capitalise on the imbalance between supply and demand, are
underpinned by societal changes that remain highly supportive of
the occupational markets and rental growth. The special dividend,
paid in August, is reflective of the Board’s desire to return some
of the strong performance delivered over the last number of
quarters to shareholders, allowing them all to benefit from the
recent growth in net asset value that is not currently being
reflected in the Company’s share price.
Looking ahead, as a Board we are acutely aware of the broader
economic challenges that have been prevalent throughout the year
and, more recently, the impact of the government’s latest fiscal
announcement on the debt markets, which have created further
uncertainty. However, UKCM is extremely lowly levered, has a
strong and flexible balance sheet and a portfolio that has been
positioned over the past few years to deliver income growth through
market cycle. As a result, we have a number of options
available to us to both manage and, where appropriate, seek
opportunities arising from the current environment, and are
confident in the future prospects for the Company.”
Will Fulton, Fund Manager at
UKCM at abrdn, added: “The UK real estate market’s performance
remained very positive throughout the first half of this year,
despite the economic challenges. The Company’s portfolio also
successfully outperformed the benchmark again, benefitting from our
strategic overweight position to the industrial sector, which again
delivered the strongest returns of all the major sectors, and from
positive leasing and asset management.
Against a backdrop of economic and inflationary pressure, and
rising interest rates, we are alert to the challenges that lay
ahead for our sector, but remain positive on the ability of our
Company’s portfolio to deliver positive rental and earnings growth
going forward. Our strategy has been fashioned with this in mind by
targeting those areas of the market most likely to benefit from
positive structural changes and so experience positive demand
versus supply over the coming years with the ability for active
asset management to enhance income.
As we move into the second half of the year we expect ESG
considerations 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. An even
greater emphasis on ESG requirements for both acquisitions and
developments is already underway across our portfolio.”
PERFORMANCE SUMMARY
CAPITAL VALUES AND
GEARING |
30
June
2022 |
31
December 2021 |
%
Change |
Total assets less
current liabilities (excl bank loan) £’000 |
1,733,981 |
1,573,554 |
10.2 |
IFRS Net asset value
(£’000) |
1,467,443 |
1,325,228 |
10.7 |
Net asset value per
share (p) |
112.9 |
102.0 |
10.7 |
Ordinary share price
(p) |
75.0 |
74.7 |
0.4 |
Discount to net asset
value (%) |
(33.5) |
(26.8) |
n/a |
Gearing (%)* |
13.7 |
13.5 |
n/a |
|
|
|
|
|
6
month
% return |
1
year
% return |
3
year
% return |
5
year
% return |
TOTAL
RETURN |
|
|
|
|
NAV† |
12.3 |
28.8 |
33.0 |
50.9 |
Share
Price† |
2.3 |
1.5 |
(5.0) |
(1.1) |
UKCM Property
portfolio |
11.2 |
26.8 |
35.5 |
56.0 |
MSCI
Benchmark |
8.1 |
19.6 |
25.7 |
43.2 |
FTSE Real Estate
Investment Trusts Index |
(18.8) |
(5.2) |
4.9 |
9.2 |
FTSE All-Share
Index |
(4.6) |
1.6 |
7.4 |
17.8 |
EARNINGS AND DIVIDENDS |
30
June
2022 |
30
June
2021 |
EPRA Earnings per
share (p) |
1.58 |
1.16 |
Dividends paid per
ordinary share (p) # |
1.55 |
1.635 |
Dividend Yield
(%)‡ |
3.8 |
3.3 |
MSCI Benchmark Yield
(%) |
3.9 |
4.5 |
FTSE Real Estate
Investment Trusts Index Yield (%) |
3.6 |
2.7 |
FTSE All-Share Index
Yield (%) |
3.5 |
2.8 |
*
Calculated, under AIC guidance, as gross borrowings less cash
divided by portfolio value.
†
Assumes re-investment of dividends excluding transaction costs.
‡
Based on last four quarterly dividends, paid pre-30 June of 2.838p
and the share price at 30 June
2022.
#
Notes to the accounts, note 6 for further details.
Sources: abrdn, MSCI
CHAIR’S STATEMENT
Background
UKCM has delivered a strong set of results from our portfolio
during the first half of 2022, with capital allocation and further
positive leasing momentum by our asset management team driving
rental growth and an increase in portfolio valuation. The Company
delivered a NAV total return of 12.3% for the period and once again
outperformed its benchmark. 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 asset
classes, where we are invested in student housing, and hotels. In
all of these, the imbalance between supply and demand and the
societal changes continue to be highly supportive of the
occupational markets and rental growth.
We are acutely aware of the broader economic challenges ahead,
including rising inflation and interest rates, that
could be negative on valuations. However, 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. The
Investment Manager has delivered a 19% increase in portfolio annual
rent over the last 12 months and 9% ERV growth within the standing
portfolio. This confidence is reflected in the additional – and
fully covered – dividend increases the Company announced in the
first half of 2022.
The Board, as noted in recent prior statements, is conscious of
the significant discount on the share price to NAV which, in line
with the broader real estate sector, has continued to widen since
the end of June. The Company paid 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, allowing all shareholders to
benefit from the recent growth in net asset value that is not
currently being 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.
While the ongoing situation in Ukraine has created further economic
uncertainty just as Covid-19 restrictions were
receding, resulting in higher energy and developments costs, we
remain confident in the robustness and resilience of our portfolio.
The Company is also benefitting from the improved corporate
efficiencies arising from the reduction in investment management
fees we announced at year end. These factors combined with the
strength of the current financial performance and future investment
pipeline were integral to our decision to recommend further
increases to shareholder dividends.
Portfolio Activity
In line with our strategy of increasing portfolio exposure to
operational assets and the alternatives sector, the Company
committed to funding the development of a high-quality hotel in
central Leeds which will operate
under the renowned Hyatt brand. The development has a maximum
commitment of £62.7 million and will complete in mid-2024 when it
will be operated under a lease by Interstate Hotels & Resorts.
We expect it to be one of the best hotels in Leeds on completion and to deliver a high
income return as the lease structure means the rents will be
derived from the performance of the hotel.
The Company has made progress on its student housing
developments in Gilmore Place, Edinburgh. We were pleased to secure a strong
20-year lease with the University of
Edinburgh at an annual rent of £1.24 million per annum,
which is subject to annual CPIH increases. Whilst the Company had
originally expected to operate and lease the asset independently to
generate a higher level of rent, the opportunity to secure a lease
of this nature to a leading UK university whilst de-risking the
asset was felt to be in the best interest of shareholders. The
Company will retain operational leasing exposure in the student
residential market at its asset in Exeter.
Portfolio occupancy increased to 98.5% within the period and
this low level of vacancy demonstrates the appeal of the assets to
both current and prospective tenants and provides good visibility
on income streams. The Board and the Investment Manager are
focussed on driving earnings growth from the portfolio and
capturing the reversionary potential of the assets to deliver value
for shareholders.
Rent collection rates have normalised and returned to pre-Covid
levels. Cumulatively across the three relevant billing periods
straddling the first half of the year 99% of rents due have been
received taking in to account agreed deferrals and monthly
payments.
Further details on all investment transactions and significant
lettings are given in the Investment Manager’s Review.
Portfolio and Corporate Performance
The portfolio delivered a total return of 11.2% in the half year,
ahead of the MSCI benchmark total return of 8.1%. UKCM has
continued to outperform against its MSCI UK Balanced Portfolio
Quarterly Index benchmark for 1,3,5 and 10 years.
Further details on the Company’s portfolio performance are given
in the Investment Manager’s Review.
The strong portfolio performance allowed the Company to report a
12.3% NAV total return for the period. This strong performance,
both absolute and relative to its peers, is not reflected in the
share price total return of 2.3% for the same period. The discount
at which the Company’s shares traded versus their net asset value
increased from 26.8% at the end of December
2021, to 33.5% at 30 June
2022.
Financial Resources
UKCM continues to be on a solid financial footing with a NAV of
£1.47 billion as at 30 June 2022, and
gearing of just 13.7%, meaning the Company remains one of the
lowest geared in its AIC peer group and the wider REIT sector. The
weighted average cost of this debt remains low at 2.79% per annum,
and the Company continues to be comfortably within the covenants on
its three debt facilities. In addition, with over £520 million of
unencumbered assets, the Company has significant headroom and
further flexibility with respect to its covenants and overall
gearing strategy.
On the 19 August 2022 the Group
increased its revolving credit facility with Barclays Bank plc to
£180 million (Dec 2021: £150 million). There
were no other amendments to the agreement. The facility expires in
April 2024 and is cancellable at any
time.
Dividends
The Company paid two interim dividends totalling 1.55 pence per share during the period. The
second quarter dividend was 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 first half of 2022
was 103% 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 Company paid 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.
Environmental, Social and Governance (“ESG”)
ESG is embedded within the processes of UKCM and underpins every
Board discussion and decision.
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 and climate crisis, the case for the pathway
to net-zero and integrating ESG considerations across all UK real
estate sectors has never been greater.
Within the 2021 Annual Report & Accounts the Company made a
commitment of achieving Net Zero Carbon on Landlord emission by
2030 and Net Zero Carbon on all emissions by 2040 and the Board is
focussed on these ambitious targets.
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 convening an
extraordinary general meeting in October
2022 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 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.
Outlook
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 asset classes, where we
are invested mainly 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.
The underlying pace of the UK economy is clearly slowing whilst
inflation is running at multi-year highs. Despite the government’s
announcement that energy prices will be frozen to help UK
households and businesses, short-term inflation is still set to
rise above 10% in October. The government's huge fiscal stimulus
was always going to cause interest rates to rise further, but the
large market moves since the government's economic agenda was
announced suggest even higher rates will be necessary to restore
confidence in UK assets. We are sceptical on what is currently
priced by markets, but a period of high and sustained rates is
likely increasing our conviction that the economy will soon be in a
recession. For UK real estate, the environment of rising
rates has resulted in a repricing of debt and other asset classes,
which has been a catalyst for a change in sentiment towards UK real
estate more generally, with prices having started to adjust. Weaker
returns are expected for UK real estate over the next 12-18 months,
led by the lower yielding industrial and logistics sector although
almost all sectors are expected to follow suit. On a positive note
the occupational market for the industrial sector remains well
balanced, with healthy levels of take-up and a national vacancy at
a low 3%. Despite increased development for this sector, build cost
inflation and development delays are expected to act as a natural
cap on future supply. Meanwhile, the office market is becoming
increasingly polarised between truly best in class space and the
rest. ESG is playing an increasingly critical role in this regard,
as are changing tenant requirements due to hybrid working
arrangements, necessitating greater flexibility of space. With the
cost of living crisis likely to weigh on consumer spending, the
retail sector is more exposed, but this will be felt most acutely
for discretionary led retailers, with high street shops and
shopping centres more vulnerable.
While we are acutely aware of the broader economic challenges
ahead, 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.
Ken McCullagh
Chair of UKCM
29 September 2022
MANAGER’S REVIEW
For the half year ended 30 June
2022
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 ‘game of 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 8.1% over the first six months of 2022
(MSCI Balanced Portfolios Quarterly Property Index). As expected,
the industrial and logistics sector continued to drive the market
and posted a total return of 13.3% in the first half of the year,
whilst over the same period the office sector once again provided
the weakest performance at 3.3%. The retail sector recorded
performance and provided a total return of 8.0%, but much of this
positive performance was attributable to the retail warehouse
sector, which provided a robust total return of 14.1% in the first
half according the Company’s MSCI benchmark.
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
with £31.2 billion 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 Ltd (‘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.
Portfolio Performance
The Company’s portfolio delivered strong outperformance against its
MSCI IPD benchmark in the first half of the year. For the six
months to 30 June 2022, UKCM
portfolio’s total return was 11.2%, significantly ahead of the
benchmark return of 8.1%. The property portfolio continues to show
outperformance over 1, 3, 5 and 10 years. Total return performance
was particularly strong in Q1 2022 at 8.8% v 4.9% for the benchmark
with performance still positive but slowing in the second quarter,
which was in line with our expectations, at 2.3% against the
benchmark return of 3.0%.
The table below breaks down this return by sector with all
valuations undertaken by the Company’s external valuer, CBRE. The
portfolio delivered an income return marginally below benchmark of
1.8% (benchmark 1.9%) over the first six months of the year, but
this was offset by greater capital value growth than the benchmark,
9.3% vs 6.1%. Portfolio-level outperformance has been driven by the
Company’s strong overweight position to the industrial sector which
again delivered the strongest returns of all the major sectors. The
Company’s exposure stands at 63.9% weighted by capital value at the
end of H1 2022. The office and retail assets within the portfolio
also significantly outperformed their benchmark over the first half
of the year.
|
Exposure |
Total Return |
Income Return |
Capital Growth |
|
|
|
UKCM
% |
Benchmark % |
UKCM
% |
Benchmark % |
UKCM
% |
Benchmark |
All |
100.0% |
£1,711.0m |
11.2 |
8.1 |
1.8 |
1.9 |
9.3 |
6.1 |
Industrials |
63.9% |
£1,092.5m |
12.5 |
13.3 |
1.4 |
1.6 |
11.0 |
11.6 |
Offices |
13.3% |
£227.6m |
6.1 |
3.3 |
2.3 |
1.8 |
3.8 |
1.5 |
Retail |
12.4% |
£212.7m |
16.7 |
8.0 |
2.5 |
2.6 |
14.0 |
5.3 |
Alternatives |
10.4% |
£178.2m |
1.8 |
5.1 |
3.5 |
2.4 |
(1.6) |
2.6 |
Source: MSCI June 2022
Industrial
The Company has maintained for some time a strong, strategic
overweight position to the industrial sector which continues to be
well placed to benefit from the structural changes that have
fuelled tenant demand for space such as the growth e-commerce and
renewed demand for storage of inventory due to the disruption of
global supply routes. Whilst demand is likely to taper down from
the heightened levels seen in 2020 and 2021 it is still expected to
outstrip levels of supply leading to rental growth, particularly in
strategic locations and those where supply of industrial land for
development is restricted.
In the first half of 2022 the Company’s industrial holdings
delivered a strong total return of 12.5%, albeit this was behind
the benchmark return of 13.3%. The six-month industrial income
return of 1.4% which is below the benchmark level of 1.6%.
As the strongest performing segment of the benchmark, our
strategic overweight allocation to the sector enhanced overall
portfolio returns. The Company’s industrial holdings are split
respectively between multi-let industrial estates at 45% by capital
value and 55% by capital value in single-let big-box distribution
units in strategic locations throughout the South-East and the
Midlands. In general, the
multi-let estates offer more immediate prospects for asset
management, and therefore opportunities to grow income, whilst the
distribution units tend to be longer let and offer secure income
streams with the opportunity to capture growth at rent reviews and
lease renewals. We expect that returns from the sector will be
driven by rental growth and would expect some yield weakening
throughout the rest of 2022 as a result of interest rate rises.
This will be most pronounced initially on very low yielding
London / South East assets but is
likely to have a knock-on effect to the rest of the sector.
Office
The Company has a low exposure to the office sector of 13.3%
against the benchmark weighting of 25%. The office portfolio
significantly outperformed the benchmark with a return of 6.1% vs
3.3%. It delivered an above benchmark income return of 2.3% vs 1.8%
for the 6-month period reflecting that the Company is deliberately
underweight to lower yielding London offices, with the vast majority of its
office exposure being elsewhere in the South East or in regional
cities where yields are generally higher.
Over H1 2022 a strong capital return of 3.8% was also delivered
by the office portfolio significantly ahead of the benchmark level
of 1.5%. Capital growth was driven by positive asset management at
assets such as 2 Rivergate, Bristol where a lease extension was agreed
with the Secretary of State and at Craven House in London where a strong rent review settlement
was also agreed. There was also the positive impact of acquisitions
completed in Q4 2021 particularly Kantar
House at Hanger Lane where the value is underpinned by the
redevelopment value of the site which has significantly
increased.
The polarisation of the sector is expected to continue with
occupiers strongly favouring best in class ‘future-fit’ properties
with access to amenities and excellent ESG credentials. The Company
is focused on ensuring all its office assets meet, or can meet,
these standards and as a result of this analysis the decision was
made to sell 9 Colmore Row, Birmingham in July for £26.48 million. Full
details are provided below.
Retail
At the end of the half year, the Company’s weighting to retail was
12.4% compared to 22% in the benchmark. The portfolio comprises
supermarkets and retail parks dominated by either bulky goods
retailers or convenience and discount operators. These tenants have
generally emerged strongly from the Covid-19 pandemic and should
prove to be robust in the forthcoming challenging economic
environment where spending is likely to be focussed away from
non-discretionary items. The Company has no exposure to shopping
centres and its only remaining high street shops are part of the
office investment at 81 George Street, Edinburgh which are well let. At the end of Q2
2022 there were no vacancies in the retail portfolio which reflects
the strength of these locations and their appeal to tenants.
The quality of the Company’s retail holdings is further
demonstrated by its total return in the period of 16.7% against
8.0% recorded in the benchmark. This was principally driven by much
stronger capital growth in the period of 14.0% against 5.3% for the
benchmark with the majority of this performance derived from the
retail park element of the portfolio. These assets closely match
those sought by investors in 2021 and H1 2022 in that they are
well-located and let to tenants suited to the surrounding
demographic at sustainable rental levels, and they have therefore
benefitted from the strong yield compression seen in this
sub-sector of the market.
Alternatives
Within the alternatives sector we saw positive total returns of
1.8% delivered over the first half of 2022 which was below the
benchmark level of 5.1%. The Company’s alternatives portfolio at
the end of the period was split evenly in terms of capital value
between three cinema-led leisure schemes in Kingston upon Thames, Glasgow and Swindon and four hotel / student housing
assets, of which three are developments and therefore will not
fully contribute to portfolio performance until completion. The
Maldron Hotel in Newcastle which
is let on a long-lease to Dalata and trades strongly is the fourth
non-leisure asset within the alternatives sector.
Rent collection levels at the leisure assets have normalised
which contributed to an above benchmark income return of 3.5% v
2.4%, but this was offset by a capital decline of 1.6% in the
portfolio whilst the benchmark recorded capital growth of 2.6%.
The Company’s student housing development in Edinburgh completed in time for the 2022/2023
academic year. Within the period the Company agreed an attractive
20 year lease, which includes annual index-linked rental uplifts,
with the University of Edinburgh over
its asset at Gilmore Place, Edinburgh substantially derisking the
operation of this asset. UKCM also committed to the funding of a
305 bed Hyatt Hotel in Leeds which
is scheduled to complete in mid-2024 and detailed below.
Investment Activity
Following the significant levels of investment activity seen in
2021 there have been fewer transactions completed in the first half
of this year. 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 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 and on completion should be one of the best
quality hotels in Leeds. The
acquisition is in line with part of UKCM’s strategy to increase its
exposure to alternatives and to invest in operational real estate
sectors that are expected to deliver resilient rental incomes. On
completion the asset is expected to have strong ESG credentials
with a target EPC rating of A and an expected BREEAM rating of
Excellent.
After 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.
The building’s current EPC rating is D and this will require to
be improved to meet forthcoming Minimum Energy Efficiency Standards
legislation, with an expectation these costs will primarily fall
upon the landlord.
The Company has financial resources totalling £24 million
available as at 30 June 2022 to
utilise for further acquisitions including the post-period receipt
from the sale of Colmore Row, and allowing for future commitments
and the dividends paid in August
2022. We are exploring sectors offering higher initial
income returns but with some future capital growth potential with a
focus on best in class regional offices which meet future occupier
demands in terms of access to amenity and ESG credentials and well
as further assets in the alternatives sector which offer strong
fundamentals and robust incomes.
Asset Management and Rent Collection
Rent collection rates have normalised throughout the first half of
2022 and have largely returned to pre-pandemic levels of
collection. There continue to be some tenants within the portfolio
that pay rents by agreement on a monthly basis as opposed to
quarterly however once these are adjusted for rent collection for
the three billing periods covering the start of this year, 99% of
rents due have been collected.
The Company benefits from low tenant income concentration due to
its diverse tenant mix of 227 tenancies across 41 assets, with its
top tenant, Ocado, accounting for 6% of contracted rental income.
In total the portfolio’s top ten tenants account for 36.9% of total
rents at the end of June 2022.
Occupancy levels in the portfolio increased to 98.5% at the end
of H1 2022 which reflects a void rate approximately one fifth of
the MSCI Benchmark rate of 7.7% at the same period. The portfolio
occupancy rate is also an improvement on the position at the end of
2021 when the occupancy rate stood at 97.9%. This minimal level of
vacancy reflects the work undertaken by the asset management team
in securing income for the Company as well as the quality and
appeal to occupiers of the assets themselves.
Asset management highlights within the period included:
- As previously mentioned, at Gilmore Place in Edinburgh, the Company’s student housing
development, a 20 year lease has been agreed with University of Edinburgh at an annual rent of
£1.238m per annum. The rent is increased annually by CPIH with a
cap and collar of 1-4%. The development is due to complete in time
for the commencement of the 2022/23 academic year.
- At Temple Quay in Bristol, the
Secretary of State has extended its occupation of the Company’s
70,000 sq ft HQ-style office building for a further three years
which includes an increase in rent to £1.72 million per annum. The
asset is located in a prime location within Bristol’s office core
directly opposite Temple Meads railway station which is due to
benefit from an investment of £95 millon into to the station and
surrounds. The lease is now outside the Landlord & Tenant Act
and the deal therefore secures the opportunity for a future
redevelopment in this excellent location.
- 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 £14 psf per annum and the lease incorporates 5 yearly
upward 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 building’s EPC was improved from a
rating of D to A through the refurbishment works which included
using energy efficient materials and installing photo voltaic
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.
- The rent review from June 2021
over the accommodation at Craven House, Foubert’s Place,
London the Company’s 20,100 sq ft
West End office, was settled 5% ahead of ERV at an increased rent
equating to £54 psf per annum. The prominent building is situated
adjacent to Carnaby Street and is let to film and television
production company Molinaire until June
2026.
- St George’s Retail Park in Leicester became fully occupied within the
period as Autoglass completed a new 10 year lease with a tenant
break on the fifth anniversary at a rent of £52,500 per annum in
line with ERV. The park has been substantially repositioned
following extensive letting activity on 2021 and boasts an
attractive line-up of strong tenants including Next, Home Bargains,
DSG and Iceland.
Environmental, Social and Governance (ESG)
The Company received a three star rating and was second in its
GRESB peer group for ESG performance and made its 2022 submission
in Q2. The Company also obtained a Gold Star from EPRA for
ESG reporting in 2021. UKCM is working towards the long-term
commitments announced within its 2021 Annual Report of Net Zero
Carbon for landlord emissions by 2030 and Net Zero Carbon for all
portfolio emissions by 2040.
A number of asset-specific initiatives have been completed
within the period such as the ESG-focussed refurbishment of Unit
12, Newton’s Court, Dartford
detailed above. The Manager continues to assess all assets within
the portfolio for potential opportunities to improve ESG
performance and also to ensure that the buildings can comply with
forthcoming Minimum Energy Efficiency Standards legislation in a
commercially sensible manner.
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.
By early September 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 3.1% in
response to increasing inflation and interest rate expectations. We
expect the yield on the UK 10 year gilt to remain at or above this
level in the near-term adding pressure on UK real estate yields to
move out to maintain an appropriate yield buffer. 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 beginning
to see 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
sustainability 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. An even greater emphasis on ESG
requirements for both acquisitions and developments is already
underway.
The government's huge fiscal stimulus was always going to cause
interest rates to rise further, but the large market moves since
the government's economic agenda was announced suggest even higher
rates will be necessary to restore confidence in UK assets. We are
sceptical on what is currently priced by markets, but a period of
high and sustained rates is likely increasing our conviction that
the economy will soon be in a recession. Whilst we expect a
slowdown in the market in the near term, we also expect inflation
to fall through 2023 into 2024 as a result of interest rate
tightening from the Bank of England before a cutting cycle starts. When
the overall cost of debt does in time move lower, 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. We therefore expect a relatively short period of
increasingly tight spreads over the next 12-18 months, before UK
real estate begins to look more attractive. Opportunities within
the market should emerge once repricing has occurred and a rebound
in real estate performance is anticipated.
Portfolio Strategy
Against a backdrop of economic and inflationary pressure, and
rising interest rates, we remain positive on the ability of your
Company’s portfolio to deliver positive rental, and so earnings,
growth. Our strategy has been fashioned with this in mind by
targeting those areas of the market most likely to benefit from
positive structural changes and so experience positive demand
versus supply over the coming years with the ability for active
asset management to enhance income. Embedded across your Company’s
strategic thinking is an awareness of the current and future
implications of environmental, social and governance factors,
collectively ESG, with the Company’s February announcement of its
net carbon zero targets of 2030 (landlord-controlled emissions) and
2040 (all emissions) a focus for asset management and investment
decision-making.
Whilst, as highlighted earlier, we do expect some negative
repricing of real estate over the short term we also believe
winners and losers will emerge. We look to maintain a diversified
portfolio to reduce specific risk which we achieve by maintaining a
wide spread of tenants, geography and a diversified property sector
allocation – but importantly diversified across those sectors and
assets we believe will deliver better rental growth and value
prospects rather than simply spreading across a benchmark. The bulk
of the portfolio comprises a solid bedrock of assets with strong
fundamentals, durable income streams and a low risk profile.
Layered on this is a select group of assets allowing the team to
add value and rent through more active management and, in some
cases, controlled development exposure aiming to drive superior
income and returns. And across all an aim to maintain relatively
low levels of gearing from our low cost and flexible debt
facilities.
Although we may consider selective disposals in the
logistics/distribution and industrial sector to recycle to higher
yielding stock, we wish to maintain a strong allocation to this
important part of the market in high demand locations and
fit-for-purpose property. We believe this sector remains well
placed to deliver rental growth as we continue to see growing
demand from the twin engines of continuing e-commerce penetration
plus the growth expected in the demand for UK on-shoring of goods
as the country adapts to disrupted global supply chains. Both, we
believe, will lead to a growing demand for distribution space in a
market still short of the right supply.
We remain keen on parts of the alternative property ‘beds’
sector, particularly selective student accommodation and hotel
opportunities, which can also offer the opportunity for enhanced
returns versus traditional leasing models. Our latest commitment is
to a Hyatt Hotel due to open in Leeds city centre during summer 2024 which
will supplement our hotel investment in Newcastle and two student developments at
Exeter and Edinburgh.
The office sector potentially offers the greatest scope for
divergence of returns and opportunity, as ever with care. Not only
is it exposed to the force of an evolving model for how business
and employees use an office, but it is also approaching regulatory
hurdles to be met on energy efficiency in buildings by 2027 and
2030. Many offices will require significant investment to meet
these.
It is very easy to imagine business embracing the potential of
agile or flexible home working to reduce office occupancy costs,
but also allocating that smaller overall budget to higher quality
offices to attract and retain staff to encourage regular office
participation for the business community benefits that can bring.
And so we believe extreme bifurcation is the watchword for the
office sector. Those assets in strong locations displaying
flexibility, with good built-in or locally available amenities,
strong e-connectivity, multi-modal transport links and
sustainability are likely to emerge best placed to capture this
focused demand. The reverse is likely to be true for those that do
not with the potential they become ‘stranded’ economic assets
requiring investment to meet regulations that is not rewarded by
demand and rental growth. We are interested in opportunities in
this thin slice of the overall office market, those asset-specific
opportunities representing offices of the future. Conversely, we
may disinvest from those assets we do not believe pass muster on
this test and indeed our sale of Colmore Row, Birmingham, fits that category.
We believe that the Company’s well-let portfolio of scale,
heavily weighted towards future-fit sectors, and with good
prospects for rental growth, is well placed to deliver positive
relative performance with good potential for future earnings
growth.
Will Fulton
Fund Manager
29 September 2022
PRINCIPAL RISKS AND UNCERTAINTIES
The Group’s assets consist of direct investments in UK commercial
property. Its principal risks are therefore related to the UK
commercial property market in general, but also the particular
circumstances of the properties in which it is invested and their
tenants. Other risks faced by the Group include those relating to
strategy, investment & asset management, macroeconomics &
finance, operations, regulation and shareholder engagement. These
risks, and the way in which they are mitigated and managed, are
described in more detail under the headings Principal Risks and
Emerging Risks within the Report of the Directors in the Company’s
Annual Report for the year ended 31 December
2021, published in April 2022,
on pages 34 to 41. The Group’s principal risks have not changed
since the date of that report.
GOING CONCERN
After making enquiries, and bearing in mind the nature of the
Company’s business and assets, the Directors consider that the
Company has adequate resources to continue in operational existence
for the next twelve months. In assessing the going concern basis of
accounting the Directors have had regard to the guidance issued by
the Financial Reporting Council. They have considered the current
cash position of the Group, forecast rental income and other
forecast cash flows. The Group has agreements relating to its
borrowing facilities with which it has complied during the period.
Based on the information the Directors believe that the Group has
the ability to meet its financial obligations as they fall due for
the foreseeable future, which is considered to be for a period of
at least twelve months from the date of approval of the financial
statements. For this reason, they continue to adopt the going
concern basis in preparing the accounts.
STATEMENT OF DIRECTORS’
RESPONSIBILITIES IN
RESPECT OF THE HALF YEARLY FINANCIAL REPORT TO 30 JUNE 2022
We confirm that to the best of our knowledge:
- The condensed set of half yearly financial statements have been
prepared in accordance with IAS 34 “Interim Financial Reporting”,
and give a true and fair view of the assets, liabilities, financial
position and return of the Company.
- The half yearly Management Report includes a fair value review
of the information required by:
(a) DTR 4.2.7R of the Disclosure Guidance and Transparency
Rules, being an indication of important events that have occurred
during the first six months of the financial year and their impact
on the condensed set of financial statements and a description of
the principal risks and uncertainties for the remaining six months
of the year; and
(b) DTR 4.2.8R of the Disclosure Guidance and Transparency
Rules, being related party transactions that have taken place in
the first six months of the current financial year and that have
materially affected the financial position or performance of the
company during that period; and any changes in the related party
transactions described in the last Annual Report that could do
so.
On behalf of the Board
Ken McCullagh
Chair
29 September 2022
HALF YEARLY CONDENSED Consolidated
Statement of Comprehensive Income
For the HALF year ended 30 JUNE
2022
|
Notes |
Half
year ended 30 June 2022 (unaudited)
£’000 |
Half
year ended 30 June 2021 (unaudited)
£’000 |
Year
ended 31 December 2021
(audited)
£’000 |
REVENUE |
|
|
|
|
Rental income |
|
32,326 |
28,769 |
58,307 |
Impairment
reversal/(loss) on trade receivables |
|
641 |
(1,152) |
412 |
Service charge
income |
|
3,024 |
2,963 |
6,063 |
Gains on investment
properties |
2 |
141,768 |
51,761 |
201,753 |
Interest income |
|
66 |
61 |
116 |
Total
Income |
|
177,825 |
82,402 |
266,651 |
EXPENDITURE |
|
|
|
|
Investment management
fee |
|
(4,798) |
(4,080) |
(8,500) |
Direct property
expenses |
|
(1,756) |
(4,004) |
(5,343) |
Service charge
expenses |
|
(3,024) |
(2,963) |
(6,063) |
Other expenses |
|
(1,754) |
(1,125) |
(3,229) |
Total
expenditure |
|
(11,332) |
(12,172) |
(23,135) |
Net operating
profit before finance costs |
|
166,493 |
70,230 |
243,516 |
FINANCE COSTS |
|
|
|
|
Finance costs |
|
(4,137) |
(3,422) |
(7,283) |
Operating profit
after finance costs |
|
162,356 |
66,808 |
236,233 |
Net profit from
ordinary activities before taxation |
|
162,356 |
66,808 |
236,233 |
Taxation on profit on
ordinary activities |
8 |
- |
- |
- |
Net profit for the
period |
|
162,356 |
66,808 |
236,233 |
Total comprehensive
income for the period |
|
162,356 |
66,808 |
236,233 |
Basic and diluted earnings per share |
3 |
12.49p |
5.14p |
18.18p |
EPRA earnings per share |
3 |
1.58p |
1.16p |
2.65p |
All of the profit and total comprehensive income for the period
is attributable to the owners of the Company. All items in the
above statement derive from continuing operations.
The accompanying notes are an integral part of this
statement.
HALF YEARLY CONDENSED Consolidated Balance Sheet
As at 30 JUNE 2022
|
Notes |
30 June 2022 (unaudited)
£’000 |
Year
ended
31 December 2021
(audited)
£’000 |
30 June 2021 (unaudited)
£’000 |
NON-CURRENT
ASSETS |
|
|
|
|
Investment
properties |
2 |
1,655,915 |
1,508,368 |
1,172,556 |
|
|
1,655,915 |
1,508,368 |
1,172,556 |
CURRENT ASSETS |
|
|
|
|
Investment properties
held for sale |
2 |
22,675 |
- |
6,250 |
Trade and other
receivables |
|
56,198 |
50,763 |
41,073 |
Cash and cash
equivalents |
|
34,288 |
42,121 |
176,742 |
|
|
113,161 |
92,884 |
224,065 |
Total
assets |
|
1,769,076 |
1,601,252 |
1,396,621 |
CURRENT LIABILITIES |
|
|
|
|
Trade and other
payables |
|
(35,095) |
(27,698) |
(26,017) |
|
|
(35,095) |
(27,698) |
(26,017) |
NON-CURRENT LIABILITIES |
|
|
|
|
Bank loan |
|
(266,538) |
(248,326) |
(198,065) |
|
|
|
|
|
Total
liabilities |
|
(301,633) |
(276,024) |
(224,082) |
Net assets |
5 |
1,467,443 |
1,325,228 |
1,172,539 |
REPRESENTED BY |
|
|
|
|
Share capital |
|
539,872 |
539,872 |
539,872 |
Special distributable
reserve |
|
568,891 |
568,891 |
566,194 |
Capital reserve |
|
358,233 |
216,465 |
66,473 |
Revenue reserve |
|
447 |
- |
- |
Equity
shareholders' funds |
5 |
1,467,443 |
1,325,228 |
1,172,539 |
Net asset value per share |
5 |
112.9p |
102.0p |
90.2p |
EPRA Net tangible asset value per share |
5 |
112.9p |
102.0p |
90.2p |
The accompanying notes are an integral part of this
statement.
HALF YEARLY Consolidated Statement of Changes in Equity
FOR THE HALF YEAR ENDED 30 JUNE
2022
HALF YEAR ENDED
30 JUNE 2022
(UNAUDITED) |
Notes |
Share Capital
£’000 |
Special Distributable Reserve £’000 |
Capital
Reserve
£’000 |
Revenue
Reserve
£’000 |
Equity
Shareholders’ funds
£’000 |
At 1 January
2022 |
|
539,872 |
568,891 |
216,465 |
— |
1,325,228 |
Total Comprehensive
income |
|
— |
— |
— |
162,356 |
162,356 |
Dividends paid |
6 |
— |
— |
— |
(20,141) |
(20,141) |
Transfer in respect of
gains on investment property |
2 |
— |
— |
141,768 |
(141,768) |
— |
As at 30 June
2022 |
|
539,872 |
568,891 |
358,233 |
447 |
1,467,443 |
FOR THE YEAR ENDED
31 DECEMBER 2021
(AUDITED) |
Notes |
Share Capital
£’000 |
Special Distributable
Reserve
£’000 |
Capital Reserve
£’000 |
Revenue Reserve
£’000 |
Equity
Shareholders’
Funds
£’000 |
At 1 January
2021 |
|
539,872 |
572,392 |
14,712 |
— |
1,126,976 |
Total comprehensive
income |
|
— |
— |
— |
236,233 |
236,233 |
Dividends paid |
|
— |
— |
— |
(37,981) |
(37,981) |
Transfer in respect of
gains on investment property |
|
— |
— |
201,753 |
(201,753) |
— |
Transfer from special
distributable reserve |
|
— |
(3,501) |
— |
3,501 |
— |
As at 31 December 2021 |
|
539,872 |
568,891 |
216,465 |
— |
1,325,228 |
HALF YEAR ENDED
30 JUNE 2021
(UNAUDITED) |
Notes |
Share Capital
£’000 |
Special Distributable
Reserve
£’000 |
Capital Reserve
£’000 |
Revenue Reserve
£’000 |
Equity
Shareholders’
Funds
£’000 |
At 1 January
2021 |
|
539,872 |
572,392 |
14,712 |
— |
1,126,976 |
Total comprehensive
income |
|
— |
— |
— |
66,808 |
66,808 |
Dividends paid |
6 |
— |
— |
— |
(21,245) |
(21,245) |
Transfer in respect of
gains on investment property |
|
— |
— |
51,761 |
(51,761) |
— |
Transfer from special
distributable reserve |
|
— |
(6,198) |
— |
6,198 |
— |
As at 30 June 2021 |
|
539,872 |
566,194 |
66,473 |
— |
1,172,539 |
The accompanying notes are an integral part of this
statement.
HALF YEARLY CONDENSED CONSOLIDATED CASH FLOW STATEMENT
FOR THE HALF YEAR ENDED 30 JUNE
2022
Notes |
30
June 2022 (unaudited)
£’000 |
30
June 2021 (unaudited)
£’000 |
Year
ended 31 December 2021
(audited)
£’000 |
CASH FLOWS FROM
OPERATING ACTIVITIES |
|
|
|
|
Net profit for the
period before taxation |
|
162,356 |
66,808 |
236,233 |
Adjustments for: |
|
|
|
|
Gain on investment
properties |
2 |
(141,768) |
(51,761) |
(201,753) |
Movement in lease
incentive |
2 |
(2,277) |
(2,827) |
(5,877) |
Movement in provision
for bad debts |
|
641 |
(1,152) |
412 |
(Increase)/decrease in
operating trade and other receivables |
|
(3,312) |
10,338 |
2,134 |
Increase/(decrease) in
operating trade and other payables |
|
7,397 |
(2,578) |
(464) |
Finance costs |
|
4,137 |
3,422 |
7,283 |
Net cash inflow from operating activities |
|
27,174 |
22,250 |
37,968 |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
Purchase of investment
properties |
2 |
(6,552) |
(7,124) |
(179,861) |
Sale of investment
properties |
|
- |
67,926 |
74,181 |
Capital
expenditure |
2 |
(21,902) |
(4,424) |
(18,077) |
Net cash (outflow)/inflow from investing activities |
|
(28,454) |
56,378 |
(123,757) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
Facility fee charges
from bank financing |
|
(657) |
(560) |
(1,020) |
Dividends paid |
6 |
(20,141) |
(21,245) |
(37,981) |
Bank loan interest
paid |
|
(3,755) |
(2,823) |
(5,831) |
Bank loan
drawdown |
|
28,000 |
- |
50,000 |
Bank loan repaid |
|
(10,000) |
- |
- |
Net cash (outflow)/inflow from financing activities |
|
(6,553) |
(24,628) |
5,168 |
Net (decrease)/increase in cash and cash equivalents |
|
(7,833) |
54,000 |
(80,621) |
Opening cash and cash equivalents |
|
42,121 |
122,742 |
122,742 |
Closing cash and cash equivalents |
|
34,288 |
176,742 |
42,121 |
REPRESENTED BY |
|
|
|
|
Cash at bank |
|
17,800 |
53,247 |
22,879 |
Money market
funds |
|
16,488 |
123,495 |
19,242 |
|
|
34,288 |
176,742 |
42,121 |
The accompanying notes are an integral part of this statement. |
NOTES TO THE ACCOUNTS
1. ACCOUNTING
POLICIES
The condensed consolidated financial statements have been
prepared in accordance with International Financial Reporting
Standard (‘IFRS’) IAS 34 ‘Interim Financial Reporting’ and, except
as described below, the accounting policies set out in the
statutory accounts of the Group for the year ended 31 December 2021.
The condensed consolidated financial statements do not include
all of the information required for a complete set of IFRS
financial statements and should be read in conjunction with the
consolidated financial statements of the Group for the year ended
31 December 2021, which were prepared
under full IFRS requirements.
These condensed interim financial statements were approved for
issue on 29 September 2022.
2.
INVESTMENT PROPERTIES
FREEHOLD AND
LEASEHOLD PROPERTIES |
Period ended
30 June 2022
£’000 |
Opening valuation |
1,508,368 |
Purchases at cost |
6,552 |
Capital
expenditure |
21,902 |
Gain on revaluation to
fair value |
144,045 |
Adjustment for lease
incentives |
(2,277) |
Total fair value at
30 June 2022 |
1,678,590 |
Less: Current
Assets - reclassified as held for sale |
(22,675) |
Non-current Assets
- Fair value as at 30 June 2022 |
1,655,915 |
GAINS ON INVESTMENT
PROPERTIES AT FAIR VALUE COMPRISE |
|
Valuation gains |
144,045 |
Movement in provision
for lease incentives |
(2,277) |
|
141,768 |
ASSET HELD FOR SALE
At the balance sheet date one asset was classified as held for
sale, Colmore Row, Birmingham. The
asset has been shown at market value in the Balance Sheet as a held
for sale asset and included within the investment property table
shown in this note.
3.
BASIC AND DILUTED EARNINGS PER SHARE
|
Period ended
30 June 2022 |
Period ended
30 June 2021 |
Weighted average
number of shares |
1,299,412,465 |
1,299,412,465 |
Net Profit
(£’000) |
162,356 |
66,808 |
Basic and diluted
Earnings per share (pence) |
12.49 |
5.14 |
EPRA earnings per
share (pence) |
1.58 |
1.16 |
4.
EARNINGS
Earnings for the period to 30 June
2022 should not be taken as a guide to the results for the
year to 31 December 2022.
5.
NET ASSET VALUE
|
Period ended
30 June 2022 |
Period ended
30 June 2021 |
Number of ordinary
shares in issue at the period end |
1,299,412,465 |
1,299,412,465 |
Net assets
attributable at the period end (£’000) |
1,467,443 |
1,172,539 |
Net asset value per
ordinary share (pence) |
112.9 |
90.2 |
EPRA net tangible
asset per share (pence) |
112.9 |
90.2 |
6. DIVIDENDS
|
Period ended
30 June 2022
£’000 |
Period ended
30 June 2021
£’000 |
2021 Fourth interim:
PID of 0.466p per share, Non PID of 0.284p per share paid 25
February 2022 (2020 Fourth interim: PID of 0.46p per share) |
9,746 |
5,977 |
2021
Fifth interim: nil
(2020 Fifth interim: PID of 0.531p per share) |
- |
6,900 |
2022 First interim:
PID of 0.80p per share paid 25 May 2022 (2021 First interim: PID of
0.644p per share) |
10,395 |
8,368 |
|
20,141 |
21,245 |
7. RELATED PARTY
TRANSACTIONS
No Director has an interest in any transactions which are or
were unusual in their nature or significant to the nature of the
Group.
abrdn Fund Managers Limited (previously Aberdeen Standard Fund
Managers Limited) received fees for their services as investment
managers. The total management fee charged to the Statement of
Comprehensive Income during the period was £4,798,238 (30 June 2021: £4,079,597) of which £4,798,238
(30 June 2021: £2,061,904) remained
payable at the period end.
The Directors of the Company are deemed as key management
personnel and received fees for their services. Total fees for the
period were £134,377 (30 June 2021:
£159,759) of which £Nil (30 June
2021: £Nil) was payable at the period end.
The Group invests in the abrdn Liquidity Fund which is managed
by abrdn. As at 30 June 2022 the
Group had invested £16.5 million in the Fund (30 June 2021: £123.5 million). No additional fees
are payable to the Investment Manager as a result of this
investment.
8.
TAXATION
|
Period ended
30 June 2022
£’000 |
Net profit from
ordinary activities before tax |
162,356 |
UK corporation tax at
a rate of 19 per cent |
30,848 |
Effects of: |
|
Capital gain on
investment properties not taxable |
(26,936) |
UK REIT exemption on
rental profits and gains |
(3,912) |
Total tax charge |
— |
9. FINANCIAL
INSTRUMENTS AND INVESTMENT PROPERTIES
The Group’s investment objective is to provide ordinary
shareholders with an attractive level of income, together with the
potential for income and capital growth from investing in a
diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial
property investments. The Group’s financial instruments consist of
cash, receivables and payables that arise directly from its
operations and loan facilities.
The main risks arising from the Group’s financial instruments
are credit risk, liquidity risk, market risk and interest rate
risk. The Board reviews and agrees policies for managing its risk
exposure. These policies are set out in the statutory accounts of
the Group for the year ended 31 December
2021. The Board, through its Risk Committee, has undertaken
a thorough review of these risks and believe they have not changed
materially from those set out in the 2021 statutory accounts.
Fair value hierarchy
The following table shows an analysis of the fair values of
investment properties recognised in the balance sheet by level of
the fair value hierarchy:
Explanation of the fair value
hierarchy:
Level 1 Quoted prices
(unadjusted) in active markets for identical assets or liabilities
that the entity can access at the measurement date.
Level 2 Use of a model
with inputs (other than quoted prices included in level 1) that are
directly or indirectly observable market data.
Level 3 Use of a model
with inputs that are not based on observable market data.
30 June 2022 |
Level 1
£’000 |
Level 2
£’000 |
Level 3 £’000 |
Total
fair value
£’000 |
Investment
properties |
— |
— |
1,678,590 |
1,678,590 |
The lowest level of input is the underlying yields on each
property, which is an input not based on observable market
data.
The fair value of investment properties is calculated using
unobservable inputs as set out in the statutory accounts of the
Group for the year ended 31 December
2021.
The following table shows an analysis of the fair value of bank
loans recognised in the balance sheet by level of the fair value
hierarchy:
30 June 2022 |
Level 1
£’000 |
Level 2
£’000 |
Level 3
£’000 |
Total
fair value
£’000 |
Loan Facilities |
— |
266,538 |
— |
266,538 |
The lowest level of input is the interest rate applicable to
each borrowing as at the balance sheet date which is a directly
observable input.
The fair value of the bank loans is estimated by discounting
expected future cash flows using the current interest rates
applicable to each loan.
The following table shows an analysis of the fair values of
financial instruments and trade receivables and payables recognised
at amortised cost in the balance sheet by level of the fair value
hierarchy:
30 June 2022 |
Level 1
£’000 |
Level 2
£’000 |
Level 3
£’000 |
Total
fair value
£’000 |
Trade and other
receivables |
— |
56,198 |
— |
56,198 |
Trade and other
payables |
— |
35,095 |
— |
35,095 |
The carrying amount of trade and other receivables and payables
is equal to their fair value, due to the short-term maturities of
these instruments. Expected maturities are estimated to be the same
as contractual maturities.
There have been no transfers between levels of the fair value
hierarchy during the period.
10. FINANCING
The Company has fully utilised the £100 million facility, which
is due to mature in April 2027, with
Barings Real Estate Advisers (previously Cornerstone Real Estate
Advisers LLP).
The Company has fully utilised the £100 million facility, which
is due to mature in February 2031,
with Barings Real Estate Advisers.
The Company has in place a £150 million revolving credit
facility with Barclays Bank Plc of which £68m was drawn down at the
period end (30 June 2021: £nil).
11. SUBSIDIARY UNDERTAKINGS
The Company owns 100 per cent of the issued share capital of UK
Commercial Property Estates Holdings Limited (UKCPEHL), a company
incorporated in Guernsey whose principal business is to hold and
manage investment properties for rental income. UKCPEHL Limited
owns 100 per cent of the issued share capital of UK Commercial
Property Estates Limited, a company incorporated in Guernsey whose
principal business is to hold and manage investment properties for
rental income. UKCPEHL also owns 100% of Brixton Radlett Property
Limited and UK Commercial Property Estates (Reading) Limited, both
are UK companies, whose principal business is that of an investment
and property company. In addition, UKCPEHL owns 100% of the issued
share capital of Duke Distribution Centres Sarl and Duke Offices
& Developments Sarl; both companies are incorporated in
Luxembourg with the principal
business being to hold and manage investment properties for rental
income.
The Company owns 100 per cent of the issued ordinary share
capital of UK Commercial Property Finance Holdings Limited
(UKCPFHL), a company incorporated in Guernsey whose principal
business is to hold and manage investment properties for rental
income.
UKCPFHL owns 100 per cent of the issued share capital of UK
Commercial Property Nominee Limited, a company incorporated in
Guernsey whose principal business is that of a nominee company.
UKCPFHL owns 100 per cent of the issued ordinary share capital of
UK Commercial Property Holdings Limited (UKCPHL), a company
incorporated in Guernsey whose principal business is to hold and
manage investment properties for rental income. UKCPT Limited
Partnership, (LP), is a Guernsey limited partnership, whose
principal business is to hold and manage investment properties for
rental income. UKCPHL and GP, have a partnership interest of 99 and
1 per cent respectively in the LP. The GP is the general partner
and UKCPHL is a limited partner of the LP.
In addition, the Group controls three JPUTS namely Junction 27
Retail Unit Trust, St George’s Leicester Unit Trust and Rotunda
Kingston Property Unit Trust. The principal business of the Unit
Trusts is that of investment in property.
As at 31 March 2021, Brixton
Radlett Property Limited, UK Commercial Property Estates (Reading)
Limited, the GP, Nominee and the Limited Partnership were all
placed in the hands of liquidators as part of a solvent liquidation
process and the conclusion of this process is due to conclude in
the second half of 2022.
During the period the Group successfully completed the voluntary
liquidation of Kew Retail Park, a JPUT whose principal business
prior to liquidation was that of investment in property.
12. POST BALANCE SHEET
EVENTS
The Group completed the sale of Colmore Row, Birmingham on 7 July for a headline sales
price of £26.48m.
On the 10 August 2022 the Company
declared a Property Income Distribution of 0.85p per ordinary share
payable in respect of the quarter-ended 30
June 2022 and a Special Dividend of 1.92p per ordinary
share. Both were paid to Shareholders on the 31 August 2022.
On the 19 August 2022 the Group
increased its revolving credit facility with Barclays Bank plc to
£180m (Dec 2021: £150m). There were
no other amendments to the agreement, the facility expires in
April 2024 and is cancellable at any
time.
- For further information please contact:
Will Fulton / Jamie Horton, abrdn
Via FTI consulting
William Simmonds / Harry Randall, J.P. Morgan Cazenove
Tel: 020 7742 4000
Richard Sunderland / Claire Turvey / Emily
Smart / Andrew Davis, FTI
Consulting
Tel: 020 3727 1000
UKCM@fticonsulting.com
------------
The Interim Report will be posted to shareholders in
October 2022 and additional copies
will be available from the Manager or by download from the
Company's webpage (www.ukcpreit.co.uk).
Please note that past performance is
not necessarily a guide to the future and that the value of
investments and the income from them may fall as well as rise.
Investors may not get back the amount they originally invested.
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration Services
(Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Tel: 01481 745001
END OF ANNOUNCEMENT