7 November
2022
UK Commercial Property REIT Limited
(“UKCM” or “the Company”)
Net Asset Value at
30 September 2022
NEW LEASING
ACTIVITY CONTINUES TO DELIVER RENTAL GROWTH - DIVIDEND
MAINTAINED
7 November
2022: UK Commercial Property REIT Limited (“UKCM” or the
“Company”) (FTSE 250, LSE: UKCM), which owns a £1.6 billion
portfolio of high quality and diversified real estate across the UK
today provides a net asset value (“NAV”) and trading update for the
third quarter of 2022.
Highlights
- NAV per share of 101.5p (30 June
2022: 112.9p) a NAV reduction of 10.1% and a NAV total
return for the quarter of -7.9% (Q2: +2.3%). The first nine months
of 2022 show an overall 0.5% NAV reduction, and a NAV total return
of 3.7%.
- 7.1% decrease in like-for-like portfolio capital value, net of
capital expenditure, to £1.6 billion, against the MSCI UK
Monthly Property Index capital value, which decreased by 5.1% over
the quarter.
- Rent collection rates have normalised to pre-pandemic levels
with 97% received for the fourth quarter of 2022 and 98% for the
year to date.
- The quarterly dividend of 0.85p per share has been maintained.
Payable in November 2022.
- EPRA earnings per share for the quarter was 0.73p (30 June 2022: 0.83p) giving dividend cover of
86.3%, with dividend cover for the nine months of 96.9%.
- Reflecting the Company’s continued progress with its ESG
strategy, the Company retained its three star GRESB rating,
increasing its overall score placing it second within its GRESB
peer group, and retained its EPRA Gold award for its sustainability
disclosures.
- The Company continues to be one of the lowest geared companies
in its peer group at 16.0%, with drawn debt at a blended interest
rate of 3.16% per annum, of which 75% is fixed rate. The
weighted maturity is 5.2 years and all banking covenants are well
covered.
Ken McCullagh, Chair of UKCM,
commented: “Since we last reported, and as widely anticipated,
the economic environment has become more challenging. The
rise in interest rates has resulted in weakening yields, which
have, in turn, put downwards pressure on valuations. We have
continued to focus on our strategy that we have put in place over
the past few years to proactively manage our portfolio towards high
quality assets in sectors that are supported by structural drivers
and societal changes, that positions us well for the future.
Our assets remain well placed to deliver income growth and
security, as evidenced by the continued high occupancy our
portfolio enjoys and we have continued during the quarter to sign
tenants at above passing rents and / or rental value as vacancy or
lease events arise. I take further comfort from the fact that
our balance sheet remains lowly levered, with over three quarters
of our debt at fixed rates and continues to be comfortably within
the banking covenants, and undrawn debt that provides us with
flexibility.”
Positive Investment Activity
As previously disclosed, 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
its 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 maintained a very low void rate of 1.3% (1.5% at
Q2 2022) which provides good visibility of future income and
clearly demonstrates both the quality of the Company’s portfolio
and the asset management team’s ability to retain income while
focusing on capturing reversionary potential.
Notable transactions over the last quarter include:
At Emerald Park industrial estate in Bristol, a new 10 year lease has been secured
with Pitchmark Group Ltd, incorporating a tenant only break in year
5. The letting has established a new rental tone of £10.50
psf per annum on the estate, 11% up from the previous rent passing
of £9.30psf per annum and 8% ahead of the unit’s previous rental
value (ERV).
At Newton’s Court industrial park in Dartford, a 10 year extension was completed at
lease renewal with Clear Channel over Unit 9 with a tenant break in
year 5. The lease was agreed at a new rent of £169,737 per
annum, equating to £12.50 psf per annum, 32% ahead of the previous
passing rent and 2% ahead of ERV.
In Hatfield, an open market rent review over the 298,400 sq ft
distribution warehouse was settled with online logistics solutions
retailer Ocado at £4,000,000 per annum, equating to £11.88 psf. The
reviewed rent reflects a 32% increase on the previous rent passing
and was 13% ahead of ERV at the time of review.
At the Company’s 260,100 sq ft distribution warehouse in
Newcastle Under Lyme another rent
review was settled with TK Maxx, at £1,391,535 per annum equating
to £5.35 psf. The settlement was 15% ahead of the previous passing
rent and 2% ahead of ERV at the rent review date.
Excellent progress continues to be made at the Company’s
developments with notable updates as follows:
At Gilmore Place, Edinburgh the
Company’s new student housing development reached completion on
1 September and was handed over to the University of Edinburgh who have taken a new FRI 20
year lease at a rent of £1,238,000 per annum with annual uplifts
(CPIH+1% with a collar/cap at 1% - 4%)
The first phase of the Company’s other student housing
development, in Exeter, is
expected to complete shortly this month, at which time 131 students
will be housed in the scheme. Phase 2 completion is anticipated to
follow shortly thereafter with the rooms marketed towards
postgraduate students with a start date in early January 2023.
Sectional completion was achieved in September over units
2&3 at the Sussex Junction industrial estate in Bolney,
delivering 60,229 sq ft of new space. The units are let to CGG
under two 15 year leases at a combined rent of £780,875, equating
to £12.50 psf per annum. Completion of unit 1 totalling 46,500 sq
ft, which is being marketed for lease, is scheduled for
November 2022.
Construction continues at Precision Park, Leamington Spa to
create a modern logistics facility of 67,700 sq. ft with strong ESG
credentials. Practical Completion is scheduled to take place
in February 2023 with the unit
attracting encouraging levels of interest.
Cash and Borrowings
As at 30 September 2022, gearing
continued to be one of the lowest in the Company’s peer group at
16.0%*. The drawn debt has an overall blended interest rate of
3.16% per annum, of which 75% is fixed rate, with a weighted
maturity of 5.2 years and banking covenants that are well covered.
Allowing for its committed capital expenditure the
Company has available resources of £54.8m having agreed an
additional £30 million facility in August
2022.
* Calculated, under AIC guidance, as gross borrowings less cash
divided by portfolio value.
Rent Collection
Rent collection rates have normalised to pre covid levels with
97% of fourth quarter rents due as at close of business on 31
October 2022 already collected after allowing for agreed rent
deferrals, as well as those tenants who have paid, by agreement, on
a monthly basis.
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 (5.8% of rent), Public Sector (4.9%)
Warner Brothers (4.2%), Amazon (4.0%) and Armstrong Logistics
(3.6%). The remainder of the portfolio’s income is secured on
190 tenancies.
The third quarter dividend has been maintained at 0.85p per
share, following the 13.3% dividend increase announced in relation
to the first half of 2022.
Breakdown of NAV movement
Set out below is a breakdown of the change to the unaudited net
asset value per share calculated under International Financial
Reporting Standards ("IFRS") over the period from 30 June 2022 to 30
September 2022:
UK Commercial
Property REIT Limited |
Per
Share (p) |
Attributable Assets (£m) |
Comment |
Net assets as at 30
June 2022 |
112.9 |
1,467.4 |
|
Unrealised decrease in
valuation of property portfolio |
-8.1 |
-105.7 |
Predominantly decrease
in property portfolio |
Realised gain on sale
of property |
0.3 |
3.5 |
In July the Company
disposed of its central Birmingham office, 9 Colmore Row. |
Capex |
-1.5 |
-20.0 |
Primarily relates to
ongoing development capex for the student accommodation at Exeter
and Edinburgh, the industrial units at Sussex Junction and
Leamington Spa and the hotel at Sovereign Square, Leeds. |
Income earned for the
period |
1.3 |
16.8 |
Equates to
dividend cover of 86.3%. |
Expenses for the
period |
-0.6 |
-7.3 |
Dividend paid in
August 2022 |
-0.9 |
-11.0 |
Special dividend paid
in August 2022 |
-1.9 |
-25.0 |
|
Net assets as at 30
September 2022 |
101.5 |
1,318.7 |
|
The EPRA Net Tangible Assets per share is 101.5p (30 June 2022: 112.9p) with EPRA earnings per
share for the quarter being 0.73p (30 June
2022: 0.83p).
Sector Analysis
|
Portfolio Value as at 30 Sept 22 (£m) |
Exposure as at 30 Sept 22 (%) |
Like
for Like Capital Value Shift (net of CAPEX) |
Capital Value Shift (including sales & purchases
& development spend) (£m) |
|
(%) |
Valuation as at 30
Jun 22 |
|
|
|
1,710.9 |
|
|
|
|
|
Industrial |
987.5 |
62.3 |
-10.0 |
-104.9 |
South East |
|
39.3 |
-8.9 |
-56.8 |
Rest of UK |
|
23.0 |
-12.0 |
-48.1 |
|
|
|
|
|
Retail |
204.8 |
13.0 |
-3.7 |
-7.9 |
High St – South
East |
|
0.9 |
-5.4 |
-0.8 |
High St- Rest of
UK |
|
1.2 |
-5.3 |
-1.0 |
Retail Warehouse |
|
10.9 |
-3.4 |
-6.1 |
|
|
|
|
|
Offices |
194.3 |
12.3 |
-5.5 |
-33.3 |
West End |
|
1.8 |
-6.9 |
-2.1 |
South East |
|
5.0 |
-7.1 |
-6.1 |
Rest of UK |
|
5.5 |
-3.6 |
-25.1 |
|
|
|
|
|
Alternatives |
196.4 |
12.4 |
2.1 |
18.2 |
|
|
|
|
|
External valuation
at 30 Sept 22 |
1,583.0 |
100.0 |
-7.1 |
1,583.0 |
Top Ten Investments
|
Sector |
Properties valued in excess of
£100 million |
|
Ventura Park, Radlett |
Industrial |
Hannah Close, Neasden, London |
Industrial |
Properties valued between £50
million and £100 million |
|
Dolphin Industrial Estate,
Sunbury-on-Thames, London |
Industrial |
Ocado Warehouse, Hatfield |
Industrial |
Newton’s Court, Dartford |
Industrial |
Junction 27 Retail Park, Leeds |
Retail |
XDock 377, Lutterworth |
Industrial |
Properties valued between £25
million and £50 million |
|
Emerald Park, Bristol |
Industrial |
The Rotunda, Kingston on Thames |
Alternatives |
Maldron Hotel, Newcastle |
Alternatives |
The independent valuation as at 30
September 2022 was carried out by CBRE Ltd.
Net Asset Value analysis as at
30 September 2022 (unaudited)
|
£m |
% of
net assets |
Industrial |
987.5 |
74.9% |
Retail |
204.8 |
15.5% |
Offices |
194.3 |
14.7% |
Alternatives |
196.4 |
14.9% |
Total Property
Portfolio |
1,583.0 |
120.0% |
Adjustment for lease
incentives |
-32.3 |
-2.4% |
Fair value of
Property Portfolio |
1,550.7 |
117.6% |
Cash |
14.6 |
1.1% |
Other Assets |
55.6 |
4.2% |
Total
Assets |
1,620.9 |
122.9% |
Current
liabilities |
-35.6 |
-2.7% |
Non-current
liabilities (bank loans) |
-266.6 |
-20.2% |
Total Net
Assets |
1,318.7 |
100.0% |
The NAV per share is based on the external valuation of the
Company’s direct property portfolio as at 30
September 2022. It includes all current period income and is
calculated after the deduction of all dividends paid prior to
30 September 2022.
The NAV per share at 30 September
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
Following a strong start to the year, UK real estate is now in
the midst of a broad repricing and performance for the remainder of
the year and into 2023 is expected to slow further. This trend is
already apparent as, according to the MSCI Monthly Index, all
property total return for Q3 2022 turned negative at -4.1%, the
weakest quarterly performance recorded since May 2009. Capital value declines have been the
principal driver in slowing performance, with capital values
falling 5.1% over the same quarter, as yields have begun to move
out sparked by rising interest rates and government bond yields,
particularly in lower yielding areas of the market. By way of
illustration, industrial capital growth fell by 8.1% in Q3 2022,
with south east industrials reporting the steepest monthly capital
value decline since December
2008.
Transaction volumes also fell in Q3 2022 to £10bn according to
Real Capital Analytics, as weaker sentiment spread throughout the
UK real estate market, causing lower liquidity as a result.
Increased market volatility in September
2022, on the back of economic and political uncertainty, has
also ensured that investor conviction on asset pricing levels has
fallen. The speed of this change in sentiment is characterised by
the fact that H1 2022 transaction volumes were the second strongest
since 2002 and totalled just under £40bn.
Despite a record breaking Q1 2022 for transactions in the
industrial sector, with over £7.1bn traded, transaction volumes in
Q3 are down 64% on this number, primarily due to lower demand in
response to the highlighted rise in the cost of debt financing and
a thinning margin over UK gilt yields.
However, from an occupational perspective, the sector continues
to benefit from positive supply/demand dynamics and the UK vacancy
rate remains near historic lows. Limited new development and robust
demand should allow for rental value growth in the prime end of the
sector, but at more normalised levels. Further capital value
declines are to be expected in the sector, but the medium to long
term sector fundamentals remain well balanced.
The office sector is also experiencing headwinds in the face of
a weaker economic environment. Historically, office occupational
demand has been closely correlated with GDP growth and, given the
poor economic outlook, office take up levels are expected to
fall. This will be more patently felt in the secondary end of
the market, while demand for best in class assets should prove more
robust. Tight supply of best in class accommodation should insulate
Grade A rental values, but a decline in secondary office rents is
to be expected as occupiers narrow their focus on future fit
assets, with strong ESG and wellbeing credentials. Investor demand
also continues to narrow and office capital value declines are
expected. It is still unclear how medium-term demand for office
space will be influenced by COVID-induced changes to working habits
and how these will evolve - it seems fair to assume companies
embracing agile/home working will also look to reduce occupational
costs and that many will concentrate that reduced budget on a
smaller quantity of better quality “Grade A” space; in other words
less overall demand but potentially greater demand for the best
space.
The cost of living crisis and subsequent squeeze on household
disposable incomes will be most acutely felt in the retail sector,
and particularly within discretionary led retail schemes. While
fiscal support measures will likely soften the blow, data already
suggests that consumers are cutting back on non-essential spending
and seeking savings wherever possible. As a result, occupational
demand from discretionary retailers (such as fashion) is likely to
fall whilst those retailers deemed to be essential (such as budget
supermarkets) will perform better in this environment. DIY and
housing related retailers are also likely to face tougher trading
conditions in the period ahead as the UK housing market comes under
pressure. The prospect for rental value growth in the sector is
therefore limited and investors are also expected to focus
principally on non-discretionary retail schemes, such as budget
retailers and supermarkets.
The alternatives sector has continued to see growth over the
course of 2022, driven by strong demographic and structural
tailwinds. Investment into the sector is already ahead of the
calendar year total in 2020 and only 6% behind that in 2021, with
investment into the residential sector the largest contributor to
this rise. The Purpose Built Student Accommodation (PBSA) and
healthcare sectors, while not immune to the weaker environment,
will also benefit from thematic tailwinds and are expected to
outperform the wider market over the next 12 months. The PBSA
sector in particular has often run countercyclical to economic
downturns, with UCAS data indicating increasing demand for
university places in the 2022/2023 academic year.
Investment Outlook
Whilst rising debt costs proved to be a catalyst for a repricing
in UK real estate, ongoing concerns surrounding elevated gilt
yields is now a significant driver, as the margin between the risk
free rate and UK real estate yields tightens. This is more
pronounced in lower yielding areas of the market, such as parts of
the industrial sector, where it has resulted in yields moving out
by between 100 – 125 bps since June
2022 according to CBRE. UK gilt yields are anticipated to
remain elevated and, with further tightening of monetary policy
ensuring debt costs remain prohibitive, UK real estate performance
will remain under pressure in the short term.
However, a rebound in UK real estate performance is expected in
the medium term as the economic situation in the UK improves.
Inflation, which has driven the Bank of England’s recent interest
rate hike of 0.75% to 3%, is anticipated to fall as recessionary
pressures weigh on the global economy and, as a result, the Bank is
expected to start reversing monetary policy in late 2023 in a bid
to pull the economy out of recession. UK gilt yields are also
expected to move lower as the economic outlook improves and this,
combined with a repricing of UK real estate, will ensure that UK
real estate will look attractive from a relative pricing
perspective to investors.
Better quality assets are expected to lead the recovery over the
medium term due in part to ESG considerations becoming ever more
important to both occupiers and investors. As a result, and given
the current energy crisis and drive towards net zero, integrating
ESG strategies into investment decision making is paramount to
ensuring assets are future fit and ready for a recovery in real
estate performance.
The Board is not aware of any other significant events or
transactions which have occurred between 30
September 2022 and the date of publication of this statement
which would have a material impact on the financial position of the
Company.
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 Fund Managers Limited.