In May 2023, following an assessment of the asset’s business plan, UKCM sold its 186,455 sq ft Wembley 180 logistics asset in London to Covent Garden IP Limited, a registered charitable company, for £74 million. The price achieved reflected a net initial yield of 3.49% which was broadly in line with the 31 March 2023 valuation. UKCM had owned the property since 2009 and completed a refurbishment of the asset in 2019 when it let the unit to a global e-commerce company until 2029. The proceeds of the sale were used to enhance earnings by paying down a substantial amount of the Company’s Revolving Credit Facility (RCF).
In the period, the Company achieved practical completion of its 107,00 sq ft industrial development, Sussex Junction, in Bolney. Two units are pre-let to geological services company CGG on a 15-year lease at an annual rent of £780,875 pa and the final, third unit of 46,500 sq ft was let after the period end, in August, to Birch Sussex Ltd. The development is rated BREEAM ‘Very Good’ and has an EPC rating of A for its shell and core.
The Company’s 226-room student housing development at Glenthorne Road in Exeter completed during Q1 and is let directly to students. With a significant supply shortage of student accommodation in the local market, there is already strong letting momentum for the 2023/2024 academic year and UKCM benefits from guaranteed Year 1 income of £1,650,000. The development has an EPC rating of B, benefits from PV solar panels on the roof and is targeting a BREEAM ‘Very Good’ rating.
The Company has successfully retained Cineworld at Glasgow and Swindon following negotiations in relation to its US Chapter 11 process. The agreement involved a restructuring of the leases to reduce the tenant’s annual outgoings and ensure the cinemas are profitable. The restructure has been reflected in the portfolio value and NAV.
The Company has agreed a reduction in Cineworld’s rent representing c.1% of the annualised portfolio valuation rent as at 30 June 2023. Despite this adjustment, the annualised portfolio rent roll, on a like-for-like basis, remains higher than at the start of the year. The retention of Cineworld as a tenant ensures these two assets remain occupied and income producing.
The Company also completed the development of Units G&H at Precision Park in Leamington Spa during the quarter. The property provides 67,700 sq ft of high-quality industrial space with flexibility to sub-divide to accommodate smaller requirements as required. The units have strong ESG credentials with an EPC of A and a BREEAM ‘Very Good’ rating, as well as PV enablement. The completed asset is attracting encouraging levels of occupier interest.
Further details on all investment transactions and significant lettings are outlined in the Investment Manager Review.
Portfolio and Corporate Performance for the period
The property portfolio delivered a total return of 3.9% for the half year, ahead of the MSCI benchmark total return for the period of 0.0%. UKCM has continued to outperform against its MSCI UK Balanced Portfolio Quarterly Index benchmark for 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 3.9% NAV total return for the period. This strong performance, both in absolute and relative terms compared with its peers, is not reflected in the share price total return of -14.5% for the same period. As mentioned above, addressing the discount at which the Company’s shares trade versus their net asset value remains a priority for the Board.
The Company’s strategic overweight position to the industrial sector (58.5% v MSCI 34.9%) was the primary driver of portfolio outperformance against the benchmark during the period.
The portfolio continues to benefit from strong underlying fundamentals to generate growth opportunities. The Company’s underlying EPRA earnings per share increased 6% from h3 2022 to 1.67 pence per share.
The following table provides an analysis of the movement in the NAV (pence per share) for the period:
Strong balance sheet with significant covenant headroom and flexibility
UKCM continues to be on a solid financial footing with a NAV of £1.1 billion at 30 June 2023, and gearing of 15.6%, 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 3.35% per annum, of which 88% is at a low fixed rate, with a blended period to maturity of 5.3 years. The Company continues to sit comfortably within the covenants on its three debt facilities. In addition, with over £330 million of unencumbered assets, the Company has significant headroom and further flexibility with respect to its covenants and overall gearing strategy.
UKCM has financial resources of £123.6 million available after allowing for future capital commitments and the August 2023 dividend. The bulk of these resources relate to the Company’s RCF, which is a relatively expensive form of debt, and it is therefore only likely to be deployed if a compelling and accretive opportunity arises.
The Company paid two interim dividends totalling 1.70 pence per share during the period. Dividend cover for the first half of 2023 was 98%.
On the 31 July 2023, Ken McCullagh stepped down as Chair and I assumed the role. I would first like to thank Ken for his significant contribution and commitment to UKCM over the past ten years, and particularly during his term as Chair of the Board. In the decade since Ken was appointed to the Board, the Company has successfully navigated multiple headwinds: Brexit, Covid, the invasion of Ukraine and the current period of rising interest rates and market volatility. To address these challenges, the Board, expertly led by Ken over the last three years, has worked with the Investment Manager to ensure the Company’s portfolio is comprised of high-quality assets that meet the future needs of tenants and deliver reliable income to shareholders.
The direct UK real estate market faces a challenging macroeconomic climate, with gilt yields expected to remain volatile and with the higher level of interest rates exerting pressure on real estate pricing. Investors are expected to remain cautious, and are likely to prefer good-quality assets with more robust supply/demand dynamics of the type owned by UKCM. Polarisation between individual property sectors is expected to remain, with the sectors that benefit from structural and thematic tailwinds, including industrial, set to perform well over the longer term.
The Company’s portfolio strategy revolves around creating an environment where the underlying performance and consequently the share price, will improve. This includes increasing earnings through strong asset and company management; having a portfolio allocation strategy that targets growth; and maintaining very strong balance sheet discipline. The Company will continue to assess the portfolio for opportunistic trading but is broadly comfortable with its current composition, with assets focused on favoured sectors and offering strong geographic and tenant diversification.
Risk factors you should consider prior to investing:
- The value of investments and the income from them can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future returns.
- The value of property and property-related assets is inherently subjective due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the valuations of Properties will correspond exactly with the actual sale price even where such sales occur shortly after the relevant valuation date.
- Prospective investors should be aware that, whilst the use of borrowings should enhance the net asset value of the Ordinary Shares where the value of the Company's underlying assets is rising, it will have the opposite effect where the underlying asset value is falling. In addition, in the event that the rental income of the falls for whatever reason, including tenant defaults, the use of borrowings will increase the impact of such fall on the net revenue of the Company and, accordingly, will have an adverse effect on the Company's ability to pay dividends to Shareholders.
- The performance of the Company would be adversely affected by a downturn in the property market in terms of market value or a weakening of rental yields. In the event of default by a tenant, or during any other void period, the Company will suffer a rental shortfall and incur additional expenses until the property is re-let. These expenses could include legal and surveying costs in re-letting, maintenance costs, insurance costs, rates and marketing costs.
- Returns from an investment in property depend largely upon the amount of rental income generated from the property and the expenses incurred in the development or redevelopment and management of the property, as well as upon changes in its market value.
- Any change to the laws and regulations relating to the UK commercial property market may have an adverse effect on the market value of the Property Portfolio and/or the rental income of the Property Portfolio.
- Where there are lease expiries within the Property Portfolio, there is a risk that a significant proportion of leases may be re-let at rental values lower than those prevailing under the current leases, or that void periods may be experienced on a significant proportion of the Property Portfolio.
- The Company may undertake development (including redevelopment) of property or invest in property that requires refurbishment prior to renting the property. The risks of development or refurbishment include, but are not limited to, delays in timely completion of the project, cost overruns, poor quality workmanship, and inability to rent or inability to rent at a rental level sufficient to generate profits.
- The Company may face significant competition from UK or other foreign property companies or funds. Competition in the property market may lead to prices for existing properties or land for development being driven up through competing bids by potential purchasers.
- Accordingly, the existence of such competition may have a material adverse impact on the Company's ability to acquire properties or development land at satisfactory prices.
- As the owner of UK commercial property, the Company is subject to environmental regulations that can impose liability for cleaning up contaminated land, watercourses or groundwater on the person causing or knowingly permitting the contamination. If the Company owns or acquires contaminated land, it could also be liable to third parties for harm caused to them or their property as a result of the contamination. If the Company is found to be in violation of environmental regulations, it could face reputational damage, regulatory compliance penalties, reduced letting income and reduced asset valuation, which could have a material adverse effect on the Company's business, financial condition, results of operations, future prospects and/or the price of the Shares.
The Company is a Closed-ended investment scheme registered pursuant to the Protection of Investors (Bailiwick of Guernsey) Law 2020, as amended and the Registered Collective Investment Scheme Rules 2021 issued by the Guernsey Financial Services Commission.
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London, EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.