The Local Shopping REIT plc
Interim Management Statement
ONGOING PROGRESS IN ACTIVE MANAGEMENT INITIATIVES AND
FURTHER GROWTH OF ASSETS UNDER MANAGEMENT
London: 10 February 2012 - The Local Shopping REIT plc. ("LSR" or the "Company"), a UK real estate investment trust focused on investments in local shopping assets, is pleased to provide the following update on trading for the four months to 31 January 2012.
§ Ongoing asset management success:
o 38 vacant units let at a combined rent of £497,818 per annum
o Healthy letting pipeline, with 27 units under offer at a combined rental of £259,139 per annum
o Rent reviews completed on 110 units, increasing rental income by £23,116 per annum
§ Four properties sold since 30 September 2011 for a total of £0.91 million at an average of 23.8% above their September 2011 valuation and contracts exchanged on a further two properties for. £0.75 million, 7.9% above their September 2011 valuation
§ Good progress during the period with our acquisition programme for the Pramerica Real Estate Investors joint venture; three properties purchased for a combined £10.65 million, contracts exchanged to buy a newly built parade in Stoke-on-Trent for £0.81 million and five further properties under offer for a combined £7.11 million
§ Ongoing discussions with UK lending banks regarding the management of distressed assets and with other potential joint venture partners.
Nick Gregory, LSR's Joint Chief Executive Officer, said:
"Tenant demand for smaller local shopping assets from both national operators and independent traders is holding up well. This gives us confidence that the wide geographic spread and diversity of our assets and tenant base, with its focus on supporting the top-up shopping needs of local communities, will continue to underpin our strong, cash generative business model."
Mike Riley, LSR's Joint Chief Executive Officer, added:
"Our business continues to demonstrate the ongoing relative resilience of our portfolio and the benefits that our highly specialised management skills can deliver, not only to our wholly owned assets, but also to those properties we manage for co-investors and third parties. In the coming months, we will continue to apply these skills to increase the revenues from our existing holdings, while seeking to grow our assets under management through discussions with lending banks and potential joint venture partners."
Against the backdrop of a challenging retail environment, we are pleased to report that tenant demand for smaller local shopping assets from both national operators (in particular, supermarkets for their convenience store formats) and independent traders is holding up well. This gives us confidence that the wide geographic spread and diversity of our portfolio of assets and tenant base, with its focus on supporting the top-up shopping needs of local communities, will continue to underpin our strong, cash generative business model. This is in contrast to the wider occupier market, in which subdued consumer expenditure is putting further pressure on retailers, particularly those whose business models rely on discretionary spend. With retailers facing ever-growing competition from the internet, out-of-town developments and larger regional centres, we anticipate further High Street store closures and business failures over the coming months.
Demand for our smaller units remains steady. This has resulted in the successful letting of 38 vacant units since 30 September 2011 at a combined rent of £497,818 per annum. Overall these lettings were agreed at a level in line with Market Rent. Of these lettings, six incorporate stepped rent increases, with the initial rents rising from £56,397 per annum to £77,763 per annum over the first three years of their leases, compared with a Market Rent of £68,570 per annum. The remaining 32 units were let at 2.7% above Market Rent. The letting pipeline also remains healthy, with 27 units under offer, as at 31 January 2012, at a combined rental of £259,139 per annum.
We also made encouraging progress in growing rents through rent reviews. We completed reviews on 110 units, increasing rental income by £23,116 per annum, representing an average uplift of 1.5% and 5.0% above Market Rent. Only seven leases were renewed during the period which has resulted in a small fall in rental income of £5,845 per annum for those units, largely arising from the pragmatic renewal of the lease of an office suite above a shop in Sunderland.
We continue to work hard to extract further value from our properties, particularly those with under-used upper floors that we can reconfigure and improve, through change-of-use planning consents. During the period, we secured planning consent to convert vacant office space above shops in Weymouth and Braintree into five flats. We intend to build these out in line with our policy of doing so if we can secure an acceptable rental yield following conversion. Since 30 September 2011, we have completed five such flat conversions with a further seven under construction. Two of the completed flats have been let at a combined rent of £13,800 per annum, with the remainder being held back for sale.
We have also obtained five change of use consents on vacant retail units from A1 (shops) to higher value uses which should significantly improve their letting prospects.
We are pleased to report that the core commercial void rate decreased over the period to 7.6% (September 2011: 7.7%), while deliberate voids fell to 2.2% (September 2011: 2.3%) as we completed the conversion of five flats. However, there has been a small increase in the overall void rate to 10.7% (September 2011: 10.6%) as the result of a seasonal rise in the residential void rate to 0.9% (September 2011: 0.6%). We anticipate the level of residential voids will fall over the coming weeks as newly converted units and flats vacated over the Christmas period are let. Despite the challenging economic backdrop, tenant defaults and associated bad debts remained in line with our expectations over the period.
Acquisitions and Sales
We believe that low interest rates are broadly supportive of current valuation levels within the local shopping market. However the worsening Eurozone crisis during the final quarter of 2011 has undoubtedly shaken the confidence of private investors. While such investors continue to buy assets to satisfy their requirement for income, they are becoming increasingly selective in their purchasing criteria. Against this backdrop, there is little available stock in the market. Investors under no pressure to sell prefer to retain assets for income, while many lenders are unable to make the necessary loan write-downs that will enable them to sell properties at a market clearing level. However, with bank debt remaining scarce (and expensive where available), near term yield compression in our sector seems unlikely. Under these conditions, growth in the value of our portfolio will therefore be driven by our success in growing rents and adding value through active asset management.
We have maintained our highly selective approach to acquisitions over the period and have not purchased any properties within the wholly owned portfolio since 30 September 2011.
In line with our ongoing policy to sell ex-growth properties, we have sold four properties (including one flat and a vacant property in Colchester) since 30 September 2011 for a total of £0.91 million. These sales were completed at an average of 23.8% above their September 2011 valuation. In addition, we have exchanged contracts to sell two properties (one flat and one retail unit subject to planning) for £0.75 million, 7.9% above their September 2011 valuation. Over the coming months we intend to sell further ex-growth properties in order to reinvest the proceeds into our joint ventures and other interesting opportunities.
As a result of these sales, the Company now has a portfolio of 647 properties comprising over 2,000 letting units.
Working with Banks
One element of our strategy for growth is the management of distressed assets. We currently manage properties on behalf of three lenders with an annual rent roll of circa £900,000. Faced with increasingly stringent capital requirements, we believe that over the coming months many lenders will focus their deleveraging efforts on the sale of larger portfolios and loan books. However, some properties and portfolios will require longer term asset management led solutions and we are continuing our discussions with a view to managing assets for lenders who recognise the value of our business model, encompassing nationwide coverage, an extensive network of local agents and our intensive and specialist asset management skills.
A second and key element of our strategy is to seek to grow the business through the creation of joint ventures. Our first such JV, with Pramerica Real Estate Investors, was established in November 2010 to invest in retail parades and neighbourhood centres throughout the UK. Since 30 September 2011 we have continued to make good progress with our acquisition programme, completing the purchase of three properties for a combined £10.65 million (including the £7.15 million forward funding of the Halewood District Centre in Liverpool). In addition, as at 31 January 2012, we have exchanged contracts to buy a newly built parade in Stoke-on-Trent for £0.81 million and have a further five properties under offer for a combined £7.11 million. In order to finance these acquisitions we have drawn down £9.4 million from the JV's HSBC facility, of which we have hedged £4.9 million, resulting in an overall average interest rate of 3.4%. Should all these transactions complete, this would bring the purchase price of deals so far to over £30 million.
As previously announced, our second "work out" JV with an established UK financial institution was set up in September 2011. We are in the process of agreeing three rent reviews and negotiating a potential lease extension on the four assets currently owned by the JV. Further properties will be added to the portfolio when the opportunity arises.
In addition to our existing Joint Ventures, the Company is currently considering a range of other opportunities to deploy its unique set of specialist asset management skills. These include the management of third party assets and further joint venture prospects, built upon our expertise in managing smaller properties throughout the UK.
The Company's borrowing position remains broadly unchanged from that reported as at 30 September 2011. It has two fully drawn loans with debt outstanding of £116.9 million. The term of both loans runs until 2016 and there are no ongoing loan-to-value default provisions.
LSR also has an additional, part-drawn long-term loan facility from HSBC. This part-drawn loan comprises a £35 million revolving credit facility, of which £6.0 million has been drawn (September 2011: £3.9 million), and a separate £25 million term facility of which £10.5 million has been drawn (September 2011: £10.5 million). This loan has an 85% loan-to-value covenant and 2016 expiry. In October 2011 the balance of £14.5 million of the term facility was cancelled in order to reduce undrawn commitment fees.
The average interest rate of the Company's borrowing is 5.5% (September 2011: 5.5%).
Our business continues to demonstrate the ongoing relative resilience of our diversified portfolio and tenant base and the benefits that our highly specialised management skills can deliver, not only to our wholly owned assets, but also to those properties we manage on behalf of our partners and third parties. Our future success will, therefore, be based upon the continuing effective execution of our strategy:
§ Optimising the value of, and income from, existing assets
§ Using our unique business platform and management skills to grow revenue, which will be achieved by:
o sales of ex-growth properties to invest in new opportunities;
o portfolio or private company acquisitions;
o the creation of further partnership vehicles aligned to our sector; and
o distressed asset management.
For more information please contact:
The Local Shopping REIT plc Tel: 020 7292 0333
Mike Riley/Nick Gregory
FTI Consulting Tel: 020 7831 3113
Stephanie Highett/Richard Sunderland/Olivia Goodall
About The Local Shopping REIT
The Local Shopping REIT plc ("LSR") is the first specialist start-up Real Estate Investment Trust ("REIT") to launch in the UK.
Already a major owner of local retail property, the Company is building a portfolio of local shops in urban and suburban areas, investing in neighbourhood and convenience properties throughout the UK. Typical of the portfolio are shops in local shopping parades and neighbourhood venues for convenience or 'top-up' shopping. As at 31 January 2012 the Company's directly owned portfolio comprised 647 properties, with over 2,000 letting units. In addition, the Company intends to deploy its unique set of specialist asset management skills in the management of third party assets and joint ventures, building upon its current mandates with a number of leading institutions.
For further information on LSR, please visit www.localshoppingreit.co.uk.