The Local Shopping REIT plc
Interim Management Statement
FURTHER GROWTH IN ASSETS UNDER MANAGEMENT
London: 9 August 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 July 2012.
§ Active asset management shows continuing benefits, securing annualised rental income from the core portfolio of £15.9 million:
o 30 vacant units let since 31 March 2012 at a total rent of £251,830 per annum
o Strong letting pipeline, with 21 units under offer as at 31 July 2012, at a combined rental of £269,920 per annum
o Completed rent reviews on 73 units, increasing rental income by £21,236 per annum (2.3% above passing rent and 4.7% above Market Rent), and 14 additional leases renewed
o Ongoing drive to extract additional value through securing planning consents for extensions or change-of-use
§ Disposals totalling £1.8 million completed or in solicitors' hands during the period
§ Growth in the management of distressed assets for third parties, with an annual rent roll of properties under management of over £1.38 million (31 March 2012: £0.90 million); discussions with other lenders advancing
§ Continued momentum in existing partnerships - assets under management increased to £39.3 million:
o Seven properties acquired for the Pramerica Real Estate Investors JV, for a combined £13.2 million, bringing deals completed to date to £36.3 million
o First acquisitions completed for the fund created with Schroders in March 2012 to invest in convenience retail opportunities; five properties acquired for a combined purchase price of £3.0 million, with a further eight properties under offer for a total consideration of £7.0 million.
Nick Gregory, LSR's Joint Chief Executive Officer, said:
"The portfolio has continued to perform resiliently since March, demonstrating the benefits delivered both by our highly diversified asset and tenant base and by the specialist management skills we can apply not only to our wholly owned assets, but also to the growing number of properties we manage on behalf of our partners and third parties."
Mike Riley, LSR's Joint Chief Executive Officer, added:
"We view the current market as challenging but also as offering compelling opportunities where genuine asset management capability and a thorough understanding of the secondary property market backed by a highly motivated national network of agency contacts are at a premium. Looking ahead, we will continue to optimise the value of, and income from, our existing assets while at the same time seeking to use our unique business platform and management skills to grow revenue."
Against a challenging economic backdrop, 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 remains resilient. This is particularly the case for units where rents are sub £15,000 per annum which is typically an affordable level for local convenience retailers. We are confident that this demand for affordable space, coupled with the wide geographic spread and diversity of our portfolio of assets and tenant base, focused on the top-up shopping needs of local communities, will continue to underpin our strong, cash generative business model.
The relative strength of this specific sub-sector compares favourably to the wider occupier market, in which subdued consumer expenditure is putting further pressure on retailers, especially those depending on discretionary spend. It is our continuing view that the ever-increasing competition from the internet, out-of-town developments and larger regional centres will lead to further High Street store closures and business failures over the coming months which, in turn, will cause downward pressure on rents in shopping centres and on the traditional High Street.
Despite this difficult retail climate, demand for our smaller units in local retail locations let at affordable rents remains stable. This steady demand has resulted in the successful letting of 30 vacant units since 31 March 2012 at a total rent of £251,830 per annum. Of these lettings, three incorporate stepped rent increases, with the initial rents rising from £15,380 per annum to £19,080 per annum over the first three years of their leases, compared with a Market Rent of £19,050 per annum. The remaining 27 units were let in line with Market Rent. The letting pipeline also remains healthy, with 21 units under offer, as at 31 July 2012, at a combined rental income of £269,920 per annum.
We also made further progress in growing rents through rent reviews and lease renewals. We completed reviews on 73 units, increasing rental income by £21,236 per annum, representing an average rental uplift of 2.3% and a premium of 4.7% above Market Rent. We also renewed 14 leases at rents in line with both the previous passing rent and Market Rent.
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 two vacant office suites above shops in Newhaven into two flats and consent to convert and extend a first floor restaurant in Kingsbridge 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 and, at the end of July, two such flat conversions were completed in Braintree. Since 31 March 2012, we have also obtained planning consent for a 12,000 sq ft extension to an 18,000 sq ft supermarket in St Helens and obtained a change of use consent on a vacant retail unit from A1 (shops) to A2 (financial) where a letting to an estate agent is due to complete shortly.
Over the period there has been a small rise in the overall portfolio void rate to 11.0% (31 March 2012: 10.6%). This slight increase is as a result of an anticipated rise in the deliberate void rate to 2.4% (31 March 2012: 2.2%) as we continue to look for opportunities to add value through change-of-use and other asset management initiatives. In addition there has been a small rise in the core commercial void rate to 7.8% (31 March 2012: 7.6%) as we take a more robust approach to taking back possession from tenants in financial difficulty where we are confident in the letting prospects for their units. During the period the residential void rate remained unchanged at 0.8%. 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, weak domestic growth coupled with the ongoing Eurozone crisis has led private investors to become increasingly selective in their purchasing criteria, seeking either secure income streams or added value opportunities in the more affluent parts of the UK. Bank debt remains scarce (and expensive where available) which has effectively removed the traditional debt backed buyers from the market. Against this backdrop, 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, over recent months we have seen more distressed stock released into the market either directly by the banks or alternatively from the purchasers of loan books. This is likely to have an adverse impact upon values in the wider property market. Under these conditions, we will therefore be focussing our efforts on driving value growth through growing rents and adding value through active asset management.
During the period we acquired a retail investment in Ayr for £0.30 million, at a 7.32% net initial yield. The property lies adjacent to a shop we already own and there is the potential to combine both units at a future date to create a larger convenience store unit.
In line with our ongoing policy to sell ex-growth properties, we have sold two properties (one of which was a vacant shop to an owner-occupier) since 31 March 2012 for a total of £0.32 million, at an average of 5.7% above their 31 March 2012 valuation. A further three properties are under offer for sale for a combined £0.68 million, a 6.8% premium to their 31 March 2012 valuation. In addition, we have sold one flat in Okehampton for £0.07 million, at a 40.6% premium to its 31 March 2012 valuation, and have a further seven flats under offer for sale at £0.73 million, at a 10.4% premium to their 31 March 2012 valuation.
As a result of the purchase and these sales, the Company now has a wholly owned portfolio of 644 properties with over 2,000 letting units, generating an annualised rental income of £15.9 million.
Working with Banks
One element of our strategy for growth is the management of distressed assets. During the period we were appointed to manage a further three properties on behalf of a UK lender, taking the annual rent roll of properties under management to over £1.38 million (31 March 2012: £0.90 million) on behalf of three lenders. We are continuing our discussions with these and a number of other lenders with a view to managing assets for those 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 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 31 March 2012 we have continued to make good progress with our acquisition programme, completing the purchase of seven properties for a combined £13.2 million bringing the purchase price of deals completed to date to £36.3 million. A further two properties are under offer for a combined £4.2 million. In order to finance these acquisitions, we have drawn down £18.5 million from the JV's HSBC facility, of which we have hedged £9.3 million, resulting in an overall average interest rate of 3.1%.
As previously announced, our second "work out" JV with an established UK financial institution was set up in September 2011. Four properties were acquired at inception for a combined £3.4 million. We are currently reviewing further properties within their distressed book which will be added to the portfolio as the opportunity arises.
Our third such venture was the creation of a £60 million unlisted fund in partnership with Schroders in March 2012 to invest in convenience retail opportunities. During the period the fund completed its first acquisitions and now owns five properties with a combined purchase price of £3.0 million with a blended yield of 6.56%. A further eight properties with a combined purchase price of £7.0 million are under offer.
The Company's borrowing position remains broadly unchanged from that reported as at 31 March 2012. 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 £9.5 million has been drawn (31 March 2012: £6.5 million), and a separate £10.5 million term facility which is fully drawn. These loans have an 85% loan-to-value covenant and 2016 expiry.
The average interest rate of the Company's borrowing is 5.5% (31 March 2012: 5.5%).
The portfolio has continued to perform resiliently since March, demonstrating the benefits delivered both by our highly diversified asset and tenant base and by the specialist management skills we can apply not only to our wholly owned assets, but also to the growing number of properties we manage on behalf of our partners and third parties. We view the current market as challenging but also as offering compelling opportunities where genuine asset management capability and a thorough understanding of the secondary property market backed by a highly motivated national network of agency contacts are at a premium. Looking ahead, we will therefore continue to optimise the value of, and income from, our existing assets while at the same time seeking to use our unique business platform and management skills to grow revenue.
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/Daniel O'Donnell
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 July 2012 the Company's directly owned portfolio comprised 644 properties, with over 2,000 letting units. In addition, the Company deploys 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.