The Local Shopping REIT plc
Interim Management Statement
CONTINUED LETTING AND DISPOSAL SUCCESSES
London: 08 February 2013 - 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 2013.
· Annualised rent roll from the core portfolio maintained at £16 million:
o 38 units let since 30 September 2012, at a total rent of £342,386 per annum
o Robust lettings pipeline with 16 units under offer as at 31 January 2013, for a combined rental income of £169,700 per annum
o Rent reviews completed on 69 units, increasing rental income by £88,421 per annum, representing an average uplift of 9% and a 9.5% premium to Market Rent
o Nine leases renewed at a combined rent of £94,190, an average uplift of 3% and 1.6% above Market Rent
· Reduction in the Company's core commercial void rate to 7.3% by rental value (30 September 2012: 7.7%) with an overall void rate of 10.5% (30 September 2012: 10.9%), the lowest rate since November 2008, of which 2.4% is deliberate (30 September 2012: 2.5%)
· Disposals totalling £1.13 million of ex-growth properties, achieved at an average of 17.4% above September 2012 valuation, completed or in solicitors' hands during the period
· £6.9 million of acquisitions completed or under contract during the period for the Company's joint venture with Pramerica Real Estate Investors, bringing the total purchases to date to £42.55 million, concluding the acquisition phase of the joint venture.
Nick Gregory, LSR's Joint Chief Executive Officer, said:
"The portfolio continues to perform well and we have leveraged the expertise of our specialist management skills in order to bring down the void rate to its lowest level over the last four years. We have also continued to make good progress in growing rents through rent reviews and lease renewals, achieving these at significant premiums to Market Rent."
Mike Riley, LSR's Joint Chief Executive Officer, added:
"In contrast to the wider retail market, and as demonstrated by the significant progress in reducing the void rate over the period, the occupier market for local and convenience shopping remains strong. A number of factors are supporting this market: higher petrol prices, "just in time" shopping, and a pressure to shop locally, driven by convenience. Our portfolio of properties which provides occupiers with affordable rents is well positioned to capitalise upon this sustained demand."
For further information:
The Local Shopping REIT plc
Mike Riley +44 20 7292 0333
Richard Sunderland +44 20 7831 3113
While the economic backdrop remains challenging and consumer confidence is fragile, we are pleased to report that, since 30 September 2012, tenant demand for smaller local retail units from both national operators and independent traders has held up well. This is particularly the case for units with rents below £15,000 per annum - a typically affordable level for local convenience retailers. 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. As structural changes to the way we buy goods continue to play out, we would not be surprised to see more high profile retail failures over the coming months and a further contraction of the traditional High Street.
Steady demand for our affordable units has resulted in the successful letting of 38 vacant units since 30 September 2012 at a total rent of £342,386 per annum. Of these lettings, ten incorporate stepped rent increases, with the initial rents rising from £108,200 per annum to £134,500 per annum over the first three years of their leases, compared with a Market Rent of £133,900 per annum. The remaining 28 units were let at a small (1.7%) discount to Market Rent. The letting pipeline also remains healthy, with 16 units under offer as at 31 January 2013, at a combined rental income of £169,700 per annum.
We also continue to make good progress in growing rents through rent reviews and lease renewals. We completed reviews on 69 units, increasing rental income by a total of £88,421 per annum, representing an average rental uplift of 9.0% and a premium of 9.5% above Market Rent. This included a £48,375 (40.0%) uplift on the review of a 17,200 sq ft unit in St Helens let to Tesco, demonstrating the strong potential for rental growth for well-located convenience stores and smaller supermarkets. We also renewed nine leases at a combined rent of £94,190 per annum, an average uplift of 3.0% and 1.6% above Market Rent.
We continue to work hard to extract further value from our properties, particularly those that are poorly configured or have under-used upper floors where we can add value through change-of-use planning consents. During the period, we secured planning consent to convert a vacant office suite in Great Clacton into two flats and consent to convert some unused ancillary retail space in Braintree into a single residential unit. In line with our ongoing policy, we will build these out if we can secure an acceptable rental yield following conversion and during the period we commenced the construction of six flats located across Cardiff, Caversham and Sudbury.
Over the period we are pleased to report a reduction in the overall portfolio void rate to 10.5% (30 September 2012: 10.9%). This is the lowest level of overall void rate since November 2008. Within this, strong letting progress in December 2012 and January 2013 has resulted in a reduction in the core commercial void rate to 7.3% (30 September 2012: 7.7%). The residential and deliberate void rates remained broadly unchanged at 0.8% (30 September 2012: 0.7%) and 2.4% (30 September 2012: 2.5%) respectively. Despite the challenging economic backdrop, tenant defaults and associated bad debts remained in line with our expectations over the period.
Acquisitions and Sales
Local shopping assets are typically purchased by private investors or small property companies looking to satisfy their income requirement. However, over recent months, it has become clear that private investors have become increasingly selective and are focussing their purchasing on what they perceive to be lower risk properties - particularly those in the South-East or properties let on long leases to secure covenants. The lack of bank debt available to these investors continues to deter them from moving up the risk curve despite the attractive yields on offer. Low interest rates are encouraging occupiers to consider owning rather than renting units and we are seeing increasing interest from our existing tenants in buying their properties, as well as interest in vacant units from owner occupiers. However, again, the constrained supply of bank finance prevents many potential purchasers from transacting.
During the period we did not purchase any properties for our directly owned portfolio whilst our acquisition efforts were focussed on our Joint Ventures, an update on which is given in the Joint Ventures section below.
In line with our ongoing policy to sell ex-growth properties, we have sold one shop and four flats since 30 September 2012 for a total of £0.57 million, at an average of 16.3% above their 30 September 2012 valuation. In addition, we have exchanged contracts to sell a flat in Warwick for £0.12 million (11.7% above valuation) and a further two shops and two flats are under offer for sale for a combined £0.44 million, a 20.5% premium to their 30 September 2012 valuation.
As a result of these sales, the Company now has a wholly owned portfolio of 643 properties with over 2,000 letting units, generating an annualised rental income of £15.98 million.
Joint Ventures and External Management Mandates
As at 31 January 2013 the annual rent roll of distressed properties under management on behalf of lenders was £2.9 million.
Pramerica Joint Venture
Since 30 September 2012 we have completed the purchase of two properties in Frodsham and Birmingham for a combined £5.95 million and unconditionally exchanged contracts to acquire a property in Nailsworth for £0.96 million. This brings the purchase price of deals completed to date to £42.55 million. These three purchases will conclude the acquisition phase of the joint venuture and we are now focussing our efforts on implementing the asset management initiatives we have identified to add value to the portfolio.
Joint venture with an established UK financial institution
Following the sale of a tyre service depot in September 2012, the portfolio now comprises three properties let to Co-op with a combined purchase price of £2.32 million.
During the period the fund exchanged contracts to acquire a property in Warwick which, on completion, will bring the combined purchase price of completed acquisitions to £6.91 million. A further nine properties with a combined purchase price of £16.79 million are under offer. See the Strategic Review paragraph below for further details.
The Company's borrowing position remains broadly unchanged from that reported as at 30 September 2012. It has two fully drawn loans from Barclays and HSBC with debt outstanding of £115.7 million (30 September 2012: £116.9 million). The term of both loans runs until 2016 and there are no ongoing loan-to-value default provisions. A small portion of the fully drawn HSBC loan is unhedged and on 31 January 2013 we repaid £1,189,700 of the outstanding balance.
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 £9.4 million has been drawn (30 September 2012: £9.5 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 5.4%.
In contrast to the wider retail market and, as demonstrated by the significant progress in reducing the void rate over the period, the occupier market for local and convenience shopping remains strong. A number of factors are supporting this market: higher petrol prices, "just in time" shopping, and a pressure to shop locally, driven by convenience. The local shopping market has traditionally been the preserve of independent traders. However, supportive demographics are prompting supermarket chains to increase their representation in local communities. As a by-product, these new stores often have a beneficial, footfall-driven impact on adjacent smaller units. In addition to the national supermarket chains and symbol groups growing their networks of convenience stores, other retailers are also highly active given the affordable rental levels. We have in the recent past let units to Greggs, William Hill, Subway, Barnados, Sue Ryder, and many other retailers have requirements which we feel will provide future opportunities for good quality and well located local shopping real estate portfolios.
It was announced by the Board on the 12 November 2012 that it was undertaking a strategic review of the business to consider how value can be maximised for shareholders. This review is being conducted by a committee comprising the Board's non-executive directors. While this process is on-going, the LSR team remains committed to optimising the value of and income from its existing assets.
As stated in the unaudited full year results announcement, as a result of suspending its commitment to further fund the joint ventures during this process, the Company breached the terms of the partnership agreement with Schroders. The consequences of the breach are that the Company no longer has any rights in relation to the fund other than repayment of its loan to the fund which will only be made as part of any final distribution once Schroders has been repaid all loans it has provided to the fund and all related costs have been paid. For clarity, the Company has a total of £909,090 invested (£909,045 by way of a loan) in the Schroders joint venture and has suspended any further funding. The company continues to manage the assets on behalf of the joint venture.
The strategic review process is progressing and the Board will update shareholders in due course.
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 2013 the Company's directly owned portfolio comprised 643 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.