The Local Shopping REIT plc
Interim Management Statement
London: 16 August 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 July 2013.
· Annualised rental income from the portfolio of £15.60 million (net of rent payments: £15.49 million)
· 39 vacant units let since 31 March 2013 at a total rent of £313,850 per annum
· Strong letting pipeline, with 26 units under offer as at 31 July 2013, at a combined rental of £337,420 per annum
· Rent reviews completed on 35 units, increasing rental income by £8,323 per annum (1.48% above passing rent and 9.36% above Market Rent), and 13 additional leases renewed
· Continued policy of extracting additional value through securing planning consents for extensions or change-of-use and building out where appropriate
· Disposals totalling £0.95 million completed or in solicitors' hands during the period comprising:
o Three flats sold for £0.35 million, representing a 17.6% premium to their 31 March 2013 valuation
o One commercial property together with a flat, and a further three flats are under offer for sale for £0.60 million, representing a 7.86% premium to their 31 March 2013 valuation.
Steven Faber, LSR's Executive Director, said:
"The portfolio performed robustly since the half-year against the challenging conditions in the retail market and the economy generally. We are pleased that the portfolio continues to respond to a hands-on approach to asset management and active communication with our occupiers during what has been a period of major transition for the business, with the transfer of its executive management, office relocation and a number of other significant changes."
Although recent market commentaries have pointed towards initial signs that a sustained economic recovery may have begun, it appears that this has yet to impact meaningfully on occupational demand in traditional high streets and local shopping centres and recent months have seen a number of high-profile retailers falling into administration. Sustained improvement in spending patterns is unlikely until there is a significant improvement in household finances and consumer confidence.
Despite the challenging overall market, smaller local shops, particularly convenience stores, have in general continued to perform robustly, with national supermarket operators continuing to expand into the convenience sub-sector.
We continue our policy of marketing our local retail units at affordable rents and we are pleased to report that 39 vacant units were let between 31 March and 31 July 2013 at a total rent of £313,850 per annum. Of these 8 incorporate stepped rent increases, with the initial rents rising from £62,640 per annum to £70,250 per annum over the first three years of the leases, compared with a Market Rent of £70,900 per annum. The remaining 31 units were let in line with Market Rent. The letting pipeline also remains healthy with 26 units under offer at 31 July 2013, at a combined rental income of £337,420 per annum.
We continued our efforts to grow rents through rent reviews and lease renewals. Reviews were completed on 35 units, increasing rental income by £8,323 per annum, representing an average rental uplift of 1.48% and a premium of 9.36% above Market Rent. We also renewed 13 leases at rents in line with both the previous passing rent and Market Rent.
Wherever possible we look to extract further value from our properties through use changes of upper parts (either through obtaining planning consents or by notice to the local planning authority under the recently introduced permitted development regime) for under-utilised upper parts and, where appropriate, undertaking remodelling work. Since 31 March we completed the conversion of two flats in Cardiff, one flat in Caversham and, recently, three flats in Sudbury. Both the flats at Cardiff have been let at a combined rent of £21,600 per anum and the flat at Caversham has been let at £10,500 per annum. Of the three flats at Sudbury two are now under offer to rent.
Planning consent was also obtained during the period for use changes over properties in Tenterden (A1 to A3) and Salford (A1 to A5).
The period saw a rise in the overall portfolio void rate to 12.43% (31 March 2013: 11.14%). Within this, the core commercial void rate increased to 8.86% (31 March 2013: 7.94%) and the residential void rate moved from 0.74% to 1.16%. The void figure also includes properties deliberately held back for asset management initiatives. In part the increase in the portfolio void rate reflects the policy we put in place during 2012 to take possession early where tenants are in financial difficulty and we can see good prospects for letting the unit. Taking early action in such cases has contributed to ensuring that tenant defaults and associated bad debts remained in line with our expectations over the period.
Acquisitions and Sales
Whilst the continued scarcity of bank debt has removed a substantial segment of purchasers from the market, the low interest rate environment continues to drive appetite for higher yielding properties. Market analysts reported a significant increase in year on year transactional activity in the first quarter of 2013 and auctioneers have noted an improvement in sales outside London and the South East. Active investors remain selective, favouring well-let properties or those with the potential for income improvement. Banks dealing with distressed property loans appear to be releasing stock into the market on a highly measured basis which, to date, has not resulted in a major adverse impact on market values.
During the period three flats in Staple Hill, Bristol were sold for £0.35 million, at a 17.6% premium to their 31 March 2013 valuation. One commercial property together with a flat, and a further three flats are under offer for sale £0.60 million, at a 7.86% premium to their 31 March 2013 valuation.
The Company now has a wholly owned portfolio of 641 properties with 2,038 letting units, generating an annualised rental income of £15.49 million.
The Strategic Review conducted by the Company's non-executive directors was concluded during the period and led to the departure of the previous executive team and the appointment of Internos Global Investors Limited as investment manager for the Company. The Company's shareholders subsequently approved a new investment policy. Details of matters related to the Strategic Review have been announced separately.
As a result of the Strategic Review, the Company disposed of its interests in two of its three joint venture interests during the period, for an aggregate consideration of £3.515 million. It is the Board's intention to dispose of the Company's interest in the third joint venture in due course.
The terms of the Company's borrowing facilities with HSBC Bank Plc and Indus (Eclipse 2007-1) plc were revised during the period as a result of the Strategic Review. Details of these changes are given in the Circular to Shareholders dated 8 July 2013.
The Company's net borrowings reduced by £0.60m during the period to a total of £134.9m due to the agreed amortisation under the facility originally provided by Barclays, and subsequently transferred into Indus (Eclipse 2007-1) plc. All facilities are fully drawn, as the HSBC revolver has been cancelled with a corresponding saving of £0.154m per annum in commitment fees.
The ex-Barclays facility will expire in 2016 and the two HSBC facilities now expire in 2018, having been extended as part of the recent restructuring. There is no LTV covenant within the ex-Barclays facility whilst the HSBC facilities, which are now cross-collateralised, contain a 91.5% LTV covenant. The March 2013 valuations provide significant headroom in relation to this covenant and the interest cover ratios across all facilities are well above covenants.
The average interest rate across all of the Company's borrowings has increased marginally to 5.52% (31st March 2013 5.4%), and will increase further next quarter when a full quarter of the 1.14% HSBC margin increase in included. The margin increase was agreed with HSBC to secure the loan term extensions, which will allow sales to be achieved at the end of the facility without triggering punitive hedge break costs.
The portfolio continues to perform robustly with key metrics such as void rate, arrears, new lettings, and renewals tending to oscillate around a fairly consistent degree of tenant churn, as may be expected from a large portfolio of small shops. Other than where asset-specific circumstances prevail, market rental levels appear to have stabilised following previous declines. Certain occupational sectors, that are well-represented in the portfolio, are showing signs of more active demand, including, but not limited to Charity, Betting, Pawnbroker, Pay-Day Lender and Convenience Food retail.
Whilst the occupational market continues to be challenging, the portfolio is responsive to rigorous and conscientious asset management and a network of highly motivated local agents and managers. The change in investment policy towards a realisation of the portfolio over the forthcoming years provides an opportunity to adopt a cogent strategy of seeking to sell assets to the best available capital.
For more information please contact:
The Local Shopping REIT plc Tel: 020 7355 8800
FTI Consulting Tel: 020 7831 3113
For further information on LSR, please visit www.localshoppingreit.co.uk.