The Local Shopping REIT plc
Interim Management Statement
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 2015.
· Annualised rental income from the portfolio at 31 January 2015 of £7.809 million net of head rent payments (gross: £7.878 million);
· 15 vacant units let since 30 September 2014 at a total rent of £106,470 per annum, (0.83% below Market Rent);
· 16 further units under offer as at 31 January 2015, at a combined rental of £152,320 per annum (1.79% above Market Rent);
· Rent reviews completed on 21 units, increasing rental income by £49,033 per annum (11.37% above previous passing rent and 13.08% above Market Rent), and 18 further leases renewed (0.49% above passing rent and 8.42% above Market Rent);
· Six properties sold for £1.497 million, representing a premium of 3.24% to their 30 September 2014 valuation.
Steven Faber, LSR's Executive Director, said:
"We believe that our hands-on and pragmatic management approach, working with agents and tenants to achieve optimal returns from individual properties in relation to local market conditions, remains appropriate in the current climate. At the same time, and in furtherance of the policy adopted by shareholders, we are carrying on with our programme of individual asset sales whilst pursuing opportunities for disposals of portfolios and property-holding subsidiaries."
We continue to execute the investment policy, adopted by shareholders in July 2013, of seeking the orderly liquidation of assets, the repayment of debt and the return of remaining capital to shareholders. A number of options are currently in hand for the liquidation of assets, including the disposal of property-owning subsidiaries with stapled debt, smaller portfolio sales and the continuing programme of individual property sales.
We remain active on all these fronts, progressing the programme of individual property sales whilst following up opportunities for larger transactions. Our approach to sales of individual assets and smaller portfolios is mindful of the need for the residual assets to maintain an appropriate balance of quality, location and economic performance, whilst improving their marketability as a portfolio with the pre-existing debt facility. We anticipate that sale opportunities are likely to increase as the expiry of the current interest rate swaps, beginning in July 2016, is reflected in reduced funding costs.
The big picture for the local shopping economy seems to have altered little during the period. The overall economy continues to show steady, but muted, improvement. However, growth and confidence remains patchy and often highly subject to local factors. The general election is now a tangible factor and there is a general assumption that the new Government, whatever its composition, will need to redouble efforts to make a meaningful impact on the fiscal deficit. Accordingly, expectations for tax cuts remain subdued. Conversely, the recent significant reduction in fuel prices seem likely to have a positive impact on retail shopping generally, although clear evidence of this has yet to be seen in the local shopping segment. The Bank of England has indicated that the oil price reduction may give rise to negative inflation in the coming months, with the likelihood that interest rates will continue to remain low into 2016, or even be cut further in consequence. However, the Bank remains ready to raise interest rates should low fuel costs stimulate the economy to a greater degree than currently forecast.
Statistics recently released show that employment opportunities in the UK economy continued to rise during the period, with unemployment having fallen by 0.8 million from its peak in the same period in 2011. However, the most recent figures for the construction of new homes, often viewed as an economic barometer, showed a contraction, albeit marginal, for the first time in two years.
The steadily improving trend in retail sales continued during the period, with December's figures showing a 4.3% improvement over December 2013, and 2014 overall bettering 2013 by 3.8%. Whilst December 2014's average retail prices were 2.2% down on December 2013, much of this resulted from the oil price reduction.
Whilst internet sales decreased in December 2014 by 2.8% on the previous month, they nevertheless showed an increase of 8% on December 2013 and is likely to have had a material effect on Christmas trading. However, the extent to which this trend has impacted on local and convenience shopping, as opposed to town centres and out of town retail, is less clear. Our experience is that the local and convenience segment continues to show great resilience, particularly where there is local growth and confidence.
The annualised rental income from the portfolio at 31 January 2015 was £7.809 million, after netting off head rent payments (gross: £7.878 million). The Market Rent for the portfolio was £8.435 million, net of head rent payments (gross: £8.504 million).
During the period we let 15 vacant units at an aggregate rent of £106,470 per annum, at 0.83% less than Market Rent. A further 16 units were under offer at 31 January, at a total rent of £152,320 (1.79% ahead of Market Rent).
Rent reviews were completed on 21 units, increasing rental income by £49,033 per annum, representing an average rental uplift of 11.37% and a premium of 13.08% above Market Rent.
We also renewed 18 leases at rents in line with both the previous passing rent, but at a premium over Market Rent of 8.42%.
The overall portfolio void rate at 31 January was 12.22% of portfolio Market Rent (30 September 2014 11.94% and 31 January 2014: 12.32%), equivalent to Market Rent of £1.039 million. Within this, the core commercial void rate was 10.95% (30 September 2014 10.53% and 31 January 2014: 11.5%), with 1.27% attributable to residential units (30 September 2014 1.41% and 31 January 2014: 0.82%). Both the void and lettings figures reflect our policy of taking back units swiftly where tenants are in difficulty and letting prospects are good. The void figures include properties deliberately held back for asset management initiatives or where significant expenditure is currently not justified.
During the period six properties were sold for an aggregate of £1.497 million, a premium of 3.24% to their 30 September 2014 valuation. At the period end contracts had been exchanged for the sale of two further properties at a total price of £0.689 million (a premium to 30 September 2014 valuation of 16.58%), the sales of which have since been completed.
The Company's total borrowings figure at 31 January 2015 was £64.54 million, having reduced during the period by £0.58 million as a result of amortisation as well as loan repayments following asset sales. The Company's borrowings are provided through its two facilities with HSBC Bank Plc, which expire in 2018. The property valuations as at 30 September 2014 together with the cash balances held by the Company provide significant headroom in relation to our banking covenants. The loan to value ratio (debt to total property value) at 31 January 2015 was 74.86%. Taking account of the cash balances held by the Company of £16.50 million, the loan to value ratio on net debt was 55.7%. The average interest rate of the Company's borrowings during the period was 6.18% and the projected interest rate to 31 March 2015 is 6.09%.
We anticipate that the coming twelve months will see a continuation of the slow but steady improvement in the economic environment for local and convenience retail. Against this backdrop we expect the portfolio to perform robustly under active management whilst we continue to bear down on costs. We continue to execute the Company's policy of liquidating the property portfolio in a manner that achieves best value for shareholders.
For more information please contact:
The Local Shopping REIT plc Tel: 020 7355 8800
Steve Faber Director
Bill Heaney, Company Secretary