The Local Shopping REIT plc
Interim Management Statement
Strong progress on Joint Venture and resilient occupation levels
London: 9 August 2011 - 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 2011.
§ Strong progress made on behalf of the JV with Pramerica Real Estate Investors:
o Three properties acquired for £4.98 million, contracts exchanged on a further four properties for £4.15
million and five additional properties under offer for £11.64 million. Should these all complete, this
would bring the total value of transactions so far to over £22 million
§ Ongoing success with the active asset management programme:
o Reduction in the overall void rate to 10.8% (March 2011: 11.1%; July 2010: 11.7%)
o 34 previously vacant units let, generating a total annualised rent of £300,730, in line with or above
o Encouraging progress in growing rents through rent reviews and lease renewals:
§ Completed reviews on 73 units, increasing rental income by £31,433 per annum, representing an average uplift of 4.0%, and 6.3% above Market Rent
§ Renewed 24 leases, increasing rental income by £7,420 per annum at an average uplift of 2.5%, and 5.4% above Market Rent
o Ongoing extraction of further value from our properties, through change-of-use planning consents and reconfiguration:
§ Secured change-of-use planning consent on two vacant office suites and six vacant retail units
§ Completed eight flat conversions with a further 13 under construction
§ Continued selective recycling of capital:
o Disposal of two ex-growth properties for a total of £0.18 million, 23.7% above their March 2011 valuation
o Exchanged contracts to sell two further properties for £0.66 million, 11.6% above their March 2011 valuation
§ Financial position (with £45.6 million of undrawn facilities and a cash generative portfolio) remains strong, ensuring the Company is well positioned to continue to build on its existing portfolio and activities.
Nick Gregory, LSR's Joint Chief Executive Officer, said:
"Tenant demand for smaller local shopping assets remains resilient and our proactive approach to leasing space is reflected in the successful letting of vacant units, reducing our overall void rate, and in the encouraging progress we have made in growing rents through reviews and lease renewals. We are confident 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."
Mike Riley, LSR's Joint Chief Executive Officer, added:
"We have made strong progress in buying assets for our JV with Pramerica during the period, with a total of £22 million of properties already acquired or under offer. The expansion of third party assets under management and creation of joint ventures are a key part of our growth strategy and we are currently considering a range of other opportunities to use our unique set of specialist asset management skills to secure these mandates. These include discussions with a number of lenders who recognise the value of our business model, network and skill set as a solution to their increasing requirement to manage distressed assets."
Within the occupier market, conditions remain challenging, characterised by weak domestic growth, inflation exceeding the Bank of England's target for over 18 consecutive months and ongoing substantial cuts to public spending. The resulting squeeze on consumers' disposable income is putting severe pressure on many traditional high street retailers whose business models rely on discretionary spend. These retailers face ever growing competition from the internet, out-of-town developments and the larger regional centres, and we anticipate further High Street store closures and business failures over the coming months. By contrast, tenant demand for smaller local shopping assets remains resilient and we are confident 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.
Against this challenging economic backdrop, demand for our smaller units remains steady and this has resulted in the successful letting of 34 vacant units since 31 March 2011 at a total rent of £300,730 per annum. Overall these lettings were agreed at a level in line with or above Market Rent. Of these lettings, six incorporate stepped rent increases, with the initial rents rising from £56,500 per annum to £66,000 per annum over the first three years of their leases, compared with a Market Rent of £59,950 per annum. The remaining 28 units were let at 1.1% above Market Rent. The letting pipeline also remains healthy, with 31 units under offer, as at 31 July 2011, at a combined rental of £306,860 per annum.
We also made encouraging progress in growing rents through rent reviews and lease renewals. We completed reviews on 73 units, increasing rental income by £31,433 per annum, representing an average uplift of 4.0% and 6.3% above Market Rent. We also renewed 24 leases, increasing rental income by £7,420 per annum, at an average uplift of 2.5% and 5.4% above 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 a row of shops in Cardiff into three 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 31 March 2011, we have completed eight such flat conversions with a further 13 under construction. Four of the eight completed flats have been let at a combined rent of £23,880 per annum, with one being held back for sale and three available to let.
We have also obtained three change of use consents on vacant retail units from A1 (shops) to A5 (hot food takeaway), one from A1 to A2 (financial), one from A1 to A4 (pubs), and one from A1 to a taxi office. In all cases, this action will significantly improve their letting prospects.
Our success in managing defaults and letting vacant units has led to a reduction in the overall void rate to 10.8% (March 2011: 11.1%), a substantial reduction from the 11.7% reported at the same period last year. Underlying this decrease, the residential void rate has fallen to 0.5% (March 2011: 0.9%), reflecting a stronger letting market and the improving quality of our residential stock, while the core commercial void rate is unchanged at 7.8%. The deliberate void rate has risen slightly to 2.5% (March 2011: 2.4%) as we continue to look for opportunities to add value through change-of-use and other asset management initiatives. Despite the challenging economic backdrop, tenant defaults and associated bad debts remained in line with our expectations over the period.
Acquisitions and Sales
The banking sector needs to carry out a substantial de-leveraging over the next few years and over recent months we have seen some rise in the supply of distressed sales coming to the market. However, in many cases the inability of lenders to make substantial loan write-downs has led to the over-pricing of these sales as banks seek to recover the full amount of any outstanding loan. As a result we expect the banks to continue to look for longer term asset management-led solutions for the distressed properties and portfolios on their books. We believe that low interest rates are supportive of current valuation levels and private investors remain active, albeit selective, in their search for high yielding assets. With bank debt remaining scarce, near term yield compression in our sector seems unlikely. Any valuation gains will therefore be driven by the ability to grow rents and add 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 31 March 2011.
In line with our ongoing policy to sell ex-growth properties, we have sold two properties (one of which was a part sale to an existing tenant) since 31 March 2011 for a total of £0.18 million, reflecting a blended yield of 7.89%. These sales were completed at an average of 23.7% above their March 2011 valuation. In addition, we have exchanged contracts (one subject to planning) to sell two properties for £0.66 million, at an average yield of 7.37% and 11.6% above their March 2011 valuation. One part vacant property is under offer for sale at £0.22 million at a 10.0% premium to its March 2011 valuation.
As a result of these sales, the Company now has a portfolio of 649 properties comprising over 2,000 letting units.
Working with Banks
A key element of our strategy for growth is the management of distressed assets. As previously reported, we are managing a small mixed portfolio of properties in the North-West for a large UK bank and, on behalf of another lender, are managing the investment properties that it acquires when it has to take back control of assets from its distressed borrowers. We are continuing our discussions with a number of other 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 key element of our strategy is to seek to grow the business through the creation of joint ventures. As announced on 29 November 2010, we have entered into a JV agreement with Pramerica Real Estate Investors ("Pramerica") to invest in retail parades and precincts throughout the UK. It is intended that the JV will comprise over £37 million in equity which, with gearing, will provide a total of around £100 million to invest in the UK neighbourhood / convenience retail sector. With Pramerica committing to provide 80% of the equity (£30 million) and LSR providing the remaining 20% (£7.5 million), the JV is structured so that LSR and Pramerica act as co-investors and LSR will act as Manager and be responsible for sourcing the investments. Debt finance is being provided by HSBC.
Since 31 March 2011, we have reviewed 157 opportunities with a combined asking price of over £375 million, which we are sourcing both on and off market using our UK-wide network of retained agents. We continue to be highly selective in our buying, with many of these opportunities either over-priced, poor quality or located in secondary pitches within struggling town centres and traditional high streets. Despite this, we are pleased to report that, in addition to the retail parade in Stanwell, Middlesex acquired for £1.62 million prior to 31 March 2011, we have now completed the purchases of a further three properties for £4.98 million, exchanged contacts on a further four properties for £4.15 million and have five properties under offer for £11.64 million. In order to finance these acquisitions we have drawn down £3.96 million from our HSBC facility, of which we have hedged £2 million, resulting in an overall average interest rate of 3.90%. Should all these transactions complete, this would bring the total value of deals so far to over £22 million.
In addition to the Pramerica JV, 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. Our future success will, therefore, be based upon the continuing effective execution of our strategy to:
§ Optimise the value of, and income from, existing assets
§ Use 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 and/or private company acquisitions;
o the creation of further partnership vehicles aligned to our sector; and
o distressed asset management.
The Company's borrowing position remains broadly unchanged from that reported as at 31 March 2011. It has two fully drawn loans with debt outstanding of £116.9 million at an average interest rate of 5.76%. 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 of £60 million. This undrawn loan comprises a £35 million revolving credit facility, of which £3.9 million has been drawn (March 2011: £5.1 million), and a separate £25 million term facility of which £10.5 million has been drawn (March 2011: £10.5 million). This loan has an 85% loan-to-value covenant and 2016 expiry.
For more information please contact:
The Local Shopping REIT plc Tel: 020 7292 0333
Mike Riley/Nick Gregory
Financial Dynamics 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 July 2011 the Company's directly owned portfolio comprised 649 properties, with over 2,000 letting units. In addition to its wholly owned portfolio 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 mandate to manage smaller properties for two UK lenders and its joint venture with Pramerica Real Estate Investors.
For further information on LSR, please visit www.localshoppingreit.co.uk.