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Standard Life Investments Property Income Trust markedly beats IPD in H1

Standard Life Investments Property Income Trust, managed by Jason Baggaley (pictured), has announced its results for the six months ended 30 June 2016. During the period, the trust provided an NAV total return of 2.3% although NAV per share fell from 82.2p per share, as at 31 December 2015, to 81.8p per share as at 30 June 2016. The trust says that positive portfolio performance was offset by movement in interest rate swaps, caused by the result of the EU referendum. The company’s share price fell 6.3% over the period whilst its share price total return was -4.8%. However, this compares against a total return for the FTSE Real Estate Investment Trusts Index of -11.8% during the period.

The dividend increased by 2.5% in the period and, according to the trust, the yield on its shares was being 5.9% as at 26 August 2016, which it highlights as being significantly ahead of the yield on the FTSE REIT Index (3.5%) and the FTSE All-Share Index (3.5%). Then trust says that its yield is underpinned by a diversified portfolio of properties and tenants. The trust also says that dividend cover has improved. It was 111% for the six-months ended 30 June 2016 whereas it was 98% for the whole of 2015. The company says that this highlights the income accretive nature of the portfolio acquired in December 2015.

In terms of portfolio performance, the trust says that, as at 30 June 2016, its portfolio was valued at £450.1m, reflecting a capital return of 0.8% during the six month period, which is ahead of that of the IPD benchmark of 0.1%. Then trust says that the outperformance was driven mainly by industrial and office sectors. Furthermore, performance was also boosted by the sale of two assets in the period, both ahead of most recent valuations, raising £6.25m. The company says that this trend continued post the period end with a further two assets sold for £9m and that the proceeds of these sales have all been used to reduce the debt of the trust. Following interest rate falls, in the wake of the referendum result, the company had a swap liability of £5.4m as at 30 June 2016.

In terms of portfolio activity, sales totaled £15.45m, including those made after the period end, which the company says was 4% above most recent 2016 valuations. It also says that there has been a number of asset management initiatives completed: three vacant units at Budbrooke industrial estate, Warwick, have been let adding £92k in rent per annum after incentives; a rent review completed at Denby, above estimated rental value adding an additional £170k in rent; and seven lease renegotiations in the period securing £812,000 of rental income. The company says that its void rate of 3.8% at 30 June 2016 is lower than that of the benchmark (7.1%). It also says that it has strong rent collection rate (99% after 28 days), which it says underlines the strong tenant base and the Investment Manager’s commitment to maintaining income.

In terms of financing, the Company refinanced its existing debt facilities with RBS in April 2016 under which s new £110m seven-year facility was taken out which was hedged to fix the rate on this loan at 2.725%. In addition to this, a £35m RCF was also taken out with RBS. The trust says that this was to introduce flexibility into the capital structure and allow it to act quickly should opportunities arise. The trust says that it is now in a good position of having low cost debt (all-in rate of 2.6% at the date of its results release) along with a LTV, net of cash, of 28.4%.

In terms of outlook, the manager says that the slowdown in UK real estate that was materialising prior to the referendum has been exacerbated by the vote outcome. In his view, the heightened uncertainties following the result and the subsequent retreat in business and consumer confidence are likely to impact negatively on the outlook for the economy, which he believes is likely to have detrimental consequences for UK real estate given the direct linkage to economic activity. The manager is therefore anticipating increased downward pressure on UK commercial real estate capital values although he says that the magnitude of any declines will depend on the impact on the domestic economy and the level of interest rates and yields from alternative investment classes. He thinks that the impact will vary by sector and geography and expects Central London offices to be the most negatively impacted in the near term given the linkages to European markets via cross border trading. He expects industrial, given its higher yield, and retail assets, to be comparatively resilient, but says that these won’t be immune. He thinks that long income assets should provide most resilience in any downturn. Despite what the manager describes as a negative outlook, he notes that UK real estate continues to provide a higher yield than other assets and, unlike during the Financial Crisis, he comments that lending to the sector is at a much lower level than in 2007/2008. He also highlights that existing vacancy rates are at below average levels in most markets and development remains relatively constrained and he thinks that this should all help stabilise the market further out. Overall, he holds the view that the current “lower for even longer” interest rate environment, coupled with an increasing investor global search for yield and the retention of the UK’s safe haven status, should all ensure the asset class is reasonably placed longer term.

Standard Life Investments Property Income Trust markedly beats IPD in H1

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