The Local Shopping REIT has announced its annual results for the year ended 30 September 2015. Profit for the financial period was £0.02m or 0.02 pence per share (2014: £1.21m or 1.5 pence per share). However, this marked drop reflects the sale of two of the Company’s property-holding subsidiaries, NOS 2 Limited and NOS 3 Limited in August 2014, shortly prior to the reporting period. The company, which is in realisation mode, says that this has reduced the net rental income of the portfolio by circa 46% between the two years. Reflecting this, profit before tax for the year was £0.02 million, or 0.02 pence per share, (2014: profit of £1.21 million, or 1.47 pence per share). The company’s NAV has largely remained unchanged over the course of the year £34.9m or 42 pence per share at 30 September 2015 versus £34.8m at the 30 September 2014. Cash holdings at 30 September 2015 were £12.74m. The company’s management says that their target remains to complete the asset disposal and loan repayment process by the end of 2017 and return cash to shareholders as soon as possible thereafter.
Recurring profit for the period of £0.23m or 0.3 pence per share (2014: £0.68m or 0.8 pence per share), which the company says equated to 4.03% of net rental income (2014: 4.9%). Property operating expenses were £1.96 million, compared with £3.86 million in 2014. The principal reasons for these changes was the sale of properties in accordance with the investment policy (principally those held by NOS 2 Limited and NOS 3 Limited shortly before the beginning of the year). This had the effect of reducing rental income whilst removing the associated direct property expenses, but increasing the proportion of overheads to rental income. The company says that other factors included a reduction in bad debt charges, which was £0.25 million in the year compared (2014: £0.99 million) and non-recoverable service charges, which reduced to £35,000 compared with £287,000 in 2014. The profit before tax also incorporates a charge of £0.22 million representing an adjustment to the consideration for the disposal of NOS 2 Limited and NOS 3 Limited in relation to debtor balances.
In terms of portfolio activity, the company completed sales on 37 properties for a combined consideration of £5.33m, at a gross premium of 9.1% of the aggregate valuations at the time the properties went under offer. 71 vacant commercial units were let at an aggregate annual rental income of £533,170 per annum, whilst 33 rent reviews saw an aggregate rental uplift of £54,593 (9.83%) above passing rent. However, 47 lease renewals secured at an aggregate net rental decrease of £8,666 (1.76%) to previous passing rent, but the company says this was 8.42% above market rent. At the year-end a further 21 properties were under offer at an aggregate price of £2.58 million, of which 5 properties have since been sold for a total of £649,000. The company says that total property sales since the change in the Company’s investment strategy in July 2013 have reached £90.21m and that a further 20 properties are currently under offer at an aggregate price of £3.16 million.
During the year the company restructured its debt facility with HSBC. This saw the removal of ‘payment in kind’ interest accrual for a debt repayment of £6.9m. The company says that overall debt repayment for the year of £9.12m.
In terms of outlook, the managers say that within the current mixed macro environment, local and independent retailers continue to perform well, with the Association of Convenience Stores reporting 5% year-on-year sales growth amongst local shops (the most successful convenience traders are those that offer add-on services, such as mobile phone top-up, re-cycling services and internet shopping collection facilities). The managers say that they have seen this amongst our own tenants, with good performance also amongst retailers offering health and beauty services and takeaway operators.
However, despite the continuing improvement in consumer fundamentals, retail has lagged the other main property investment sectors, with rental and yield performance weaker than office and industrial markets. The managers say that, in their view, investors are still exercising a degree of caution towards the sector which has experienced a recent structural adjustment arising from the impact of internet shopping (which has led to a significant rebasing of rents to more affordable levels). They also say that recent well publicised concerns regarding excess space capacity amongst supermarket operators may also have tainted investor attitudes.
Local Shopping REIT targeting completion of asset disposal by end of 2017 : LSR