F&C UK Real Estate debt refinance will improve dividend cover

F&C UK Real Estate reports that its net asset value total return for the year was 22.7% and its shares moved to trade at a 2.6% premium, improving the return to shareholders to 24.9%. four quarterly dividends of 1.25p, totalling 5p are payable for the year and the Board say it is the intention of the Group to continue to pay quarterly interim dividends at this rate. Following the Company adopting UK REIT status, the third interim dividend was paid as a property income distribution, rather than as an ordinary dividend and it is expected that the majority of future dividends will be paid in this way.

After 10 years, Ian McBryde has indicated his intention to step down from his role as Fund Manager and retire from our investment manager in 2016. The Board is fully engaged with our management company in ensuring a smooth handover of responsibilities and we are pleased to announce that Peter Lowe will become lead fund manager of your Company with effect from the end of 2015.  Peter joins the management company from DTZ Investors where he has worked for the last 9 years on a number of mandates including Pearl Assurance, Universities Staff Superannuation Fund and Imperial Tobacco Pension Funds.

The Company’s property portfolio delivered an ungeared return of 16.7% over the period which compares favourably to a 15.7% return on the IPD UK Quarterly Index. With strong competition for stock during the year, IPD data showed initial yields at the all-property level reducing to 5.0% in the year to June. The average weighted unexpired lease term of the portfolio has been maintained at 7.7 years compared with the 7.8 years reported as at 30 June 2014. In the meantime, the void rate in the portfolio has fallen to 3.3% of rental value, from 5.7% a year earlier.

Net gearing at 30 June 2015 was 29.7%, down from 31.7% as at 30 June 2014. The Board has been considering a refinancing of the existing loan facility with Lloyds Bank which is due for repayment in January 2017 and has agreed terms to refinance this through a new long-term term loan facility with Canada Life Investments and a new revolving credit facility with Barclays Bank. The Group has entered into heads of terms for new debt facilities of up to £110m – £90m under a proposed 11 year term loan with Canada Life Investments and a £20m 5 year revolving credit facility with Barclays. Based on UK Gilt rates as at the current date, and assuming the New Facilities are drawn down in full, it is estimated that the total interest rate payable under the New Facilities would be approximately 3.3% per annum. This is significantly lower than the existing cost of debt (about 5.8%) and they say this will make a significant contribution towards improving dividend cover. There is a £6.6m break cost for the existing interest rate swap to pay however.

The manager says industrial and distribution properties produced the highest returns for the portfolio at 22.8%. Offices, boosted by holdings in the South East returned 16.5%. The retail sector outperformed its sector benchmark returning 13.6%, although this fell well short of the all property index. However, the Company’s retail warehouse portfolio performed extremely well returning 16.3% cent compared with the IPD sub sector benchmark of 10.3%.

They say a number of specific assets were responsible for boosting returns, not only as a result of a strengthening investment and occupational market, but also due to asset management and successful lettings. The largest contribution to returns came from Units 1-2 Network, Eastern Road, Bracknell, which produced a total
return of 30.8% following the re-letting of one of the units on a ten year term, without break, at a new rental level of £367,300 per annum, which equates to £10.50 per square foot, some 19% higher than the previous
passing rent.

Echo Park, Banbury, a large distribution unit with a floor area of 195,000 square feet, let to Bidvest for a further ten and a half years, returned 21.6% as a result of the continued yield shift enjoyed by large distribution
property investments, reflecting the weight of money being invested into the sector, as well as increased occupier demand.

Lakeside Industrial Estate, Colnbrook, a multi-let industrial estate consisting of 8 units close to Heathrow Airport and the M25 and M4 motorways, returned 24.0% as a result of the estate being fully let for the first time in
several years, and with rental levels approaching the peak last seen in the previous cycle.

1-2, Lochside Way, Edinburgh Park, saw returns of 30.5% over the year following the re-gearing of the lease with HSBC plc who will continue to occupy the property for another ten years (subject to a break at the fifth year). The property, located in Edinburgh Park, Scotland’s premier out of town office location, comprises two linked buildings totalling 42,400 square feet constructed in 1998. The rent agreed equated to £16.50 per square foot, subject to a rent free period of 12 months but a penalty if the tenant exercises the break.

FCRE : F&C UK Real Estate debt refinance will improve dividend cover