Pre-Annual General Meeting Information • Feb 24, 2020
Pre-Annual General Meeting Information
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THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. If you are in any doubt as to the action you should take, you should consult your stockbroker, solicitor, accountant, bank manager or other independent financial adviser authorised under the Financial Services and Markets Act 2000 if you are resident in the United Kingdom or, if not, from another appropriately authorised independent financial adviser.
If you have sold or otherwise transferred all your Shares in UK Commercial Property REIT Limited (the "Company"), you should pass this document (but not the accompanying personalised Form of Proxy or Letter of Direction) at once to the purchaser or transferee, or to the stockbroker, bank or other agent through whom the sale or transfer was effected, for transmission to the purchaser or transferee. If you have sold or otherwise transferred only part of your holding of Shares, you should retain these documents and consult the stockbroker, bank or other agent through whom the sale was effected.
The Company is an authorised closed-ended investment company which has been granted an authorisation declaration by the Commission in accordance with section 8 of the Protection of Investors (Bailiwick of Guernsey) Law, 1987, as amended, and Rule 6.02 of the Authorised Closed-Ended Investment Schemes Rules 2008 (the "Rules"). Notification of the proposals outlined in this document has been given to the Commission pursuant to the Rules. Neither the Commission nor the States of Guernsey Policy Council has reviewed this document and neither of them takes any responsibility for the financial soundness of the Company or for the correctness of any of the statements made or opinions expressed with regard to it.
(a non-cellular company incorporated with limited liability in Guernsey with registered number 45387)
and
Your attention is drawn to the letter from the Chairman of the Company set out in this document which recommends that you vote in favour of the resolution to be proposed at the Extraordinary General Meeting referred to below.
Notice of an Extraordinary General Meeting of the Company to be held at 12 noon on 18 March 2020 at the offices of Northern Trust, 50 Bank Street, Canary Wharf, London E14 5NT (the "EGM") is set out at the end of this document. A Form of Proxy for use in conjunction with the EGM is enclosed. Whether or not you propose to attend the EGM, you are requested to complete the Form of Proxy in accordance with the instructions printed on it, and return it to the Registrars at Computershare Investor Services (Guernsey) Limited, c/o The Pavilions, Bridgwater Road, Bristol BS99 6ZY as soon as possible, but in any event so as to be received no later than 12 noon on 16 March 2020. Completion and posting of the Form of Proxy will not prevent a Shareholder from attending and voting in person at the EGM.
Holders of Shares through one or more of the Aberdeen Standard Investment Trust Share Plan, the Standard Aberdeen Investment Trust ISA and the Aberdeen Standard Investment Plan for Children (the "Saving Schemes") are requested to complete the enclosed Letter of Direction. To be effective, the Letter of Direction must be returned to the Registrars at Computershare Investor Services (Guernsey) Limited, c/o The Pavilions, Bridgwater Road, Bristol BS99 6ZY as soon as possible, but in any event so as to be received no later than 12 noon on 12 March 2020.
Dickson Minto W.S., which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting for the Company and no one else in connection with the matters described in this document and will not be responsible to any person other than the Company for providing the protections afforded to clients of Dickson Minto W.S. nor for providing advice in relation to such matters.
Dated 24 February 2020
(a non cellular company incorporated with limited liability in Guernsey with registered number 45387)
Ken McCullagh (Chairman) PO Box 255 Michael Ayre Trafalgar Court Robert Fowlds Les Banques Chris Fry St. Peter Port Margaret Littlejohns Guernsey Sandra Platts GY1 3QL
Directors Registered Office
24 February 2020
Dear Shareholder,
UK Commercial Property REIT Limited is a closed-ended Guernsey registered investment company whose ordinary shares of 25 pence each in the Company (the "Shares") are listed on the Official List of the Financial Conduct Authority. It was launched in September 2006 and was admitted into the United Kingdom REIT regime on 1 July 2018. The Company's investment objective is to provide Shareholders with an attractive level of income together with the potential for capital and income growth from investing in a diversified UK commercial property portfolio.
Under the Articles, the Directors are required to put an ordinary resolution to Shareholders to approve the continuation of the Company at a meeting of the Company to be held in 2020 and at seven yearly intervals thereafter.
The purpose of this document is therefore to explain to Shareholders why the Board believes continuation of the Company is in the best interests of Shareholders as a whole and, as required under the Articles, to propose a continuation vote.
The last continuation resolution to be proposed by the Company was passed in November 2016. That continuation resolution was proposed in accordance with the Company's discount control policy which provides that if the market price of the Shares is more than 5 per cent. below the published Net Asset Value for a continuous period of 90 dealing days or more beginning after the date of the second anniversary of the Company's most recent continuation vote, the Directors will convene an extraordinary general meeting to be held within three months in order to consider an ordinary resolution for the continuation of the Company. In line with the above, following the passing of the continuation resolution in November 2016, such discount control policy was suspended for a period of 2 years.
For the avoidance of doubt, the continuation resolution to be proposed at the upcoming EGM (the "Resolution") is being proposed to comply with the provisions of the Articles and not as a result of the operation of the discount control policy. The Company has not and will not have traded at a discount to NAV of more than five per cent. for a continuous period of 90 dealing days or more before the proposed EGM. Should the Resolution be passed at the EGM, the discount control policy set out above will not apply for a period of 2 years from the date of the EGM.
The Investment Manager continues to identify attractive opportunities for the Property Portfolio and the Board believes it is important to give Shareholders certainty as regards the Company's continuation in order for the Investment Manager to pursue the investment strategy effectively. The Board is therefore proposing to convene the required EGM on 18 March 2020.
If the Resolution is passed, in accordance with the Company's discount control policy and the Articles, the Company will not propose another continuation vote until the earliest to occur of (i) the discount to NAV exceeding 5 per cent. for the period referred to above following the second anniversary of the upcoming EGM or (ii) 2027.
As at 31 December 2019 (being the most recent quarter end), the Property Portfolio was valued at approximately £1.378 billion and the Company had total assets (less current liabilities) of approximately £1.4 billion. The Property Portfolio has produced annualised total returns of 5.4 per cent. since launch in September 2006 and 6.4 per cent. annualised total returns for the last three years.
The Investment Manager's asset management initiatives continue to secure income from new lettings and lease renewals. For example, in March 2019 the Company pre-let the Company's 180,000 sq ft Wembley logistics distribution centre to Amazon ahead of the previous tenant's departure. The Company has now successfully completed the refurbishment of the property, allowing completion of the new 10 year index-linked lease to Amazon at a rent of £2.7 million per annum.
The Company continues to re-let, renew and extend leases in all sectors of its portfolio. In the quarter to 31 December 2019, the Investment Manager secured £4.9 million per annum of headline rent across 17 lettings, lease renewals and rent reviews, reflecting a combined 10 per cent. uplift on the previous rent and 4 per cent. ahead of the estimated rental value.
As at 31 December 2019, the Property Portfolio had lease voids of 7.9 per cent. compared to the IPD Benchmark (as at 30 September 2019) of 7.2 per cent. As at 30 September 2019, the Property Portfolio had an average lease length of 9.3 years, exceeding the IPD Benchmark figure of 7.8 years. (1)
In the light of the problems currently faced by the retail sector and following recent sales, as at 31 December 2019 the Company's retail portfolio weighting has reduced to 21 per cent. compared to 31 per cent. for the IPD Benchmark and it no longer owns any shopping centre assets.
The Company's Share price total return over the period from the launch of the Company to 31 December 2019 was 88.1 per cent. compared with the total return on the FTSE All Share Real Estate Investment Trusts Index over this period of 9.5 per cent. The Company's net asset value total return per Share (with dividends re-invested) over the same time period was 92.1 per cent.
Given the macroeconomic environment, the UK commercial property market is holding up well with positive total returns forecast for 'all commercial property' over the next three years (from December 2019) primarily driven by income. While investment volumes in 2019 were down compared to previous years, occupancy is generally high (other than for much of the retail sector) and thus far in the current quarter there are signs of a general pick-up in sentiment and property market activity. The trends that have negatively impacted the retail sector have benefitted the industrial/logistics sector as retailers move more of their business online, increasing the need for storage and distribution space. Aside from well documented issues in much of the retail sector, the wider property market continues to be underpinned by good fundamentals i.e. limited development, high occupancy rates and controlled leverage with attractive income returns compared to other asset classes.
The Board and the Investment Manager believe that against such a backdrop, the Company is strategically well positioned both at a portfolio and corporate level. The Company has a prime property portfolio that is diversified by tenant, sector and geography, but importantly is overweight in the industrial sector, which is anticipated to be the strongest driver of returns over the next three years. Conversely, the Property Portfolio is underweight to the retail sector, which it is anticipated will continue to have challenges. In terms of occupancy levels, the Company has a proven track record of delivering successful asset management initiatives to generate income.
Set against this outlook, the Board believes that the Company remains an attractive investment proposition. The Company has a strong balance sheet with uncommitted capital of approximately £130 million (including £100 million of undrawn revolving credit) available for investment (as at 31 December 2019) and low leverage with net gearing of 14.7 per cent. at a low blended rate of interest of 2.78 per cent. The Company also has a strong rental payment track record, collecting an average of 98.6 per cent. of rents within 21 days over the last three years and offers a robust dividend yield. In
(1) For leases using MSCI IPD's measure excluding 'long leases' over 35 years.
addition, being a closed-ended investment company, the Company is not required to sell assets to fund redemption requests, which could have the effect of disrupting its investment strategy. In the light of the above, the Board and the Investment Manager believe that the Company's financial position is strong both currently and when considered over the medium to longer term.
The Board and Investment Manager aim to maintain the Company's strategy of delivering an attractive level of income, together with the potential for capital and income growth, through investment in a diversified UK commercial property portfolio. The Company's priorities are to protect current revenue streams, to maintain and create value through active asset management and to remain alive to any opportunities that may arise in the current markets.
Whilst the Investment Manager has been successful in extending leases, removing risk, and re-letting space in relation to the Property Portfolio, occupancy rates have remained similar over the last six months and the Investment Manager's focus remains firmly on further increasing occupancy and generating income in the portfolio.
Having undertaken a number of portfolio transactions in 2019, and after refinancing and rearranging its debt in early 2019 (average maturity now 8.2 years and average cost of debt now 2.78 per cent.), the Company has access to capital of approximately £130 million, after allowing for dividend and existing capital expenditure commitments.
Following amendment of the Company's investment policy in April 2019, the Company is able to invest in the growing alternatives sector, and the Investment Manager therefore actively monitors opportunities for investments it believes will produce sustainable income and exhibit growth potential within the better yielding subsectors, and not necessarily through long leases. The Investment Manager is also increasingly alert to exploring opportunistic pricing through potential vendor distress in assets situated in vibrant local economies with strong demographics. The Investment Manager believes ongoing political and economic uncertainty may result in the availability of interesting opportunities for the Company's portfolio (for example if owners require to increase liquidity quickly).
Overall, the Board is confident that for the reasons stated above, and due to the continued strong portfolio management work being undertaken by the Investment Manager, the Company is well positioned to deliver value for Shareholders both currently and over the longer term.
It is the intention of the Board that the Company's Share buy back authority may be used to purchase Shares (subject to the income and cash flow requirements of the Company) if the level of discount to NAV at which the Shares are trading represents an opportunity to generate risk adjusted returns in excess of that which could be achieved by investing in real estate opportunities at a particular time. The Board believes this is an appropriate policy for the Company as it focuses on long term risk adjusted returns for Shareholders (weighing-up buybacks versus real estate opportunities, be it new assets or capital expenditure on the existing portfolio) and is well suited to a Company investing in an illiquid asset class. The Company has not bought back any Shares in the past 12 months.
The Board intends to renew the Company's Share buy back authority at the Annual General Meeting to be held in 2020.
The EGM has been convened for 12 noon on 18 March 2020 to be held at the offices of Northern Trust, 50 Bank Street, Canary Wharf, London E14 5NT. All Shareholders are entitled to attend, speak and vote on the Resolution to be proposed at the EGM, which will be proposed as an ordinary resolution.
If the Resolution is passed, the Company will not hold another continuation vote until the earlier of:
If the Resolution is not passed, the Directors will convene a further extraordinary general meeting of the Company to be held within six months of the date of the EGM to consider the winding up of the Company or a reconstruction of the Company, which will offer all Shareholders the opportunity to realise their investment.
Shareholders will find enclosed a Form of Proxy for use at the EGM. Whether or not you propose to attend the EGM, you should complete the Form of Proxy and return it to Computershare Investor Services (Guernsey) Limited, c/o The Pavilions, Bridgwater Road, Bristol BS99 6ZY, as soon as possible, but in any event not later than 12 noon on 16 March 2020. Completion and return of a Form of Proxy will not prevent Shareholders from attending and voting in person at the EGM, should they so wish.
If you hold your Shares via the Savings Schemes, you may instruct Harewood Nominees Limited to vote on your behalf at the EGM in respect of the Shares held on your behalf by completing the Letter of Direction enclosed with this document. Alternatively, Savings Scheme Participants may request to be appointed as proxy or authorised representative in respect of their holding to enable them to attend and vote at the EGM by completing the relevant section on the Letter of Direction.
Savings Scheme Participants are requested to complete their Letter of Direction and return it to Computershare Investor Services (Guernsey) Limited, c/o The Pavilions, Bridgwater Road, Bristol BS99 6ZY as soon as possible, but in any event so as to be received no later than 12 noon on 12 March 2020.
Phoenix Life Limited (through its subsidiaries) and Phoenix Life Assurance Limited, the Company's largest Shareholders, have irrevocably undertaken to vote in favour of the Resolution.
As at the date of this document, Phoenix Life Limited (through its subsidiaries) and Phoenix Life Assurance Limited hold in aggregate 43.5 per cent. of the issued Shares.
The Board, which has been advised by Dickson Minto W.S., considers that the continuation of the Company is in the best interests of the Shareholders as a whole. Accordingly, the Board unanimously recommends all Shareholders to vote in favour of the Resolution to be proposed at the EGM.
The Directors, who in aggregate have an interest in 178,445 Shares (being 0.01 per cent. of the issued share capital as at 21 February 2020), intend to vote their entire beneficial holdings in favour of the Resolution.
Yours faithfully
Ken McCullagh Chairman
The risk factors set out below are those which are considered to be material but are not the only risks relating to the Company, the Shares or the continuation of the Company. There may be additional risks that the Company does not consider to be material or of which the Company is not aware.
An investment in the Shares is only suitable for investors who are capable of evaluating the merits and risks of such an investment and who have sufficient resources to be able to bear any losses which may arise therefrom (which may be equal to the whole amount invested). Such an investment should be seen as long term in nature and complementary to existing investments in a range of other financial assets and should not form a major part of an investment portfolio.
There is no guarantee that the Company's investment objective will be achieved or provide the returns sought by the Company. Past performance of the Company, and of its investments managed by the Investment Manager, are not necessarily indicative of future performance.
The market value of, and the income derived from, the Shares can fluctuate and may not always reflect the net asset value per Share. There is no guarantee that the discount control policy will achieve its objective.
In the event that the Resolution is passed, the Directors will not be required to propose a continuation vote to Shareholders in relation to the discount control policy, unless the market price of the Shares is more than 5 per cent. below the published NAV for a continuous period of 90 dealing days or more, following the second anniversary of the passing of the Resolution. Furthermore, the Company does not have a fixed winding up date and therefore, unless Shareholders vote to wind up the Company, Shareholders will only be able to realise their investment through the market. Although the Shares are listed on the Official List of the Financial Conduct Authority and traded on the Main Market of London Stock Exchange plc, it is possible that there may not be a liquid market in the Shares and Shareholders may have difficulty in selling them.
Changes in regulation and the law (including tax laws) or political events may substantially and adversely affect the market value of the portfolio and/or the rental income of the portfolio. Any change in the tax legislation could affect the Company's ability to provide returns to Shareholders or alter the post-tax returns to Shareholders.
The Company cannot guarantee that it will maintain continued compliance with all of the REIT conditions and there is a risk that the REIT regime may cease to apply in some circumstances. If the Company were to be required to leave the REIT regime, this could have a material impact on the financial condition of the Group and, as a result, Shareholder returns.
Investments in property are relatively illiquid. Such illiquidity may affect the Company's ability to vary its portfolio or dispose of or liquidate part of its portfolio in a timely fashion and at satisfactory prices in response to changes in economic, real estate market or other conditions. This could have an adverse effect on the Company's financial condition and results of operations.
Ongoing uncertainty in relation to political and economic matters, including in relation to the UK's negotiation of trade deals following its exit from the European Union, may continue to create volatility in the demand for UK commercial property both from tenants and investors. In addition, an increase in supply of commercial property for sale, in particular from open-ended funds as a result of such uncertainty and due to challenges being faced in the retail sector, may cause market values to fall over the short to medium term which would have an adverse effect on the valuation of the Property Portfolio.
Returns from an investment in property depend largely upon the amount of rental income generated from the property and the expenses incurred in the development or redevelopment and management of the property, as well as upon changes in its market value.
The Company's ability to pay dividends will be dependent principally upon its rental income. Rental income and the market value of properties are generally affected by overall conditions in the relevant local economy, such as growth in gross domestic product, employment trends, inflation and changes in interest rates. Changes in gross domestic product may also influence employment levels, which in turn may affect the demand for premises. Both rental income and market values may also be affected by other factors specific to the commercial property market, such as competition from other property owners, the perceptions of prospective tenants of the attractiveness, convenience and safety of properties, the inability to collect rents because of the bankruptcy or insolvency of tenants or otherwise, the periodic need to renovate, repair and re-lease space and the costs thereof, the costs of maintenance and insurance, and increased operating costs. In addition, certain significant expenditures, including operating expenses, must be met by the owner even when the property is vacant.
| "Articles" | the articles of incorporation of the Company, as amended from time to time |
|---|---|
| "Board" or "Directors" | the current directors of the Company |
| "Company" | UK Commercial Property REIT Limited |
| "EGM" | the extraordinary general meeting of the Company to be held at 12 noon on 18 March 2020 |
| "Form of Proxy" | the form of proxy for use at the EGM |
| "Group" | the Company and any other direct or indirect subsidiaries of the Company from time to time |
| "IFRS" | International Financial Reporting Standards as adopted in the European Union |
| "Investment Manager" | Aberdeen Standard Fund Managers Limited |
| "IPD" | Investment Property Databank Limited |
| "IPD Benchmark" | the MSCI UK Balanced Portfolios Quarterly Property Index |
| "Letter of Direction" | the letter of direction for use by Saving Scheme Participants at the EGM |
| "NAV" | the net asset value of a Share calculated under IFRS |
| "Property Portfolio" | the direct assets of the Company |
| "Registrars" | Computershare Investor Services (Guernsey) Limited |
| "Resolution" | the resolution in relation to the continuation of the Company |
| "Saving Schemes" | the Aberdeen Standard Investment Trust Share Plan, the Standard Aberdeen Investment Trust ISA and the Aberdeen Standard Investment Plan for Children |
| "Saving Scheme Participants" | holders of Shares through one or more of the Saving Schemes |
| "Shareholders" | holders of Shares |
| "Shares" or "Ordinary Shares" | ordinary shares of 25 pence each in the capital of the Company |
| "United Kingdom" or "UK" | the United Kingdom of Great Britain and Northern Ireland |
(a non cellular company incorporated with limited liability in Guernsey with registered number 45387)
NOTICE IS HEREBY GIVEN that an Extraordinary General Meeting of UK Commercial Property REIT Limited (the "Company") will be held at 12 noon on 18 March 2020 at the offices of Northern Trust, 50 Bank Street, Canary Wharf, London E14 5NT to consider and, if thought fit, pass the following resolution:
THAT, in accordance with Article 46.6 of the articles of incorporation of the Company, the continuation of the Company be approved.
Trafalgar Court By Order of the Board
Les Banques St. Peter Port Guernsey GY1 3QL
24 February 2020
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