Ediston-REIT has sold its office building at Cutlers Gate, Sheffield, to UK Commercial Property Trust Limited for £20,165,000, reflecting a net initial yield of 5.00% (31 March 2017 value: £19,775,000). The property comprises 61,638 sq. ft. of modern offices and is let to Capita Business Services Limited, with a guarantee from Capita plc, until December 2039.
The asset was acquired by the Company in October 2014 as part of the seed portfolio. During the hold period, the Investment Manager used its relationship with the tenant to extend the lease term from 11 years to 25 years, improve the rent review provisions to annual RPI uplifts, and secure the Capita plc guarantee, all of which improved the value of the asset.
New acquisition – Pallion Retail Park, Sunderland
The Company has simultaneously re-invested the sales proceeds by acquiring Pallion Retail Park in Sunderland. The Company has acquired 100% of the units in a Jersey Property Unit Trust (JPUT) for £25,600,000. The sole asset in the JPUT is Pallion Retail Park, Sunderland. Taking into account the costs of acquisition and a rental guarantee on one vacant unit the net initial yield to the Company is 6.74%.
Buying the JPUT reduced the costs associated with the acquisition to a figure equivalent to approximately 0.2 per cent. of the Company’s net asset value as at 31 March 2017. The JPUT was acquired from a fund managed by Europa Capital LLP.
Pallion Retail Park, which occupies a prominent position to the North West of the city centre, extends to 131,349 sq. ft., across nine units. The immediate area is undergoing significant infrastructure change with the construction of the New Wear Bridge and the Sunderland Strategic Transport Corridor, both of which will benefit the asset.
The park has an open A1 (part food) planning consent, is let to tenants including B&M, Dunelm, Matalan, Iceland and Poundstretcher, and has a weighted average unexpired lease term (WAULT) in excess of eight years.
The asset, which is reversionary, offers a number of asset management opportunities including lease regears, lettings, and the potential to build a Costa Coffee ‘drive-thru’. These initiatives will enhance the tenant line-up, improve the already robust income stream and offers the potential for capital growth.
Funding
Pallion Retail Park was purchased with a combination of the proceeds received from the sale of the Company’s office property in Sheffield, a £4.5 million addition to the debt facilities provided by Aviva Commercial Finance Limited, which will be drawn shortly, and existing cash resources. The all-in interest rate on the additional borrowings, once drawn, is expected to be fixed at a rate below the Company’s current cost of borrowings. Following the completion of this acquisition, and the drawdown of the additional debt, the Company’s loan-to-value ratio will be 29.9%.
Impact of transaction
These transactions fit the Company’s objective of selling mature assets out of the portfolio and re-investing the proceeds in assets with growth potential, which can be unlocked by the Investment Manager’s entrepreneurial and intensive style of asset management.
The transaction is therefore expected to be return enhancing in the medium term. Furthermore, by arranging the two transactions simultaneously the Company has avoided any negative impact of cash drag on the sale proceeds of Sheffield.
The transaction is also accretive to the income position of the Company. As a net result of both transactions, the contracted rental income of the Company has increased by 4.5%, equivalent to c. £0.6 million per annum. The Company now owns assets with a book value of £190.5 million (31 March 2017, £184.7 million).
Calum Bruce, Director of Investment at Ediston Properties Limited, the Company’s Investment Manager, said: “Sheffield is a good example of the Ediston style of asset management; unlocking value from a ‘dry’ asset through a proper understanding of the tenant’s needs, creating a robust and attractive income stream and selling on to the institutional market. We are pleased to have quickly recycled the capital back into an ‘Ediston style’ asset which provides attractive asset management angles to exploit. This asset is well suited to our intensive approach to management, and allows us to recommence the value add process with a new property.”