Kames Property Income Fund Adding value through secondary property January 2015 Alex Walker Fund Manager, Property Investment John Dear Assistant Fund Manager, Property Investment
% Where are we in the property cycle? 40 30 20 10 0-10 -20-30 -40 Dec 00 Jun 02 Dec 03 Jun 05 Dec 06 Jun 08 Dec 09 Jun 11 Dec 12 Jun 14 GFC caused worst property downturn since 1930 s Values recovered for prime properties in global cities UK investor sentiment turned positive in Q4 2012 Recovery led by prime element of market Recovery now evident in secondary market Income Return Rental Value Growth Yield Impact Total Return Source: IPD, September 2014 A long time coming... but tide has turned for property 2
Property level forecasts 2014 16.8% 17.0% 17.6% 19.3% 15.6% 2015 10.4% 10.3% 12.8% 11.5% 10.0% 2016 6.4% 7.0% 5.2% 7.3% 7.7% Positive forecasts for UK property returns As at end October 2014 3
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Prime vs Active Value property yields UK Prime vs. Secondary All Property yield (exc. central London) 12% 10% 8% 6% 4% 2% 0% Flight to safety has led to recent outperformance of prime assets and divergence between prime and secondary yields Yield gap of c.100 bps in January 2007 Yield gap of c.505 bps in January 2014 Yield gap of c.440 bps in June 2014 Active Value property will offer attractive, higher yields than prime in the long term All Prime All Secondary Source: CBRE, June 2014. Past performance is not a guide to future performance Market now rewards risk 4
Kames Property Income Fund structure* Direct property (up to 80%) Active Value property assets (around 50%) Core property assets (around 30%) Core/Prime property, 30% Active Value property, 50% Cash and Indirect property (up to 20%) Equities/Indirect property (around 10%) Cash (around 10%) Cash, and Indirect property, 20% *Expected asset allocation. Fund launched 28 March 2014. Targeting strong income returns with liquidity 5
What is Active Value property investment? c.50% fund allocation Buy from the banks/motivated vendors Deliver a high income return (8% - 12%) Smaller lots of 2-10m Enhance value through active management Change of use New lettings Refurbishment Extending leases An active approach to property 6
Kames Capital competitive advantages in the Active Value market We focus on Active Value lot sizes of 2m - 10m Long established track record in Active Value space We buy from motivated sellers Banks and their distressed clients (borrowers & funds) Private equity funds i.e. debt packages acquired from banks We make ourselves a preferred purchaser Cash purchaser i.e. no debt and can move fast Discrete and reliable stock pickers Relationships and experience are key We can source and execute off-market deals Enable us to deliver asset management enhanced returns 7
Active Value property investment Purchased for 6m in April 2014 Net initial yield 8.67% Off market opportunity 25yr lease secured with 2.5% pa rental growth over the duration of the lease Carcraft, Rochdale Price underpinned by alternative use (residential) value 8
What is Core property investment? c.30% direct property allocation Typical properties: Have longer leases Are let to higher-quality tenants Are located in better locations Higher quality buildings Income return of 5.0% - 6.5% Lots of 5m - 15m More liquid than Active Value element of the portfolio Lower expected long term returns than secondary property 9
Core/prime property investment Off market purchase for 12.1 million Net initial yield 5.5% Prime retail location Very stable income stream, average weighted income of 17 years Strong tenant covenants Broadway, Bexleyheath Primark Halifax Ryman's 10
Indirect property/cash c.20% allocation Active Value property, 50% Core/Prime property, 30% Indirect property & cash, 20% 20% of fund held in cash or indirect property to facilitate liquidity Why cash? Liquidity buffer Why REITS? Efficient access to markets Value opportunities Yield Balance between cash/indirect property is flexible 11
Kames Property Income Fund Total Fund size c. 183m 20 purchases completed Balanced portfolio sector, geographical, income and tenant exposure 2 REIT investments 8m in BL & Land Secs Under offer on a further 5 properties - c. 33.3m c. 150m direct property acquisitions completed or under offer As at 28 November 2014. 12
Investor concerns and risk mitigation Increasing interest rates? Liquidity? Income security? Fund higher yielding so less susceptible to upward movements Allocation to cash and indirect property plus more liquid prime assets Although higher yielding, still strong covenants Short leases? Limited rental growth? Building and legal issues? Balanced by long leases (some c.25 years) Combination of fixed, RPI and OMR uplifts Full assessment pre-purchase includes; title, lease, building, environmental, structural and M&E assessments 13
How to access the Kames Property Income Fund Fund Type: Property Authorised Investment Fund (UK OEIC)* with a feeder fund in the form of an Authorised Unit Trust PAIF (with Gross share class) & feeder fund available Feeder Fund available *Non-UCITS retail Scheme. Please note Hargreaves Lansdown: Net class available but Hargreaves Lansdown is reclaiming tax on behalf of eligible investors. Pershing: The PAIF is available off platform with gross shareclass and on platform with feeder. 14
Why you should consider Kames Property Income Fund Forecast distribution yield of 6% pa* Potential for capital growth Monthly income Access to award winning team with proven track record in Active Value property investment strategy Building income from property investment *As at November 2014. Model generated forecast yield based on a fully invested portfolio and historic performance. Past performance is not a guide to future performance. Kames currently expects that the forecast yield will be achieved. The value of investments and the income from them may go down as well as up. 15
Appendices 16
Kames Property Income Fund Forecast distribution yield of 6% pa* Monthly income Tax efficient PAIF structure Launched 28 March 2014 Open ended/daily dealing AUM c. 183m* Carcraft, Rochdale Broadway, Bexleyheath Renfield Street, Glasgow Mosley Street, Newcastle Building income from property investment *As at 28 November 2014. Model generated forecast yield based on a fully invested portfolio and historic performance. Past performance is not a guide to future performance. Kames currently expects that the forecast yield will be achieved. The value of investments and the income from them may go down as well as up. 17
Kames Capital property investment capabilities Highly experienced property investment team Expertise in four principal areas: Direct property investment Indirect property service Specialist funds Property research Growing momentum Launch of Kames UK Active Value Property Closed Ended Fund Mandate success in Direct and Indirect property investment Recognised institutional property manager Launched first property fund specifically for the UK retail market in March 2014 18
Kames Property Income Fund positioning Direct property sector breakdown by capital value Geographical breakdown 11.9% 5.0% 27.7% Offices 4.3% 4.3% 6.0% 37.5% North West London Outer 6.4% Leisure 13.8% North East Retail Scotland Other West Midlands 17.8% 31.2% Industrial Out of town retail 18.4% 15.8% South West Yorkshire/Humberside Source: Kames Capital and Jones Lang LaSalle as at 28 November 2014 19
Birmingham Bromborough Middlesbrough Mixed use bar, restaurant, nightclub, office accommodation Purchase price 5.9m Net Initial Yield 8.38% Active Value Bulk of income secured for 25 yrs with 5-yearly fixed uplifts base on 2.5% pa growth Operator has excellent track record in leisure sector Re-gearing/new lettings opportunity for the office space Solus retail warehouse unit Good trading location Strong national covenant, 5A2 rated by Dun & Bradstreet Purchase price 5.9m Net Initial Yield 7.27% Active Value Potential for rental growth Good value in a strong trading location Five purpose-built car showrooms Site also includes car and van spaces for vehicle display, staff and customer parking Purchase price 7.5m Net Initial Yield 8.02% Strong covenant, 3A2 rated by Dun & Bradstreet Active Value Excellent value as a result of offmarket transaction Opportunities for re-gearing of lease in longer term 20
Edinburgh Exeter York Core retail unit on Princes Street, Edinburgh s prime retailing location Purchase price 2.3m Net Initial Yield 5.50% Excellent covenant, 5A1 rated by Dun & Bradstreet Active Value Rack-rented strong rental growth prospects Possibility of alternative uses for vacant self-contained offices above retail Multi-let secondary office building Excellent parking ratio Purchase price 5.1m Net Initial Yield 9.00% Good tenant covenants Active Value Potential to re-gear existing leases Potential to extend existing head leases in return for a capital payment Modern, purpose built bingo hall One of three Mecca Bingo properties (also included is Wood Green, London and Moor Lane, Bolton also acquired) Purchase price 3m Net Initial Yield 8.47% Mecca Bingo Ltd is rated 5A1 by Dun & Bradstreet Active Value Redevelopment potential in the longer term for residential/hotel use Rent review geared to RPI uplifts with a cap of 3% 21
Active Value Property Fund performance (open-ended) 16% 12% 8% 4% 4.7% 4.3% 14.9% 15.1% 8.4% 6.6% 10.2% 8.7% Active management and sell discipline important to deliver additional returns/ outperformance Stock picking and focus on income orientated opportunities provides solid platform to deliver returns Excellent outperformance within a challenging time period 0% Q2 2014 1 year 3 years* Since inception* Fund Benchmark Source: IPD/AREF All Balanced Funds as at 30 June 2014. *Annualised figures. Fund launched December 2009. Past performance is not a guide to future performance 22
What is a PAIF (Property Authorised Investment Fund)? An open-ended investment company (OEIC) Approved by HMRC in 2008 Designed to: Provide a tax transparent version of the Authorised Property Unit Trust (APUT). APUTs withhold 20% tax on property investment income which cannot be reclaimed by individuals or non-tax payers. Minimum 60% of its NAV comprised of assets that are property investment business Direct property (commercial and/or residential) Shares in listed UK REITS and property companies Other non-listed indirect investments It reports and pays out 3 types of income for tax purposes: Property investment income, dividend income and interest Gross share class for non-taxpayers e.g. ISAs, SIPPs, pension funds and charities 23
Important information This document is not intended for retail distribution and is directed only at investment professionals. It should not be distributed to, or relied upon by, private investors. All data in this presentation is sourced to Kames Capital unless otherwise stated. The views expressed in this document represent our understanding of the current and historical positions of the market. They should not be interpreted as a recommendation or advice. Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and is not guaranteed. The Kames Property Income Fund is a sub-fund of Kames Capital Investment Portfolios ICVC (an Open-Ended Investment Company). Kames Capital plc is the Authorised Corporate Director of the Company (ACD). Where funds are invested in property or indirectly into property, investors may not be able to switch or cash in their investment when they want because investments in direct property and indirect property in the fund may not always be readily realisable. If this is the case and in accordance with the fund s prospectus we may defer a request to switch or cash in units. Whilst property valuations are conducted by an independent expert, any such valuation is a matter of the valuer's opinion. The spread between the price to buy and sell is likely to be wider than for other less specialist funds and may vary. There is no guarantee that investments in property will increase in value or that rental growth will take place. There is a risk that a property held in the Fund s portfolio could default on its rental payments. There is the possibility that a portion of the portfolio will be held in cash if the supply of new investment opportunities is limited which, if the situation persists, may restrict the performance of the Fund. Funds that invest mainly in one type of asset are more vulnerable to market sentiment. We reserve the right to change the pricing basis of the funds and any change will mean an increase or decrease in the price at which you may deal. References to tax are based on current regulations which may be subject to change. For clarification please seek advice from your financial or tax adviser. This document is accurate at time of writing but can be subject to change without notification. Kames Capital is an Aegon Asset Management company and includes Kames Capital plc (Company Number SC113505) and Kames Capital Management Limited (Company Number SC212159). Both are registered in Scotland and have their registered office at Kames House, 3 Lochside Crescent, Edinburgh, EH12 9SA. Kames Capital plc is authorised and regulated by the Financial Conduct Authority (FCA reference no: 144267). Kames Capital Investment Portfolios ICVC is an open-ended investment company with variable capital, incorporated in England under the OEIC Regulations. Kames Capital Unit Trust is an authorised unit trust. Kames Capital ICVC is an open-ended investment company with variable capital, incorporated in Scotland under the OEIC Regulations. FPID: 2014/19407 24