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TEESSIDE PENSION FUND Quarterly Portfolio Strategy Report 22nd August 2014

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CONTENTS

1. Executive Summary

2. Economic Performance and Property Market

3. Portfolio Strategy and Forecasting

4. Portfolio Activity

1 EXECUTIVE SUMMARY

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EXECUTIVE SUMMARY

You have advised us of your objective to increase the property portfolio to £200m by 2014 in a risk controlled manner.

CBRE Recommended Strategy

To diversify the portfolio by spread of property types, unit sizes, occupier businesses, quality, income expiry and geographical regions.

To make acquisitions and disposals to balance the lease expiries within the portfolio.

Our strategy envisages a long term overweight position in industrial and retail. We also advocate an underweight position in offices.

Acquire prime, well let properties, together with some RPI linked assets: £15m–30m of Industrials, £20-25m of High Street Retail, £30-40m of Retail Warehousing and a Foodstore.

Disposing of a number of smaller assets at an appropriate time in the market with regard to each individual asset’s cycle.

Keep the vacancy rate consistently lower than average whilst reducing income risk in particular years.

Please note ‘Other’ includes licences associated with sub stations, car parking and containers.

Portfolio Strategy

SECTOR CURRENT TARGET RANGE Retail High Street 24.2% 25% Retail Warehouse 23.2% 22.5% - 27.5% Supermarket 9.8% 10% Car Showroom 5.6% 7% Industrial 27.1% 20-25% Central London Office 4.1% 5-10% Leisure 3.8% 4-5% South East Office 0.9% 3% Rest of UK office 1.0% 1-2% Other 0.2% 0%

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EXECUTIVE SUMMARY

Current portfolio

At 30th June 2014, the portfolio comprised 33 mixed-use properties located throughout the UK with a value of £126.145m. This reflects an overall Net Initial Yield of 5.6%, and a reversionary yield of 6.8%.

The portfolio is principally in prime and secondary assets. High street retail, retail warehouse and industrial, comprise approximately 82% of the portfolio by capital value. There are 63 demises and a total net internal area of 988,000 sq ft.

The weighted average unexpired term is 9.3 years to the earlier of first break or expiry, and 10.5 years to expiry, ignoring break dates.

The portfolio also has the following characteristics:

o The vacancy rate has reduced to 7.4% by Estimated Rental Value.

o The top ten tenants constitute 46% of the total gross annual income of the portfolio, while the top 20 tenants constitute 71%.

o The portfolio is on average 6.9% reversionary. Current gross passing rent is £7,773,000 per annum, against a gross current market rent of £8,558,000 per annum.

Portfolio Profile

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EXECUTIVE SUMMARY

Portfolio activity

Nottingham – Works or Repair to the unit have been completed. We are in negotiations with the Loss Adjusters with regard the insurance claim for cost of repairs and loss of rent. The unit will now be marketed to identify a new occupier.

Guildford – The tenant, Virgin Active requested to assign its lease to Nuffield Health, part of a larger corporate transaction. The Fund agreed to the assignment and the transaction has completed.

Sales

o The sale of Pontefract concluded.

o Melbourne House, Newcastle upon Tyne – Terms agreed, contract being finalised.

o Sunbury – Remains under offer

Acquisitions

o Northwich – The acquisition of Matalan / Barnardos for £6.78M has been completed.

o Park Royal – The acquisition of the Bonhams Warehouse for £7.00M has been completed.

Portfolio Activity

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EXECUTIVE SUMMARY

Portfolio Arrears at 7th August 2014 The total portfolio arrears at 7 August 2014 are £727,813. This includes all charges and credits. Of the total portfolio arrears:

£654,296 (89.9% of the arrears) relates to two insolvency situations:

o £646,990 – CRS Old Limited (In liquidation), formally Spring Ram Corporation plc (Pintail Close, Nottingham). These arrears relate partly to the insurance claim and partly due to the tenant being insolvent and not in occupation. Future rents will not be paid as the tenant is in liquidation and is not using the property. Discussions are ongoing between the loss adjuster and the Fund’s solicitors over the amount of rent that should be recovered from the insurers as part of the insurance claim. The loss adjusters have offered £285,000 against a claim of £602,273. The discussions are ongoing.

o £7,307 – Night Realisations plc (In Administration), formally Dreams plc (Weymouth Avenue Retail Park, Dorchester). This sum relates to monies due pre-administration and is an unsecured debt. These arrears are now crystallised and a proof of debt has been submitted to the insolvency practitioner. This debt will remain until the company either exits administration or enters liquidation.

£38,280 (5.3% of the arrears) relates to two payment plans:

o £29,780 – Aurum Group Limited (Blackett Street, Newcastle). These are not true arrears as the tenant is charged quarterly in advance but pays each quarter’s rent in three monthly instalments. The tenant has paid their first two instalments on time and their next and final instalment is due on 25 August. This will leave them with a nil balance.

Portfolio Activity and Strategy

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EXECUTIVE SUMMARY

o £8,500 – J.F.Stone Investments Limited (Gloucester Road, London). These are not true arrears as the tenant is charged quarterly in advance but pays each quarter’s rent in three monthly instalments. The tenant has paid their first instalment on time and their next instalments are due on 10 August and 10 September.

£29,165 (4.0% of the arrears) relate to recent charges across 8 separate tenant accounts. These tenants have only been charged within the last 4 weeks. These sums are all being chased.

The remaining arrears of £6,071 (0.8% of the arrears) relate to 17 different tenant accounts. All arrears are being pursued for payment.

Portfolio Activity and Strategy

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EXECUTIVE SUMMARY

These figures relate to rents only that became due on the June English Quarter Day (24 June 2014).

The non collectable sums relate to the sums charged to CRS Old Ltd (in liquidation), and the second and third instalments of the monthly payment plans with Aurum Group Ltd and J.F. Stone Investments Ltd.

The payment of £34,030 after 4 weeks (taking the percentage over 100%) relates to the second rental instalments from Aurum Group Ltd and J.F. Stone Investments Ltd.

Rent Collection Statistics

Targets 92.00% 96.00% 98.00% 99.00%

Rent Due 24 June 2014

Collectable Rent

Quarter Date up to and including

24/06/2014

Week 1 up to and including

01/07/2014


08/07/2014


15/07/2014


22/07/2014

Payment after

22/07/2014 Difference 1,860,270.92 1,735,210.92 1,518,403.81 177,426.00 35,131.11 4,250.00 0.00 34,030.00 -34,030.00 Collections Including non collectables 81.62% 91.16% 93.05% 93.28% 93.28% 95.11% Collections Excluding non collectables 87.51% 97.73% 99.76% 100.00% 100.00% 101.96%

Non Collectable Total 125,060.00

2 ECONOMIC PERFORMANCE AND PROPERTY MARKET

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The momentum in the UK economy built up through 2013 has continued into this year, as demonstrated by the 0.8% increases in GDP in both the first and second quarter. Admittedly some survey data, such as the PMIs, have softened from recent peaks, but these measures remain well above long-term averages and consistent with healthy GDP growth.

The consumer was undoubtedly the main driver of growth through 2013, despite the squeeze on real earnings. However, following substantial revisions, the national accounts now show both investment and net trade making significant contributions to growth.

Two key indicators of the demand for commercial property are employment in office-based industries and retail sales excluding fuel and internet sales. The former has been growing strongly since mid-2011, even as the economy struggled to build any momentum. In Q1 office-based employment was 4.2% higher than a year earlier. Monthly retail sales data has been particularly volatile over the past year but the underlying trend has been strongly positive. Even excluding the impact of the internet, sales volumes were 3.7% higher in Q1 2014 than in Q1 2013.

Economic Drivers of Commercial Property Demand Evolution of UK GDP Growth Forecasts

Source: CBRE, Oxford Economics Source: HM Treasury Consensus

PROPERTY MARKET AND SECTOR FORECASTS Economic Performance 2014

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Q1

2009

Q3

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Q1

2010

Q3

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Q1

2011

Q3

2011

Q1

2012

Q3

2012

Q1

2013

Q3

2013

Q1

2014

Office Based Jobs

Retail Sales Exc. Fuels and Internet Sales

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan-

13

Feb-

13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

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-13

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13

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-13

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-13

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-13

Jan-

14

Feb-

14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

%

2014 2015

12

Rental values increased in second quarter of 2014 and again in July, continuing the positive trend started that started in June 2013. If we consider annual rental value growth rates, July’s rate of growth is the highest since November 2010.

All Property capital values increased in June, growing by 1.6% over the month. This resulted in capital value growth of 3.6% over the quarter. In July capital values continued to grow, up by 1.2%. So far this year, all UK commercial property has recorded strong capital growth of 7.1%.

Total returns for All Property were strong in Q2 and in July, 5.2% and 1.7% respectively. The main driver for the strong returns was capital value growth rather than income return. Over the year to date (7 months) total return was 10.9%.

Prime Vs Secondary All Property Yields Property Total Returns

Source: CBRE Monthly Yields, August 2014 Source: IPD, CBRE, June 2014

PROPERTY MARKET AND SECTOR FORECASTS Property Market 2014

0%

2%

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8%

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12%

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-02

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Spread All Prime All Secondary

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2013 2014 2015 2016 2017 2018

%

Retail Office Industrial All Property

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UK investment activity improved in the second quarter of 2014 when compared to Q1. In Q2 more than £12bn was transacted which was almost £2bn more than was transacted in previous quarter. However, this was still £8bn less than the remarkable volume recorded in the last quarter of 2013.

This meant total UK commercial property investment stood at approximately £23.5bn for the first six months of 2014, less than £2bn below the same period in 2013. The highest activity was recorded for offices in Central London.

In terms of investor type, overseas investors accounted for almost 35% of total transaction value in Q2 2014. Across 2013 as a whole this figure was 44%.

Commercial Property Investment Transactions (£millions)

Source: : CBRE, Property Data, July 2014 Source: CBRE, Property Data, July 2014

PROPERTY MARKET AND SECTOR FORECASTS Property Market 2014 Predictions

0

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2006

Q2

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Q4

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London Office Rest of UK Office Retail

Industrial Leisure and Other

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Institutions Listed Property CompanyPrivate Property Company Overseas InvestorsPrivate Individuals Others

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Source: CBRE, June 2014

On an annualised basis, UK office and industrial rents are expected to record stronger growth than that of retail over the next five years. The relative strength of office rents is driven primarily by Central London, but we are also expecting rental growth elsewhere. South Eastern offices will see rental growth outpace offices in Rest of UK over the five years to 2018, but not by a considerable margin. Rental growth is expected to be strongest this year and next.

At the All Property level, UK yields are expected to end 2018 approximately 70 bps lower than at the end of 2013. Yield compression will be focussed in 2014 but continue until 2017. We then expect All Property equivalent yields to increase slightly in 2018.

All Property total returns are expected to be 15.6% this year and average 9.1%pa over the coming five years. This is a notable increase in the 2014 figure from last quarter’s forecast caused by yields adjusting more quickly as the investment market recovers. The five year forecast is broadly unchanged.

UK Returns Forecast

PROPERTY MARKET AND SECTOR FORECASTS

Annualised2013 2014 2015 2016 2017 2018 2014-2018

Retail 8.1 13.7 11.2 7.5 5.9 4.7 8.5Office 13.6 17.7 10.9 7.5 5.5 3.9 9.0

Industrial 13.1 17.8 12.2 9.7 7.3 4.4 10.2All Property 10.5 15.6 11.3 8.0 6.2 4.6 9.1

Retail 5.9 5.6 5.2 5.1 5.1 5.1 5.2Office 5.4 5.0 4.8 4.8 4.8 4.9 4.8


Retail 2.1 8.0 5.9 2.0 0.5 -0.6 3.1Office 7.8 11.7 5.5 2.6 0.9 -0.4 4.0

Industrial 5.7 10.8 6.0 3.7 1.4 -1.5 4.0All Property 4.3 9.6 5.7 2.6 1.1 -0.2 3.7

Retail -0.5 1.0 2.1 2.1 2.4 2.6 2.1Office 3.3 5.4 3.4 1.8 1.0 0.5 2.4


Change ppRetail 6.3 5.8 5.6 5.5 5.5 5.7 -0.6Office 7.0 6.3 6.1 6.0 6.0 6.2 -0.8

Industrial 7.9 7.2 7.0 6.9 7.0 7.1 -0.8All Property 6.8 6.2 6.0 5.9 6.0 6.1 -0.7

Equivalent Yields - % at end year

Nominal rental value growth: % per year

Capital growth: % per year

Total return: % per year

Forecast

Income return: % per year

15

Source: CBRE, January 2014

PROPERTY MARKET AND SECTOR FORECASTS UK Returns Forecast

Sub-sector Total Return Forecast, 2014-2018

0

2.0

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12.0

CL Offices SE Offices Rest of UKOffices

StandardShops

ShoppingCentres

RetailWarehouses

Industrials

Tota

l Ret

urn

%

2014-2018

CBRE forecast that IPD will provide an annual average Total Return of 9% between 2014 – 2018. Industrials, South East Offices and Retail Warehousing are expected to outperform the market over this period. Rest of UK Offices, Retail Other and Shopping Centres are forecast to underperform.

3 PORTFOLIO STRATEGY AND FORECASTING

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TOP DOWN STRATEGY

As at 30th June 2014, your total property portfolio amounted to £126.15m of the Teesside Pension Fund total fund size of approximately £3.0bn. The real estate exposure is significantly underweight, compared with similar pension funds.

We will seek to extend the weighted average unexpired lease term (WAULT) of the portfolio as well as diversifying the lease expiry profile. We have identified a lower level of lease expiries between 2018-2019 and 2023-2030; purchases with expiries in the latter range will both extend the WAULT and diversify lease expiries.

In addition to recommendations on industrial and retail purchases, we may also recommend alternative investments that offer good covenants, attractive yields and long unexpired terms; these may include hotels, car showrooms, healthcare, leisure and student housing.

Set against a backdrop of strengthening economic growth we will seek to make purchases where supply and demand conditions are stronger. This will ensure that purchases are accretive to the portfolio’s performance.

As we continually assess all of the properties within the portfolio, we will also consider sales based on asset specific considerations. Potential sales are likely to include the smaller retail properties, such as Bedford, St Albans and Swansea.

The key driver of the portfolio performance will come from effective asset management of the existing stock to maximise rental income and extend lease lengths.

A graph showing the expiry profile, per sector, is shown overleaf.

Portfolio Strategy PORTFOLIO STRATEGY AND FORECASTING

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PORTFOLIO STRATEGY AND FORECASTING

Graph Showing Portfolio Lease Expiry Profile Per Sector

Portfolio Strategy

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RETAIL INDUSTRIAL

Lease Expiry Profile

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PORTFOLIO POSITIONING AND FORECASTING Portfolio Analysis The income forecast includes our current rental growth

projections.

The CBRE forecasted rental growth figures have been taken as a starting point and have been adapted to more accurately reflect anticipated rental movement, based on the quality and estimated rental growth prospects for individual assets.

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Portfolio Income Profile

Current Income Reviewed Income Lease-Up

Rent Free Total Gross Income

PROPERTY TYPE

% TOTAL OF PORTFOLIO CAPITAL VALUE

Retail 25.1% Retail Warehouse 15.7% Supermarkets 11.8% Car Showrooms 7.0% Leisure 4.7% Offices 12.0% Industrial 23.9% 100%

REGION

% TOTAL OF PORTFOLIO CAPITAL VALUE

London 17.4% South East 26.1% South West 9.1% East - West Midlands 19.4% East Midlands 5.8% North East 6.4% North West 11.9% Wales 0.3% Northern Ireland - Scotland 3.6% 100%

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TOP 20 TENANTS (BY CURRENT RENT)

TOP 20 TENANTS TOTAL AREA CURRENT RENT (£PA)

RENTAL VALUE (£PA)

% PORTFOLIO NO OF LEASES FIRST LEASE EVENT

Tesco 25,084 £610,983 £610,983 7.06% 1 23 June 2020

Matalan 51,753 £500,000 £500,000 5.78% 1 28 September 2019

Mercedes-Benz 23,035 £454,993 £514,779 5.26% 1 24 June 2013

HSBC 12,332 £440,000 £440,000 5.08% 1 24 March 2028

Wickes 28,338 £355,150 £355,000 4.10% 1 06 February 2014

Homebase Ltd 36,000 £343,750 £362,300 3.97% 1 01 July 2012

Virgin Active Ltd 26,458 £331,000 £331,000 3.82% 1 11 June 2022

Institute of Cancer Research 9,502 £325,000 £325,000 3.75% 1 11 May 2019

Bonhams 1793 Ltd 38,722 £300,000 £403,105 3.47% 1 28 September 2019

Goldsmiths PLC 9,430 £297,800 £297,500 3.44% 1 01 July 2012

B&Q plc 30,210 £252,000 £280,000 2.91% 1 31 December 2024

The BSS Group plc 39,851 £250,000 £260,000 2.89% 1 28 September 2013

River Island Clothing Co Limited 11,534 £250,000 £275,000 2.89% 1 30 March 2012

Saint Gobain Distribution Limited 40,502 £236,151 £222,750 2.73% 2 12 November 2012

Rentokil Initial Services Ltd 44,413 £233,400 £234,000 2.70% 1 04 January 2015

Halfords 11,538 £229,725 £214,650 2.65% 3 11 April 2017

Waterstone's Booksellers Ltd 9,986 £205,000 £186,000 2.37% 2 31 December 2024

Speedy Assets Limited 20,492 £198,950 £200,000 2.30% 1 01 July 2012

Globus Office World Plc (T/A Staples) 10,591 £183,000 £170,000 2.11% 1 28 September 2013

Pets at Home Limited 7,548 £177,825 £177,825 2.05% 1 09 July 2019

487,319 £6,174,727 £6,359,892 73.47% 24

4 PORTFOLIO ACTIVITY

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Chester (8 Eastgate Street and 6 Eastgate Row)*

This vacant property is on the market with Cushmans and Nash Bond. The letting agents have negotiated lettings for both units, to a national multiple retailer, and a local retailer. We hope to conclude both lettings within the next Quarter.

Chester (Staples, Sealand Road)

CBRE are liaising with the tenant concerning outstanding repairs.

Harrow*

The Card Factory lease is subject to renewal on 3rd October 2014. The tenant has confirmed that it wishes to renew its lease and negotiations are on-going.

* Denotes properties which correspond with photos.

Asset Management Commentary PORTFOLIO ACTIVITY

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Kettering

The November 2013 rent review has been concluded, leading to a small uplift on the current rent.

London (Old Brompton Road)*

The two vacant car parking spaces have been advertised to existing tenants with wider marketing to be commenced.

Potential to create additional residential floor space on roof is being explored.

Newcastle-upon-Tyne (Melbourne House)*

We have agreed terms to sell this asset.

* Denotes properties which correspond with photos.


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Nottingham

The unit will likely be marketed To Let during the next Quarter.

Scarborough*

This is let to Waterstones, subject to lease expiry on 7 September 2013. The tenant wishes to stay. Negotiations for a new lease are progressing.

Sunbury*

This property remains under offer to be sold for residential conversion, conditional on receiving planning consent within 9 months.


For more information regarding this presentation please contact: ANDREW OWEN or ANTHONY MARTIN Directors T +44(0) 20 7182 2474 or T +44(0) 20 7182 2466 [email protected] or [email protected]

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