Padlock Partners UK Fund I Q4 2021 UPDATE

TORONTO, Feb. 7, 2022 /CNW/ -

A Letter to our Partners

To Our Valued Partners,

We are constantly sourcing new opportunities across the United Kingdom and are seeing the results of those efforts. We are pleased to report our development and acquisition pipeline is growing with additional opportunities which meet our strict criteria.

Please note, our current pipeline of acquisitions exceeds the available capital of the Trust, however, we are working on possible plans to take advantage of these additional attractive opportunities through an affiliated or successor entity to the Trust. We will keep you apprised.

We at Padlock Capital Partners continue to be excited about the UK real estate market and the benefits it provides relative to other investment asset classes. The UK self-storage market is especially attractive and has continued the rapid adoption across the country even as barriers to entry have increased. Many pandemic induced behaviors (working from home, home/room renovations, relocating, cohabitating, job loss) provide continued demand drivers for storage as the UK self storage industry has seen robust growth trends continue. Green Street, a leading real estate research and advisory firm, recently noted in a bullish research report the "U.K. Self-Storage sector remains the most attractive listed group…" and added several key themes – "COVID 19 resistant", "Property Values Up", and "Fundamentals are Resilient Amid Pandemic." 

We appreciate your continued interest and participation in the Trust and look forward to providing additional updates on the Trust's progress. In the meantime, please feel free to contact me, or any member of the team with any questions.

Sincerely,
John Stevenson
CEO Padlock Capital Partners, LLC

Property Update

Padlock Capital Partners, LLC, an affiliate of Clear Sky Capital, Inc, is pleased to present this update for Padlock Partners UK Fund I (the "Trust") for the quarter ending December 31, 2021. The Trust will file and distribute the audited year financials and management discussion and analysis on or before March 31, 2022. The Trust targets 12-14% Gross IRR, 7% Annual Return, and a 5 Year Term.

The Trust completed its initial public offering on August 21, 2020 and received total capital commitments of C$36.6 million and simultaneously acquired three properties as originally described in the offering document. Following the initial portfolio purchase, the Trust acquired an additional four sites bringing the total Trust acquired sites to seven stores.

Geographically, the portfolio comprises several sites within the London MSA with the remainder of sites mostly concentrated in the commuter markets north of London.

LEIGHTON BUZZARD

On August 21, 2020 the Trust closed the Leighton Buzzard self storage property located approximately 23 miles northwest of central London. Upon acquisition, we increased the 17,660 net rentable square foot site to over 28,192 square feet. We completed the expansion ahead of schedule and on budget. The lease up of the new units has exceeded expectations and demand has continued to be very strong. As of December 31, 2021, the property achieved just over 84% occupancy. Additionally, our efforts to increase rental rates have been effective as rates grew to over £27 per square feet. We are seeing significant adoption of our auto bill program and are converting nearly 95% of new customers onto our tenant insurance program. These combined efforts are expected to grow ancillary income and reduce related expenses. Compared to Q4 of 2020, total income has increased by over 57% for Q4 of 2021. Overall performance has exceeded estimates.

Going forward, we are reviewing the possibility of expanding the site to accommodate the growing demand. We have sought and received local planning approval for a circa 20,000 square foot addition to the existing building. We are working through the feasibility and estimating to further investigate this option. We will provide further updates should this option prove beneficial to the Trust.

LETCHWORTH

On August 21, 2020 the Trust closed the Letchworth property located about 22 miles north of central London. The property provided 18,938 square feet of storage space at acquisition. We increased the net rentable square feet through our expansion plan and converted 11,260 square feet of previously unused space to rentable square footage. The expansion was completed on time and on budget. Leasing up the newly created rental units has far exceeded expectations with the property achieving just over 91% occupancy as of December 31, 2021. Rental rate increases are another bright spot for performance, as we have grown rental rates to £24.25. Compared to Q4 of 2020, total income has increased by over 67% for Q4 of 2021. Compared to last quarter, Q4 total income has increase almost 7%. Overall performance has exceeded estimates.

WIMBLEDON

On August 21st, 2020 the Trust acquired the third property of the Initial Portfolio, a leasehold interest (with purchase option) on the small warehouse located in Wimbledon, about 7 miles from central London and within the M25 highway. The Trust exercised the purchase option to fully acquire the freehold property on April 15, 2021. The business plan incorporates demolishing the existing warehouse building and replacing it with a multi-storey Class-A self-storage facility. Full planning approval was received on August 19^th, 2021. Although the entitlements were significantly delayed due to Covid related planning committee shut downs, we were able to achieve a slightly larger building with an extra floor. The property will be 5 floors tall, rather than our expected 4 floors. The increase in building size, especially within London is expected to enhance the property value significantly. The local planning council has required additional conditions and reports prior to full construction start which have been completed in Q4. We await final sign off for construction start by the council which is expected this month. From a market perspective, the London MSA has seen the largest increase in occupancies and rental rates in the country. Similarly, cap rates within the M25 continue to decrease as acquisition opportunities are less abundant.

NEWMARKET

On November 16, 2020 the Trust acquired the freehold vacant land in Newmarket by way of cash from the proceeds of the Trust's initial public offering. Concurrently with the closing, the Trust entered into a Funding and Development Agreement by which the Trust would acquire the improvements (the fully constructed empty shell warehouse) when completed. The Trust completed the agreement, and the warehouse was delivered as planned on June 24, 2021. In order to fully fund the acquisition, the Trust entered into a Loan Agreement with a convertible option with Padlock Partners UK Fund II at a long term interest rate of 12%. The loan agreement was made necessary when the Trust debt facility was established below forecasts. The property was appraised on December 8, 2021, for £6,680,000. Upon further review by the Trustees and management, a potential sale of the asset was approved at the market rate appraisal which would provide the Trust with a sizeable return, eliminate the 12% interest on the loan, avoid potential conflicts, and provide necessary liquidity and cash reserve for the Trust. This sale was approved by the Trustees in December and closing of the transaction is expected in Q1 2022.

CHIPPENHAM

On December 17, 2020 the Trust acquired the Chippenham property via a purchase of the shares of the controlling company. Our work building the office and fitting out the first phase of the development has completed delivering 12,495 square feet of rentable space. As of December 31, 2021 the store achieved 93.5% occupancy of the current rentable space and total income continues to grow. We expect to see continued growth in rental rates and revenues as grand opening rent concessions continue to expire. We are planning to commence the second phase of the construction project, adding another 19,000 square feet, when the final commercial tenant vacates the property which we are working to expedite. Local demand has been strong as many of the units have been leased before they were even completed.

BICESTER

On December 22, 2020 the Trust acquired the Bicester Self Storage business and negotiated a new 20 year lease under the Landlord and Tenant Act of 1954.  The property is located in Bicester, a busy market town within the growing Oxford to Cambridge corridor and home to Bicester Village- one of the most visited shopping areas in all of England. The Bicester Village complex has seen retail occupancies nearing 100% as it begins to return to pre-pandemic activity. Opened in 2018, this Class A self storage property provides approximately 25,000 net rentable square feet of storage space. Since acquisition, occupancy has continued its strong trend ending December 31, 2021 at over 90%. Rental rates continue to improve and our ancillary income streams including insurance and retail sales have steady increased. As a result, the property achieved its highest ever total revenue for the quarter.

ENFIELD

On April 26, 2021 the Trust acquired the Enfield property in the London MSA within the M25. The existing warehouse conversion to offices and storage units has progressed as planned and the first rental units were made available in December. Leasing velocity has been strong as evidenced by the property renting 15 units in the first two weeks. Our local store marketing campaigns

and search engine optimization programs are in place. We will continue to produce new rental units as the first phase of the fit out continued. The second phase of the project is in planning and includes doubling the size of the existing building. The entitlement process is proceeding as expected with the local council supporting our submittal to increase the building size. When completed, we expect the property to offer over 42,000 net rentable square feet of Class A storage space in a highly desirable London location. The UK Self Storage Association notes in their most recent annual report that self storage supply within London has actually decreased as demand has risen. As a result, London rental rates have risen to all time highs and cap rates have continued to become more favorable and we can expect this to further benefit the Enfield property.

Trust Update

DISTRIBUTIONS

Since inception, the Trust has paid monthly distributions equal to 6% on an annualized basis.

NET ASSET VALUE (NAV)

The Trust plans to conduct end of year valuations on each property. The Net Asset Values are expected to benefit, since the majority of our development assets will be fully completed and operational by year end. An updated NAV will be reported   once the property valuations and year-end audits are completed.

DEBT

On April 15, 2021 the Trust announced the closing of a £17,100,000 Senior Secured Term Loan Facility. The facility is solely secured by a first, fixed legal mortgage over the properties. The facility includes a variable interest rate with a floor of 6.75% per annum and a 3 year maturity, prepayable with no penalty after 2 years. An initial drawdown of £10,315,000 was used to refinance existing assets and for the completion of the Wimbledon acquisition. Further drawdowns will be used toward the development of the Chippenham, Wimbledon, and Enfield properties. The loan was arranged by CBRE's Debt and Structured Advisory team in London.

INVESTMENT MARKET UPDATE

Commercial real estate investment activity continues to be strong across the United Kingdom. There is significant demand from real estate private equity firms and public companies, and attractive debt terms support a strong UK market. Market conditions have prompted capitalization rates to continue to compress. Capitalization rates for core market, Class "A", self storage properties are approximately 4%-5.25%, depending on the quality and location of the site, with some London locations trading for sub-4% cap rates. Commuter and secondary markets are approximately 4.75%-6%, depending on site factors. Headwinds may emerge as the yield on UK 10-year notes has risen to 1% for the first time since March 2020, as markets are confronted with a mix of inflation concerns and fears of curtailed growth from a potentially tightening cycle.

UK SELF STORAGE TRENDS

The UK Self Storage sector has seen strong growth in occupancy and rent during the past several years, according to the 2021 UK Self Storage Association Annual Report and commercial self storage agents Cushman & Wakefield. In fact, Big Yellow and Safestore, two of the largest public UK self storage operators, both reported record performance. Drivers benefitting the self storage sector include: a growing adoption by

the UK consumer, a temporary residential Stamp Duty Land Tax holiday (reducing or eliminating the tax buyers typically pay on home purchases), home renovations, a shift to work from home, a growing small and medium sized entrepreneurial business market, job changes, and relocations.

OUTLOOK

The Manager believes the portfolio will continue to benefit from strong demand for self storage space based on the quality of it's self storage sites, class leading management, Search Engine Optimization, and local store marketing. Periods of change have historically been enhanced demand drivers for self storage with both positive and negative economic and social trends providing local need. The Trust expects to continue to produce consistent investment returns for unitholders while building enterprise value for the Unitholders.

Disclosures

 About Padlock Partners UK Fund I

The Trust is an unincorporated investment trust and was established for the primary purpose of investing in a diversified portfolio of income producing commercial real estate properties in the United Kingdom with a focus on self-storage and mixed-use properties. Currently, the Trust has acquired three operating self-storage properties in Letchworth, Leighton Buzzard and Bicester, development properties in Wimbledon, Enfield, and Newmarket, and one conversion property in Chippenham which recently commenced operations.

Forward-looking Statements

This newsletter contains statements that include forward-looking information within the meaning of Canadian securities laws. These forward-looking statements reflect the current expectations of the Trust regarding future events, including statements concerning the Trust's plans for certain properties. In some cases, forward-looking statements can be identified by terms such as "may", "might", "will", "could", "should", "would", "occur", "expect", "plan", "anticipate", "approximate", "believe", "intend", "seek", "aim", "estimate", "target", "project", "predict", "forecast", "potential", "continue", "likely", "schedule", or the negative thereof or other similar expressions concerning matters that are not historical facts.

Material factors and assumptions used by management of the Trust to develop the forward-looking information include, but are not limited to, the Trust's current expectations about: the development and fit out of properties; the development timeline; the availability of materials and labor; the availability of debt financing; the impact of COVID-19; the capital structure of the Trust; the global and United Kingdom economic environment; foreign currency exchange rates; and governmental regulations or tax laws. While management considers these assumptions to be reasonable based on currently available information, they may prove to be incorrect.

Although management believes the expectations reflected in such forward-looking statements are reasonable and represent the Trust's internal projections, expectations and beliefs at this time, such statements involve known and unknown risks and uncertainties that may be general or specific and which give rise to the possibility that expectations, forecasts, predictions, projections or conclusions will not prove to be accurate, that assumptions may not be correct and that objectives, strategic goals and priorities may not be achieved. A variety of factors, many of which are beyond the Trust's control, could cause actual results in future periods to differ materially from current expectations of estimated or anticipated events or results expressed or implied by such forward-looking statements. Readers are cautioned against placing undue reliance on forward-looking statements. Except as required by applicable Canadian securities laws, the Trust undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events.

SOURCE Padlock Partners UK Fund I

John Stevenson, Chief Executive Officer, Padlock Partners UK Fund I, 480-309-6184, [email protected]; Matthew Collins, Chief Financial Officer, Padlock Partners UK Fund I, 480-428-0152, [email protected]