Results for the Year Ended 31 December 2018 (au...

To:                   RNS

Date:               24 April 2019

From:              F&C Commercial Property Trust Limited (the “Company”)

L.E.I.                213800A2B1H4ULF3K397

Results in Respect of the Year Ended 31 December 2018 (audited)

Financial Headlines

• Share price total return of -4.3 per cent*
• Portfolio total return of 4.0 per cent*
• Dividend cover decreased to 80.2 per cent from 83.1 per cent*
• Yield on year-end share price of 4.8 per cent*. Maintained dividend at 6.0 pence per share for the 13^th successive year

*see Alternative Performance Measures

Chairman’s Statement

Introduction

The UK direct commercial property market as measured by the MSCI Quarterly Property Universe (‘MSCI’) delivered positive return of 6.2 per cent during 2018, driven primarily by an income return of 4.4 per cent. Total return performance slowed as the year progressed, affected by muted economic growth, the approach of the Brexit deadline and a marked deterioration in the performance of retail property, particularly in the regions. The industrial and distribution sector was again the stand-out performer, delivering another year of double-digit total return. The office market performed broadly in line with the all-property index. Investment activity remained resilient over the year with both UK institutions and overseas buyers being net investors in UK property.

Performance for the Year

The net asset value (‘NAV’) total return for the year was 3.3 per cent and the share price total return was -4.3 per cent. The total return from the portfolio was 4.0 per cent, lagging the MSCI Index. Performance is lower quartile compared with the MSCI Index over three and five years but the longer-term historic performance of the portfolio remains strong with MSCI rating it top quartile over ten years.

The share price at the year-end was 124.6p, representing a discount of 10.9 per cent to the NAV per share of 139.8p (compared to a 3.8 per cent discount as at 31 December 2017). We continue to monitor the level of discount which we believe reflects both the uncertainties in the market surrounding Brexit and the concerns over the retail sector.

The following table provides an analysis of the movement in the NAV per share for the year:

	Pence
NAV per share as at 31 December 2017	141.2
Unrealised decrease in valuation of direct property portfolio	(0.7)
Realised gain on sale of direct property	0.3
Other net revenue	5.0
Dividends paid	(6.0)
NAV per share as at 31 December 2018	139.8

During 2018 the loss on capital for the Company was -0.1 per cent, compared to MSCI which recorded a capital return of 1.7 per cent. The strongest contributions came from the Alternatives and Industrial sectors.

In absolute terms, the most significant contributors to returns were:

• Winchester, Student Accommodation, Burma Road – reflecting the increased income to be received following its annual rent review.

• London, St Christopher’s Place Estate – continues to benefit from the high number of completed and ongoing initiatives that reached fruition at different stages during the period.

• Camberley, Building B, Watchmoor Park – sold during the year for £5.1 million, significantly ahead of the December 2017 valuation of £2.4 million.

• Manchester, Kings Street – successfully completed a number of leases; the building is now fully let.

Negative contributions came from:

• Reading, Thames Valley One and Two, Thames Valley Park – all of building one and majority of building two are void and were earmarked for sale. These sales completed in January 2019 and the valuations at 31 December 2018 were adjusted to reflect the final sale price. This sale removes the Company’s largest void and significantly reduces ongoing non-recoverable costs and capital expenditure.

• Newbury, Newbury Retail Park – reflecting the fact that the park has a number of Company Voluntary Arrangement’s (‘CVA’s’) in place. Poundworld has entered administration and the unit is now vacant.

• Solihull, Sears Retail Park – Homebase has a CVA in place which will result in their unit being vacated.

There have been a number of high profile CVA’s, administrations and failures in the retail sector over the past year and this has had a direct effect on the Company’s retail parks at Newbury and Solihull. New Look, Mothercare and Homebase have all entered CVA’s and Poundworld has gone into administration. This has resulted in the downward pressure on rents and, in some cases, the likely vacation of the properties.

The Manager has produced a number of plans to manage this situation which could produce a positive outcome over the longer-term and negotiations are ongoing. There will be a short-term fall in rental income and there has been a fall in the market values of the properties to reflect this.

Borrowings and Loan Refinancing

The Group’s available borrowings comprise a £260 million term loan with Legal & General Pensions Limited, maturing on 31 December 2024, and both a £50 million term loan facility and an undrawn £50 million revolving credit facility with Barclays, available until June 2021. The Group’s total loan to value, net of cash, was 21.2 per cent at the end of the year. The weighted average interest rate on the Group’s total current borrowings is 3.3 per cent.

Dividends and Dividend Cover

Twelve monthly interim dividends, each of 0.5p per share, were paid during the year. This maintains the annual dividend of 6.0p per share since 2006 and provides a dividend yield of 4.8 per cent based on the year-end share price. Barring unforeseen circumstances, the Board intends that dividends in 2019 will continue to be paid monthly at the same rate.

The Company’s level of dividend cover for the year (excluding capital gains and losses on properties) was 80.2 per cent. This was lower than the 83.1 per cent cover achieved last year. While the purchase of the office building at Cathedral Square, Bristol in December 2017 increased the level of rental income by £1.4 million in 2018, there have been a number of development initiatives ongoing during the year which have led to a short-term negative impact on the level of rents received, as these buildings have been empty.

The key projects have been at Cassini House in London and an office at Edinburgh Park. The combined reduction in rent against 2017 for these properties amounted to £1.3 million, although the buildings will be income producing once the developments are completed. Another negative factor has been the level of tax payable in the current year which continues to increase.

REIT Conversion

On 23 April 2019, the Company announced a proposal to take the necessary steps to join the UK REIT regime. The Group is now subject to a rising level of taxation and this will increase substantially following the policy changes announced in the Autumn Budget 2017. Non-UK resident companies that have UK property income, such as the property holding subsidiaries in the Group, will be charged UK corporation tax from 6 April 2020, rather than being subject to UK income tax as they are at present. In addition, the Board notes that from 6 April 2019 non-resident landlords who invest in UK properties, such as the Group as it is currently structured, will be brought into the UK Capital Gains tax regime.

In the light of the current and continuing increase in tax, the Board has determined that action is necessary to preserve the ongoing effectiveness of the group from a UK tax perspective in advance of the above changes. Accordingly, the Board has proposed that the Company takes the necessary steps on behalf of the Group in order to achieve real estate investment trust (‘REIT’) status.

In order to facilitate the Group qualifying as a REIT as per the Circular issued to shareholders in April 2019, certain amendments to the Company’s articles of incorporation are required. These changes address the REIT rules regarding the payment of dividends to substantial shareholders (being a shareholder who holds 10 per cent or more of the Company as more fully described in the circular) and the requirement that the Company and its Group are UK resident for tax purposes. An extraordinary general meeting will be held on 30 May 2019 immediately prior to the Annual General Meeting, to consider these proposals and, if passed, the Company will enter the REIT regime from 3 June 2019. The adoption of REIT status by the Group will alter the shareholders’ tax positions in respect of the receipt of dividends made under the REIT regime. On the basis that REIT status is achieved with effect from 3 June 2019, the first distribution that the Company could make under the REIT regime would relate to profits earned from 31 May 2019. The amount and payment date of such property income distribution will be announced in October 2019. For more detail, a copy of the Circular can be downloaded from the Company’s website at fccpt.co.uk.

Change of Company Name

In 2014 the Company’s investment manager, F&C Investment Business Limited, was acquired by BMO (‘Bank of Montreal’). BMO transitioned the majority of its remaining F&C branded products and funds to BMO in November 2018. Its savings plans, through which many of our shareholders invest, have also aligned to the BMO brand. The Board is therefore recommending that the Company changes its name from F&C Commercial Property Trust Limited to BMO Commercial Property Trust Limited and is seeking shareholder approval at the Annual General Meeting. If approved, this renaming will take effect on 3 June 2019.

Board Composition

Having served nine years on the Board, I will step down as Chairman of the Company and retire from the Board at the Annual General Meeting. Martin Moore, Senior Independent Director of the Company, will take over as Chairman and Paul Marcuse will take on the role of Senior Independent Director.

If the REIT conversion proposals are approved, Peter Cornell and David Preston, both Guernsey directors, will stand down from the Board with effect from 30 May 2019 and Linda Wilding, who is UK based, will join the Board. Both Peter and David joined the Board in April 2015 and I would like to thank them for their valuable contribution over the last four years.

Linda qualified as a chartered accountant with Ernst & Young, before working in the private equity division of Mercury Asset Management from 1989 to 2001, rising to the position of Managing Director. She has served as a non-executive director (including as Chairman) on a number of boards. She is currently a non-executive director of UDG Healthcare plc and Electra plc. She was a non-executive director and latterly chair of Corin plc from 2006 to 2012 and was a non-executive director of Touchstone Innovations plc until 2017.

John Wythe, who was appointed in September 2018, will stand for election at the Annual General Meeting of the Company. John brings considerable experience of the property market as Chairman of the Trustees of The Portman Estates after a long career with Prudential Property Investment Managers Ltd, now M & G Real Estate.

Following the above changes, the Board will consist of five Directors, three male and two female, four of which will be based in the UK and one in Guernsey.

Responsible Property Investment

I am particularly pleased with the progress that has been made with our Responsible Property Investment (RPI) strategy and the positive engagement we have had with a number of our key shareholders in this area.

The publication of the inaugural RPI Report for the Group for 2017 was a significant milestone in our pledge to drive greater transparency into our performance on material Environmental, Social & related Governance (ESG) factors and we have had some excellent feedback on it from shareholders. We continue to place considerable emphasis on our RPI commitments and are pleased to provide a further summary of progress in the Annual Report, complemented by our RPI Report 2018 which will be available on the Company’s website and gives greater detail and insight on our performance against relevant metrics.

Annual General Meeting

The Annual General Meeting will be held at 12.30pm on Thursday 30 May 2019 at Trafalgar Court, Les Banques, St. Peter Port, Guernsey, GY1 3QL.

Outlook

Investors have remained cautious given the uncertainty in the macro-economic and political spheres, with income protection a major consideration. We would expect this to persist as Brexit and its aftermath unfolds and should global growth slow and UK interest rates rise. We anticipate further problems in the retail sector which will drive valuations lower. The next two years are therefore predicted to be a period of relative weakness. However, the market is expected to be supported by its income return and continued interest from overseas buyers. Over the longer-term, we are forecasting a modest recovery with total return performance underpinned by the income return.

Notwithstanding the uncertainties, the Company has a strong financial structure and a high quality portfolio where the priority continues to be to invest in and complete asset management initiatives within the portfolio and to exploit any external opportunity to provide a dependable and long-term rental income.

I leave your company in the safe and experienced hands of my successor, the rest of the Board and the BMO management team. It only remains for me to express my appreciation to the Board, the manager and shareholders during my time as chairman for their contributions and support.

Chris Russell

Chairman

Managers’ Review

Property headlines over the year

• 12 month total return of 4.0* per cent.
• Significant capital projects at Nevis and Ness House ,Edinburgh Park; Cassini House, London and at the St Christopher’s Place Estate.
• Completed the strategic office sales of Building B, Watchmoor Park, Camberley and two office buildings in Reading in January.
• Purchase of an industrial unit in Estuary Business Park, Liverpool.

*see Alternative Performance Measures

2018 Property Market Review

The market total return for the year, as measured by the MSCI UK Quarterly Property Universe, was 6.2 per cent. A relatively subdued economic growth out-turn, coupled with the uncertainty surrounding Brexit acted to constrain occupier and investor sentiment and as a consequence rental growth and capital growth decelerated in the year, although both remained positive at 0.5 per cent and 1.7 per cent respectively. There was some modest yield compression (signalling market strength) during the year at the all-property level.

Key Benchmark Metrics – All Property
	2018	2017
Total Returns	6.2	10.3
Income Return	4.4	4.6
Capital Return	1.7	5.4
Open Market Rental Value Growth	0.5	2.2
Initial Yield	4.5	4.7
Equivalent Yield	5.5	5.6

Source: MSCI Inc

Investment activity in 2018 was lower than in the previous year but well above the long-term average, supported by overseas buying and net investment by institutions and local authorities.

Performance in 2018 was highly polarized by sector. As in the previous year, performance was driven by industrials and distribution, with a 16.4 per cent total return. This sector has now delivered double-digit performance in five out of the past six years being underpinned by strength in both occupier and investor demand, pushing annual rental growth up to 4.6 per cent and driving the equivalent yield (the UK property markets measure of current yield) to below the all-property average at 5.3 per cent. The reverse was true for retail where a succession of Company Voluntary Arrangements (‘CVAs’), store portfolio rationalisations and business failures affected both occupier and investor sentiment. Retail rental growth in the year was negative and yields shifted outwards. Central London retail delivered total returns broadly in line with the all-property average at 6.1 per cent, which is disappointing by recent standards. However, other parts of the retail market were much weaker with regional high streets, shopping centres and retail warehousing all recording negative annual total returns. The weakness in the sector is now affecting many major towns and large retailers. The problems related to the sector are structural, involving elements such as the growth of online sales, high business rates, excess and rising supply, increasing retailer costs and profit margin pressure. This will take time to resolve and pricing will continue to be affected.

The office market delivered a total return of 6.4 per cent with Rest of UK offices out-performing whilst the West End market was relatively weak. City offices surprised positively, with overseas buyers seemingly little troubled by Brexit threats. Alternatives recorded an above average 7.4 per cent total return in the year, supported by strong investor sentiment for longer let leases with a linkage to inflation. This was further strengthened by investment from balanced portfolio’s looking to diversify and the growth of specialist single strategy funds.

Overall the year was one of consolidation, which saw all-property total returns broadly in line with the historic norm. Domestic investors remained cautious, focusing on long-term secure income streams often linked to the alternative sector and prime property. The UK commercial property market has delivered ten consecutive years of positive total returns supported by relatively attractive income returns which are not available from UK gilts and in certain sectors from overseas investors. There are headwinds facing this long-lived cycle and a reversion to the longer-term average return dominated by income is in prospect.

Valuation and Portfolio

Total Portfolio Performance
	2018	2017
No of properties	38	37
Valuation (£’000)	1,430,190	1,418,612
Average Lot Size (£’m)	37.6	38.3
	Portfolio (%)	Benchmark (%)
Portfolio Capital Return	(0.1)	1.7
Portfolio Income Return	4.1	4.4
Portfolio Total Return	4.0	6.2

The total return from the portfolio over the year was 4.0 per cent compared to the MSCI UK Quarterly Property Universe of 6.2 per cent. The strongest performance in the portfolio was attributable to the student accommodation at Winchester whilst offices and retail in the Rest of UK outperformed their comparative.

The most significant negative impact to returns was due to the valuation movements on the Company’s retail warehouses, with the valuation of Solihull falling by 13.0 per cent and Newbury by 22.8 per cent. Initiatives are in place to address the impact of last year’s CVA’s. There was also a negative impact from the valuation write-downs on the office sales that were undertaken during the year and relative underperformance as a result of an underweight position to Industrial South East.

Reclassification of Sector Weightings

A key theme in the property sector over 2018 was an increase in the number of CVA’s or administrations among retail businesses. Historically, the Company’s investments in the St. Christopher’s Place Estate and at Wimbledon Broadway have been shown as retail in their entirety, consistent with how they are classified within the MSCI property index. At a time when shareholders and analysts are now scrutinising any portfolio’s retail exposure, it is important to provide more detail as to the true retail exposure. St. Christopher’s Place comprises approximately 150 lettable units made up of over 50 shops and restaurants, 40 office suites and 60 residential apartments. Wimbledon Broadway comprises a number of retail units, a cinema, a gym and some food and beverage units. These assets fall into the following underlying segments:

Sector Analysis St. Christopher Place & Wimbledon
	% of capital value as at 31 Dec 2018
Retail	47.6
Food & Beverage	20.6
Residential	15.0
Office	10.7
Leisure	6.1

Source: BMO REP Asset Management plc

Residential and leisure will now be more appropriately classified under the alternatives sector category. Food and beverage will remain in the retail category.

The effect that this reclassification had on the weightings reported in 2017 is as follows:

Effect of Sector Reclassification
	% of total property portfolio
	Reclassified 2017 (%)	2017 (%)
Offices	39.2	36.2
Retail	22.4	31.0
Retail Warehouses	13.1	13.1
Industrial	16.9	16.9
Alternative	8.4	2.8

Source: BMO REP Asset Management plc

Sector Analysis (% of total property portfolio)
	2018 (%)	Reclassified 2017 (%)
Offices	39.9	39.2
Retail	22.4	22.4
Retail Warehouses	10.9	13.1
Industrial	17.8	16.9
Alternative	9.0	8.4

Source: BMO REP Asset Management plc

Geographical Analysis (% of total property portfolio)
	2018 (%)	2017 (%)
South East	23.4	25.2
London – West End	35.3	34.3
Eastern	2.1	2.0
Midlands	11.8	12.5
Scotland	12.3	11.8
North West	11.4	10.6
Rest of London	1.4	1.4
South West	2.3	2.2

Source: BMO REP Asset Management plc

Income analysis

Although the portfolio has suffered a number of retailer defaults it still benefits from a secure income stream. The void rate, excluding properties being developed or extensively refurbished is 8.5 per cent. However, as a result of the office sales that completed in January 2019, this would equate to 5.1 per cent at year end.

Lease Expiry Profile
At 31 December 2018 the weighted average lease length for the portfolio, assuming all break options are exercised, was 7.1 years (2017: 7.3 years)
% of leases expiring (weighted by rental value)	2018 (%)	2017 (%)
0 – 5 years	44.4	46.9
5 – 10 years	30.2	27.3
10 – 15 years	17.1	15.6
15 – 25 years	8.3	10.2

Source: BMO REP Asset Management plc

Covenant Strength (% of income by risk bands)
	2018 (%)	2017 (%)
Unscored and ineligible	5.9	5.0
Maximum	10.3	4.0
High	2.1	1.8
Medium to High	3.2	2.5
Low to Medium	4.5	4.8
Low	19.9	16.8
Negligible and Government	54.1	65.1

Source: IRIS Report, MSCI Inc

The largest occupiers, based as a percentage of contracted rent, as at 31 December 2018, are summarised as follows:

Income Concentration
Company name	% of Total Income
Apache North Sea Limited	4.5
GB Gas Holdings Limited	4.4
Virgin Atlantic Limited	4.2
Kimberly-Clark Limited	4.1
Nexen Petroleum UK Limited	3.8
JP Morgan Chase Bank	3.4
Mothercare UK Limited	3.1
University of Winchester	3.0
DHL Supply Chain Limited	2.8
Transocean Drilling UK Limited	2.7
Total	36.0

Source: BMO REP Asset Management plc

Retail

Retailers have endured an extremely challenging year because of reasons well publicised in the UK’s media. This is resulting in a concentrated period of failures, administrations and CVAs and as a consequence many retailers are demanding lower rents and flexibility in leasing. The Company has no exposure to shopping centres and limited exposure to the High Street. However, the Company’s retail parks in Newbury and Solihull have been impacted by the stress in the sector with New Look, Mothercare and Homebase entering into CVA’s and Poundworld into administration. Specifically, at Newbury the CVA’s have resulted in New Look occupying one unit at a 20 per cent rent reduction, Homebase on 35 per cent rent reduction, and Mothercare on a 70 per cent rent reduction (with the intention to close the unit within twelve months of the CVA). At Solihull, Homebase have paid the full rent to year end, but the store closed at end of February 2019. In total, the rent at Newbury has reduced by £740,050 per annum and at Solihull by £1.04 million per annum.

We have identified a number of initiatives to attract new retailers to the properties, but these do require planning approvals and advanced negotiations with key retailers are taking place. Planning applications to facilitate new lettings have been submitted but have to date not been determined by the appropriate Local Authorities. It is hoped these consents will be forthcoming during the first half of 2019, which will then allow the commencement of asset management initiatives, including a variety of development, refurbishment and the reconfiguration of units, as well as allowing lettings to contract.

St Christopher’s Place

Our asset management strategy continues to drive income growth by way of refurbishment, selective relettings, the repositioning of James Street and the delivery of a carefully curated line up of retail and restaurants. Additionally, a number of apartments and offices have been refurbished during the year, all of which have been successfully re-let.

On James Street, two units have been refurbished with lettings contracted to Caprice Holdings (Harry’s Bar) and Homeslice.

Over the next twelve to twenty-four months, there are meaningful opportunities affecting eleven buildings in total, to refurbish and, in some cases, redevelop buildings, subject to securing planning consents and vacant possession.

There have been two CVAs on the Estate, Carluccios and Aldo, but in both cases the units were retained and the contracted rent unaffected.

Industrial Purchase

In May 2018, the Company completed the purchase of Hurricane 47, Estuary Business Park, Liverpool for £3.995 million together with an adjoining 3.6 acre site with planning consent of a further 52,000 sq. ft. unit. This site was purchased for £1.080 million. Hurricane 47 comprises a 47,462 sq. ft. unit which was developed speculatively and completed in April 2018. Hurricane 47 is being formally marketed and there is a reasonable level of occupier interest. The Company has entered into a forward commitment to acquire the second warehouse on completion of construction works for an additional sum of £3 million. It is expected that works will start on site in May 2019 with completion scheduled for March 2020.

Industrial Sale Update

The conditional contract for the sale of the former Ozalid Works site in Colchester remains with Persimmon Homes. The sale is conditional upon Persimmon Homes securing a revised planning consent. Progress continues to be made to negotiate and secure an acceptable planning consent which will discharge the conditionality of the sale. The planning process has been slower than expected but it is hoped the planning application will be determined during the second quarter of 2019.

Offices

A significant project for the Company has been the refurbishment of Nevis and Ness House at Edinburgh Park. Diageo committed to this building for their new Scottish headquarters and the property is currently being refurbished in accordance with Diageo’s requirements at a cost of £6.5 million. The refurbishment works completed in March 2019 and the new 16-year lease with a break at year 10, contracted at £21 per square foot.

At Cassini House, London SW1, the top three floors have been refurbished and this completes the phased refurbishment of the whole building. Two of the three floors are under offer and the new letting should shortly complete. The remaining floor is being marketed with a good level of interest identified.

The properties at Prime Four, Aberdeen are now due their rent reviews at the agreed minimum uplift of 3 per cent per annum.

Office Sales

It has been the Company’s strategy to sell a number of its vacant non-income producing properties where the immediate re-letting prospects were challenging. In November the Company completed the sale of Building B, Watchmoor Park, Camberley for a price of £5.1 million. The property is an entirely vacant, three storey office building totalling 32,641 sq. ft. The sale price was in-line with the external September valuation but significantly ahead of the £2.4 million valuation as at 31 December 2017. In December 2018, the Company exchanged contracts for the sale of its freehold interest in two further office properties, Thames Valley Park One and Thames Valley Park Two. The sale completed in January 2019 at a combined sale price of £24.4 million compared with the previous external valuation of £27.0 million. This is a strategic sale, Thames Valley Park One comprises 75,000 sq. ft. and is entirely vacant and requiring extensive refurbishment. Thames Valley Park Two is a separate building of approximately 55,000 sq. ft. of which 28,900 sq. ft. is vacant. At a time of significant uncertainty these non-core disposals address the Company’s largest void exposure by rental value, releases capital to be invested in income producing properties, significantly reduces non-recoverable expenditure and removes a future substantive capital expenditure requirement of approximately £8.0 million.

The Alternative Property Sector

Following the re-classification of sector weightings highlighted above the Company’s weighting to alternatives has increased to 9 per cent from approximately 3 per cent. To confirm, the Company’s exposure relates to the purpose-built student accommodation block in Winchester, the residential properties within St Christopher’s Place and the leisure units at Wimbledon Broadway.

Outlook

The final quarter of 2018 saw a sharp downgrade for retail property and nervousness in the property equity and “open ended” property funds. These elements may well affect the UK commercial property market in 2019 and 2020 as valuers respond to both the weaker trend in retail and pricing evidence from transactions. Brexit and its economic and political ramifications will affect sentiment more widely and it is likely over the first half of 2019 businesses will delay making decisions. Therefore the expected number of capital market and leasing transactions will reduce. In the absence of a clean Brexit a period of market volatility could be in prospect. Possible future increases in interest rates may also affect investment decisions, particularly in areas of the market that are keenly priced and dependent on aggressive rental growth assumptions. Over the longer-term, factors such as property’s attractive income return, the constrained supply of stock (outside retail), restrained bank lending, the opportunities offered by demographic and technological change will come to the fore and as the economy adapts to the post-Brexit world.

The portfolio is currently experiencing some stress in the retail sector as highlighted above but asset management initiatives are well underway to address the loss of income and capital value. There are a significant number of projects identified within the portfolio that will be the focus of activity and attention over the next eighteen months timeframe. A number of sales have also been identified and the recycling of capital into an uncertain market may offer timing opportunities to acquire quality assets at more attractive prices. Overall the Company is well positioned to progress the significant number of opportunities available in its own portfolio, as well as other opportunities that may arise in the wider market.

Richard Kirby
Fund Manager
BMO REP Asset Management plc

F&C Commercial Property Trust Limited
Consolidated Statement of Comprehensive Income (audited)

		Year ended 31 December 2018	Year ended 31 December 2017
		£’000	£’000
Revenue
Rental income		64,903	64,775
Other income		1,483	-
		---------	---------
Total revenue		66,386	64,775
(Losses)/gains on investment properties
Unrealised (losses)/gains on revaluation of investment properties		(6,171)	52,854
Gains/(losses) on sale of investment properties realised		2,613	(5)
		----------	----------
Total income		62,828	117,624
		----------	----------
Expenditure
Investment management fee		(7,823)	(7,692)
Other expenses		(6,191)	(5,659)
		----------	----------
Total expenditure		(14,014)	(13,351)
		-----------	-----------
Operating profit before finance costs and taxation		48,814	104,273
		-----------	-----------
Net finance costs
Interest receivable		6	72
Finance costs		(10,912)	(10,932)
		-----------	-----------
		(10,906)	(10,860)
		-----------	-----------
Profit before taxation		37,908	93,413
Taxation		(1,510)	(703)
		----------	----------
Profit for the year		36,398	92,710
		----------	----------
Other comprehensive income
Items that are or may be reclassified subsequently to profit or loss
Movement in fair value of effective interest rate swaps		362	457
		----------	----------
Total comprehensive income for the year, net of tax		36,760	93,167
		----------	----------
Basic and diluted earnings per share		4.6p	11.6p

All of the profit and total comprehensive income for the year is attributable to the owners of the Group.

All items in the above statement derive from continuing operations.


F&C Commercial Property Trust Limited
Consolidated Balance Sheet (audited)

	As at 31 December 2018 £’000	As at 31 December 2017 £’000
Non-current assets
Investment properties	1,384,856	1,398,894
Trade and other receivables	19,344	20,734
Interest rate swap	102	-
	------------	------------
	1,404,302	1,419,628
	------------	------------
Current assets
Investment properties held for sale	23,562	-
Trade and other receivables	6,630	3,288
Cash and cash equivalents	10,127	35,156
	------------	------------
	40,319	38,444
	------------	------------
Total assets	1,444,621	1,458,072
	------------	------------
Current liabilities
Trade and other payables Taxation payable	(16,282) (1,029)	(18,936) (739)
	------------	------------
	(17,311)	(19,675)
Non-current liabilities
Trade and other payables	(1,847)	(1,812)
Interest-bearing loans	(308,015)	(307,675)
Interest rate swaps	-	(260)
	------------	------------
	(309,862)	(309,747)
	------------	------------
Total liabilities	(327,173)	(329,422)
	------------	------------
Net assets	1,117,448	1,128,650
	------------	------------
Represented by:
Share capital	7,994	7,994
Special reserve	589,593	589,593
Capital reserve – investments sold	1,708	7,063
Capital reserve – investments held	410,237	408,440
Hedging reserve	102	(260)
Revenue reserve	107,814	115,820
	------------	------------
Equity shareholders’ funds	1,117,448	1,128,650
	------------	------------
Net asset value per share	139.8p	141.2p

F&C Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2018 (audited)

	Share Capital £’000	Share Premium £’000	Reverse Acquisition Reserve £’000	Special Reserve £’000	Capital Reserve - Investments Sold £’000	Capital  Reserve – Investments Held £’000	Hedging Reserve £’000	Revenue Reserve £’000	Total £’000
At 1 January 2018	7,994	-	-	589,593	7,063	408,440	(260)	115,820	1,128,650
Total comprehensive income for the year
Profit for the year	-	-	-	-	-	-	-	36,398	36,398
Movement in fair value of interest rate swaps							362		362
Transfer in respect of unrealised losses on investment properties						(6,171)		6,171
Gains on sale of investment properties realised					2,613			(2,613)
Transfer of prior years’ revaluations to realised reserve					(7,968)	7,968
Total comprehensive income for the year	-	-	-	-	(5,355)	1,797	362	39,956	36,760
Transactions with owners of the Company recognised directly in equity
Dividends paid	-	-	-	-	-	-	-	(47,962)	(47,962)
At 31 December 2018	7,994	-	-	589,593	1,708	410,237	102	107,814	1,117,448

Consolidated Statement of Changes in Equity
for the year ended 31 December 2017 (audited)

	Share Capital £’000	Share Premium £’000	Reverse Acquisition Reserve £’000	Special Reserve £’000	Capital Reserve - Investments Sold £’000	Capital  Reserve – Investments Held £’000	Hedging Reserve £’000	Revenue Reserve £’000	Total £’000
At 1 January 2017	7,994	127,612	831	461,150	7,068	355,586	(717)	123,921	1,083,445
Total comprehensive income for the year
Transfer to Special Reserve		(127,612)	(831)	128,443
Profit for the year	-	-	-	-	-	-	-	92,710	92,710
Movement in fair value of interest rate swaps							457		457
Transfer in respect of unrealised gains on investment properties						52,854		(52,854)
Loss on sale of investment properties realised					(5)
Total comprehensive income for the year	-	(127,612)	(831)	128,443	(5)	52,854	457	39,861	93,167
Transactions with owners of the Company recognised directly in equity
Dividends paid	-	-	-	-	-	-	-	(47,962)	(47,962)
At 31 December 2017	7,994	-	-	589,593	7,063	408,440	(260)	115,820	1,128,650

F&C Commercial Property Trust Limited
Consolidated Statement of Cash Flows (audited)

	Year ended 31 December 2018	Year ended 31 December 2017
	£’000	£’000
Cash flows from operating activities
Profit for the year before taxation	37,908	93,413
Adjustments for:
Finance costs	10,912	10,932
Interest receivable	(6)	(72)
Unrealised losses/(gains) on revaluation of investment properties	6,171	(52,854)
(Gains)/losses on sale of investment properties realised	(2,613)	5
Increase in operating trade and other receivables	(2,054)	(3,204)
(Decrease)/increase in operating trade and other payables	(2,317)	200
	-----------	-----------
Cash generated from operations	48,001	48,420
	-----------	-----------
Interest received	6	72
Interest and bank fees paid	(10,551)	(10,559)
Tax paid	(1,220)	(203)
	-----------	-----------
	(11,765)	(10,690)
	-----------	-----------
Net cash inflow from operating activities	36,236	37,730
	-----------	-----------
Cash flows from investing activities
Purchase of investment properties	(5,754)	(32,802)
Sale of investment properties	5,100	-
Capital expenditure	(12,649)	(6,831)
	-----------	-----------
Net cash outflow from investing activities	(13,303)	(39,633)
	-----------	-----------
Cash flows from financing activities
Dividends paid	(47,962)	(47,962)
Draw down of Barclays Loan revolving credit facility Repayment of Barclays Loan revolving credit facility	-	35,000 (35,000)
	-----------	-----------
Net cash outflow from financing activities	(47,962)	(47,962)
	-----------	-----------
Net decrease in cash and cash equivalents	(25,029)	(49,865)
Opening cash and cash equivalents	35,156	85,021
	-----------	-----------
Closing cash and cash equivalents	10,127	35,156
	-----------	-----------

F&C Commercial Property Trust Limited

Principal Risks and Future Prospects

Each year the Board carries out a comprehensive, robust assessment of the principal risks and uncertainties that could threaten the Company's success. The consequences for its business model, liquidity, future prospects and viability form an integral part of this assessment.

The Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council, and has established an ongoing process designed to meet the particular needs of the Company in managing the risks and uncertainties to which it is exposed.

Principal risks and uncertainties faced by the Company are described below and in note 2, which provides detailed explanations of the risks associated with the Company’s financial instruments.

•        Market – the Company’s assets comprise direct investments in UK commercial property and it is therefore exposed to movements and changes in that market.

•        Investment and strategic – poor investment decisions and incorrect strategy, including sector and geographic allocations, use of gearing, inadequate asset management activity and tenant defaults could lead to poor returns for shareholders.

•        Regulatory – breach of regulatory rules could lead to suspension of the Company’s London Stock Exchange listing, financial penalties or a qualified audit report.

•        Environmental – inadequate attendance to environmental factors by the Managers, including those of a regulatory and market nature and particularly those relating to energy performance, health and safety, flood risk and environmental liabilities, leading to the reputational damage of the Company, reduced liquidity in the portfolio, and/or negative asset value impacts.

•        Tax structuring and compliance – the Company should ensure compliance with relevant tax rules and thresholds at all time. Changes to tax legislation could have an adverse financial impact.

•        Operational – failure of the Managers’ accounting systems or disruption to its business, or that of other third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders’ confidence.

•        Financial – inadequate controls by the Managers or other third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to a qualified audit report, misreporting or breaches of regulations. Breaching Guernsey solvency test requirements or loan covenants could lead to a loss of shareholders’ confidence and financial loss for shareholders.

The Board seeks to mitigate and manage these risks through continual review, policy-setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company’s property portfolio. The Managers seek to mitigate these risks through active asset management initiatives and carrying out due diligence work on potential tenants before entering into any new lease agreements. All of the properties in the portfolio are insured.

The principal risks encountered during the year, how they are mitigated and actions taken to address these are set out in the table below.

Principal Risk	Mitigation	Actions taken in the year
Valuers have difficulty in valuing the property assets due to lack of market evidence or market uncertainty. Error in the calculation/ application of the Company Net Asset Value ('NAV') leads to a material misstatement.	Professional external valuers are appointed to value the portfolio on a quarterly basis. There is regular liaison with the valuers regarding all elements of the portfolio. There is attendance by one or more Directors at the valuation meetings and the Auditors attend the year end valuation meeting.	Transactional volumes in 2018 were at very healthy levels, although we have seen volumes fall in the first quarter of 2019. Nevertheless, there has been sufficient transactions to date with trades in all sectors in which the Company invests which provide evidence for our valuations. This level of trading has continued despite the political uncertainty of recent months.
Unchanged in the year under review
Unfavourable markets, poor stock selection, inappropriate asset allocation and under-performance against benchmark and/or peer group. This risk may be exacerbated by gearing levels. There is increased volatility at the present time given the uncertainties surrounding Brexit.	The underlying investment strategy, performance, gearing and income forecasts are reviewed with the Investment Manager at each Board Meeting. The Company's portfolio is well diversified and of a high quality. Gearing is kept at modest levels.	The Board review the Manager's performance at quarterly Board Meetings against key performance indicators and is satisfied that the Manager's long-term performance is in line with expectations.
Risk increased in the year under review
Non-resident landlords will be taxable under the UK corporation tax regime from April 2020. This change could have a material impact on the Company's tax affairs. Additionally, new capital gains tax rules were implemented in April 2019 which will also impact the Company moving forward.	The Company has announced plans to adopt UK REIT status subject to shareholder approval. Under current tax legislation, the principal tax advantage for the Company in doing this is that the Group's net rental income derived from its property rental business would be exempt from UK taxation. The same treatment would apply to capital gains arising on the disposal of relevant rental properties.	The changes in taxation were formalised in the UK Chancellor's Budget in November 2017. An extraordinary general meeting is scheduled for 30 May 2019 at which shareholders will vote on the Company adopting UK REIT status.
Risk increased in the year under review
The retail market has witnessed a number of company voluntary arrangements, profit warning announcements and administrations in recent months. There is an increased risk of tenant defaults in this sector which could put the level of dividend cover at risk.	The Manager provides regular information on the expected level of rental income that will be generated from the underlying properties. The Portfolio is well diversified by geography and sector and the exposure to individual tenants is monitored and managed to ensure there is no over exposure.	The portfolio has been impacted by a number of CVA’s and administrations at its retail parks. There is a short-term impact on retail income and the valuation of these assets. The Manager has business plans in place to asset manage these events.
Risk increased in the year under review

Viability Assessment and Statement

The Board conducted this review over a five year time horizon, a period thought to be appropriate for a Company investing in commercial property with a long-term investment outlook; with primary borrowings secured for a further six years and a property portfolio with an average unexpired lease length of 7.1 years. The assessment has been undertaken, taking into account the principal risks and uncertainties faced by the Group which could threaten its objective, strategy, future performance, liquidity and solvency.

The major risks identified as relevant to the viability assessment were those relating to a downturn in the UK commercial property market and its resultant effect on the valuation of the investment property portfolio, the level of rental income being received and the effect that this would have on cash resources and financial covenants. The Board took into account the illiquid nature of the Company’s property portfolio, the existence of the long-term borrowing facility, the effects of any significant future falls in investment property values and property income receipts on the ability to repay and re-negotiate borrowings, maintain dividend payments and retain investors. These matters were assessed over a period to March 2024, and the Directors will continue to assess viability over five year rolling periods, taking account of foreseeable severe but plausible scenarios.

In the ordinary course of business, the Board reviews a detailed financial model on a quarterly basis, incorporating market consensus forecast returns, projected out to the maturity of its principal loan of £260 million which is due to mature in 2024 and coincides with the next continuation vote. This model uses prudent assumptions and factors in any potential capital commitments. For the purpose of assessing the viability of the Group, the model has been adjusted to look at the next five years and is stress tested with projected returns comparable to the commercial property market crash experienced between 2007 and 2009. The model projects a worst case scenario of an equivalent fall in capital and income values over the next two years, followed by three years of zero growth. The model demonstrated that even under these extreme circumstances the Company remains viable.

Based on their assessment, and in the context of the Group’s business model, strategy and operational arrangements set out above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five year period to March 2024.

F&C Commercial Property Trust Limited

Going Concern

In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. They have reviewed detailed cash flow, income and expense projections in order to assess the Company’s ability to pay its operational expenses, bank interest and dividends. The Directors have examined significant areas of possible financial risk including cash and cash requirements and the debt covenants, in particular those relating to loan to value and interest cover. They have not identified any material uncertainties which cast significant doubt on the ability to continue as a going concern for the foreseeable future, which is considered for a period of not less than 12 months from the date of the approval of the financial statements. The Board believes it is appropriate to adopt the going concern basis in preparing the financial statements.

Statement of Directors' Responsibilities in Respect of the Annual Report and Accounts

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge:

• The financial statements contained within the Annual Report and Accounts for the year ended 31 December 2018, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards as adopted by the EU, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole and comply with The Companies (Guernsey) Law, 2008; and

• The Chairman’s Statement and Managers’ Review include a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

• The consolidated financial statements include details of related party transactions; and

In the opinion of the Directors:

• The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.

On behalf of the Board
Chris Russell                                                 
Director                                                           

F&C Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year ended 31 December 2018

1.         The Board has declared a twelfth, and last, interim dividend for the year of 0.50p per share to be paid on 30 April 2019 to shareholders on the register on 12 April 2019.

It is the Directors’ intention that the Company will continue to pay dividends monthly.

2.         Financial Instruments and investment properties

The Company’s investment objective is to provide ordinary 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.

Consistent with that objective, the Group holds UK commercial property investments. In addition, the Group’s financial instruments during the year comprised interest-bearing bank loans, cash and receivables and payables that arise directly from its operations. The Group does not have exposure to any derivative instruments other than the interest rate swap entered into to hedge the interest paid on the Barclays interest-bearing bank loan.

The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.

The Board reviews and agrees policies for managing the Group’s risk exposure. These policies are summarised below and have remained unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group’s investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group’s overall risk exposure.

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.

In the event of default by an occupational tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Managers monitor such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.

All of the Group’s cash is placed with financial institutions with a long-term credit rating of A or better. Bankruptcy or insolvency of such financial institutions may cause the Group’s ability to access cash placed on deposit to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank.

Liquidity risk

Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments. The Group’s investments comprise UK commercial property. Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.

The Group’s liquidity risk is managed on an ongoing basis by the Managers and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk, the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to meet its obligations for a period of at least twelve months.

Interest rate risk

Some of the Group’s financial instruments are interest bearing. They are a mix of both fixed and variable rate instruments with differing maturities. As a consequence, the Group is exposed to interest rate risk due to fluctuations in the prevailing market rate.

The Group’s exposure to interest rate risk relates primarily to its long-term debt obligations. Interest rate risk on long-term debt obligations is managed by fixing the interest rate on such borrowings, either directly or through interest rate swaps for the same notional value and duration. Long-term debt obligations and the interest rate risk they confer to the Group is considered by the Board on a quarterly basis. Long term debt obligations consist of a £260 million L&G loan on which the rate has been fixed at 3.32 per cent until the maturity date of 31 December 2024. The Group also has a £50 million interest-bearing bank loan with Barclays on which the rate has been fixed through an interest rate swap at 2.522 per cent per annum until the maturity date of 21 June 2021. The Group has agreed an additional revolving credit facility of £50 million with Barclays over the same period, which has not been drawn down as at 31 December 2018. The revolving credit facility pays an undrawn commitment fee of 0.60 per cent per annum.

When the Group retains cash balances, they are ordinarily held on interest-bearing deposit accounts. The benchmark which determines the interest income received on interest bearing cash balances is the bank base rate of the Bank of England which was 0.75 per cent as at 31 December 2018 (2017: 0.50 per cent). The Company’s policy is to hold cash in variable rate or short-term fixed rate bank accounts and not usually in fixed rate securities with a term greater than three months.

Market price risk

The Group’s strategy for the management of market price risk is driven by the investment policy. The management of market price risk is part of the investment management process and is typical of commercial property investment. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.

3.         There were 799,366,108 Ordinary Shares in issue at 31 December 2018 (2017: 799,366,108).

At 31 December 2018, the Company did not hold any Ordinary Shares in treasury (2017: nil).

4.         The basic and diluted earnings per Ordinary Share are based on the profit for the year of £36,398,000 (2017: £92,710,000) and on 799,366,108 (2017: 799,366,108) Ordinary Shares, being the weighted average number of shares in issue during the year.

5.         The Company owns 100 per cent of the issued ordinary share capital of FCPT Holdings Limited, a company registered in Guernsey. The principal activity of FCPT Holdings Limited is to act as a holding company and it owns 100 per cent of the ordinary share capital of F&C Commercial Property Holdings Limited, a company registered in Guernsey whose principal business is that of an investment and property company, and 100 per cent of the ordinary share capital of Winchester Burma Limited, a company registered in Guernsey whose principal business is that of an investment and property company.

The Company owns 100 per cent of the issued ordinary share capital of SCP Estate Holdings Limited, a company registered in Guernsey. The principal activity of SCP Estate Holdings Limited is to act as a holding company and it owns 100 per cent of the ordinary share capital of SCP Estate Limited, a company registered in Guernsey whose principal business is that of an investment and property company, and 100 per cent of the ordinary share capital of Prime Four Limited, a company registered in Guernsey whose principal business is that of an investment and property company.

The Company owns 100 per cent of the issued ordinary share capital of Leonardo Crawley Limited, a company registered in Guernsey whose principal business is that of an investment and property company.

The results of the above entities are consolidated within the Group financial statements.

6.         The Group had capital commitments totalling £3,600,000 as at 31 December 2018 (2017: £6,800,000). These commitments related mainly to contracted development work at the Group’s property at Nevis and Ness Houses, Edinburgh Park.

7.         These are not full statutory accounts. The full audited accounts for the year to 31 December 2018 will be sent to shareholders and will be available for inspection at Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3QL, the registered office of the Company, and from the Company’s website: fccpt.co.uk

Alternative Performance Measures

The Company uses the following Alternative Performance Measures (‘APMs’). APMs do not have a standard meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other entities.

Discount or Premium – the share price of an Investment Company is derived from buyers and sellers trading their shares on the stock market. This price is not identical to the NAV. If the share price is lower than the NAV per share, the shares are trading at a discount. This could indicate that there are more sellers than buyers. Shares trading at a price above the NAV per share, are said to be at a premium.

Dividend Cover – The percentage by which Profits for the year (less Gains/losses on investment properties) cover the dividend paid.

A reconciliation of dividend cover is shown below:

			2018	2017
			£’000	£’000
Profit for the year			36,398	92,710
Add back:	Unrealised losses / (gains) on revaluation of investment properties		6,171	(52,854)
	(Gains) / losses on sales of investment properties realised		(2,613)
	Other income		(1,483)	-
Profit before investment gains and losses		(a)	38,473	39,861
Dividends		(b)	47,962	47,962
Dividend Cover percentage (c= a/b)		(c)	80.2	83.1

Dividend Yield – The annualised dividend divided by the share price at the year end.

Net Gearing – Borrowings less cash divided by total assets (less current liabilities and cash).

Portfolio (Property) Capital Return – The change in property value during the period after taking account of property purchases and sales and capital expenditure, calculated on a quarterly time-weighted basis. The calculation is carried out by MSCI Inc.

Portfolio (Property) Income Return – The income derived from a property during the period as a percentage of the property value, taking account of direct property expenditure, calculated on a quarterly time-weighted basis. The calculation is carried out by MSCI Inc.

Portfolio (Property) Total Return – Combining the Portfolio Capital Return and Portfolio Income Return over the period, calculated on a quarterly time-weighted basis. The calculation is carried out by MSCI Inc.

Total Return – The theoretical return to shareholders calculated on a per share basis by adding dividends paid in the period to the increase or decrease in the Share Price or NAV. The dividends are assumed to have been reinvested in the form of Ordinary Shares or Net Assets, respectively, on the date on which they were quoted ex-dividend.

All enquiries to:

The Company Secretary
Northern Trust International Fund Administration (Guernsey) Limited
Trafalgar Court
Les Banques
St. Peter Port
Guernsey GY1 3QL
Tel:      [phone]
Fax:     [phone]

Richard Kirby
BMO REP  Asset Management plc
Tel:      [phone]

Graeme Caton
Winterflood Securities Limited
Tel:      [phone]