Results for the Year Ended 31 December 2020 (au...
To RNS
Date 12 April 2021
From BMO Commercial Property Trust Limited (the “Company”)
L.E.I. 213800A2B1H4ULF3K397
Results in Respect of the Year Ended 31 December 2020 (audited)
Headlines
- Rental collection currently received to date since the first Covid lockdown restrictions, from March 2020 to December 2020 is 88.2 per cent.
- The Company produced a portfolio total return of -4.8* per cent versus the MSCI UK Quarterly Property Index (‘MSCI’) return of -2.0 per cent.
- Net asset value total return of -8.1 per cent
- Share price total return of -28.3* per cent
- Dividends for the year amounting to 2.85 pence per share
- Dividend cover of 162.8 per cent*
- Yield on year-end share price of 3.6 per cent*.
- Void rate reduced from 4.8 per cent to 2.9 per cent at year end.
- Completed the development at Newbury for new Lidl foodstore.
- Completed the development at Solihull for new M&S general merchandise store.
- Several significant industrial lease renewals completed.
- ESG progress: Improved GRESB score and Gold award from EPRA sustainability BPR.
*see Alternative Performance Measures
Chairman’s Statement
The last year has been exceptionally challenging and, as you will have seen from the headlines, the results we are reporting for the year are disappointing. The Covid-19 pandemic (“the pandemic”) is, of course, upper most in our mind as we think about the past year and the widespread suffering and sad loss of human life. The Company’s 2020 results should be viewed against the backdrop of the pandemic.
For our part, we have done all we can to ensure the safety of our Managers’ staff and our tenants and their visitors. We have developed and implemented new protocols throughout the business, and across the portfolio, to ensure compliance with Government guidelines. We have been sympathetic to the difficulties faced by many of our tenants, carefully considering their differing circumstances, aligning interests by offering rent concessions where appropriate to support the short-term needs of their businesses as they re-map post-Covid plans for recovery and growth.
Notwithstanding the 2020 headline results, much positive progress has been made this year with the completion of many new lettings and lease renegotiations as well as asset management and ESG initiatives. Welcoming many new tenants to our portfolio during such a difficult year is testament to its underlying quality. At the end of the year, our void level stands at an historically low 2.9 per cent and we firmly believe that our portfolio, underpinned by our strong core assets, is well positioned for recovery.
Property Market
In what was the most demanding year in recent memory, the UK direct commercial property market delivered a -2.0 per cent all-property total return. The disruption caused by the pandemic, coupled with persisting concerns on what a post-Brexit trading environment would mean for the UK, were the two significant factors weighing heavily on the property market.
At a sector level, industrial and distribution units proved resilient, delivering positive total returns in the year, buoyed by the shift to online sales. Other sectors fared less well, in particular the structural problems affecting the retail sector were exacerbated by pandemic related restrictions that ultimately led to suspensions in trading and store closures. Sadly, some businesses have been critically damaged and will never return to our high streets and retail parks. The office sector was also negatively impacted, clouded by concerns about tenants reducing their future space requirements as a consequence of a permanent shift, or more flexible approach, to remote working.
The market steadied as the year progressed, delivering a modest positive total return in the second half, although capital values and open market rental growth remained negative throughout. All property returns were supported by a 4.5 per cent annual income return. Investment volumes showed some signs of recovery later in the year with activity focused on Central London offices and the industrial sector, while the retail and leisure sectors remained firmly out of favour with little to no transactions evident.
Performance for the Year
Our relatively higher weighting to the out of favour retail and office sectors, particularly our exposure to London's West End through St Christopher's Place, combined with a lower exposure to the strongly performing logistics sector, has amplified our relative underperformance in these challenging markets.
Our share price at the end of the year was 80.0p, representing a discount of 31.9 per cent to the year-end Net Asset Value (NAV) per share of 117.5p (compared to an 11.7 per cent discount as at 31 December 2019).
The persistency of the discount is a primary concern of the Board and is reviewed at each Board Meeting. The option of share buybacks was regularly considered but, in the face of such heightened uncertainty, the immediate preference was to strengthen cash resources and invest in accretive asset management initiatives.
While the NAV total return for the year was -8.1 per cent, the widening in the discount during the year, resulted in a disappointing share price total return of -28.3 per cent. The total return for the portfolio was -4.8 per cent, lagging the total return of -2.0 per cent from the MSCI UK Property Index (MSCI) and our capital return was -9.0 per cent, compared with -6.2 per cent for the Index.
It has been a period of significant valuation movement as investment and occupier markets re-set in response to changing structural trends. From today’s adjusted levels, the Board has confidence that the high quality, core assets owned by the Company are positioned to benefit as business and consumer sentiment improves and the UK returns to a more normal trading environment.
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 2019 | 130.9 |
| Unrealised decrease in valuation of property portfolio | (15.2) |
| Net revenue | 4.6 |
| Dividends paid | (2.8) |
| NAV per share as at 31 December 2020 | 117.5 |
The largest detractor to performance were our retail assets, returning -14.0 per cent for the year with large capital falls at the St Christopher’s Place Estate and Broadway, Wimbledon.
The St Christopher’s Place Estate, our largest investment, fell overall by -17 per cent in the year with its two Oxford Street retail units being particularly hard hit (-33 per cent) as yields moved out and rental values were significantly downgraded. We remain optimistic about the prospects for this Estate and are looking forward to entering a more positive next chapter, encouraged by the number of new retail and restaurant businesses that have committed to new leases during 2020. This is a great vote of confidence in the Estate. Elsewhere, working with local stakeholders, the exciting repositioning of James Street continues and a number of other plans to deliver further value across the Estate are mentioned in the Manager’s Report.
In addition to St Christopher’s Place, another large valuation fall was seen at Broadway, Wimbledon, where a combination of yield movement, rental concessions and rental value downgrades for the dominant restaurant, gym and cinema uses, resulted in a reduction of 24 per cent. In the current environment, it’s unsurprising that no credit can be taken for the medium-term development potential of this significant asset, but the Manager will continue to explore these interesting future options in the months ahead.
Mirroring the positive leasing activity at St Christopher’s Place, there was also good progress on a number of fronts at the Company’s two retail parks. Of particular note were the major capital projects undertaken in the year. Newbury saw the construction of a new 19,500 sq.ft. Lidl foodstore that opened to the public in October 2020 and at Solihull, Marks and Spencer entered into a new 20 year lease for a redeveloped 35,000 sq.ft. store that we have combined with the adjacent M&S Food Hall. Both will bring increased footfall to the Parks. This activity combined with other initiatives already underway to introduce more new tenants on to the Parks will provide good prospects for positive future performance at a time when investor interest is beginning to return to this sector of the property market.
Moving away from retail, our office portfolio experienced an overall return for the year of -1.0 per cent with this headline number masking some large increases and falls. The Leonardo Building, Crawley, fell by -22 per cent as a result of a lease renegotiation with the tenant, Virgin Atlantic, as part of their financial restructuring in response to the pandemic’s huge impact on airline businesses. 3 The Square, Stockley Park, fell by -19 per cent due to the reducing unexpired lease term which led to a valuation re-rating in response to the ‘risk off’ attitude of investors that was prevalent during 2020.
These downward movements were counterbalanced by increases elsewhere. Cassini House, London SW1, now fully occupied following the letting to Mitsui Fudosan in February 2020, enjoyed a valuation uplift of 4.5 per cent over the year. Strong progress has also been made at Watchmoor Park in Camberley with an increase of 10 per cent. Here, a new lease for 5 years with Muller was completed on the refurbished second floor and, since the end of the year, terms have been agreed to lease all the remaining vacant space.
Our well-located industrial portfolio returned 7.2 per cent over the year. Performance was constrained by some significant lease events on the horizon in 2021 so it’s pleasing to note that we were able to advance two of these towards the end of the year. At G Park in Liverpool, a new 10-year renewal from March 2021 has been agreed with DHL and, more recently, terms have been settled with Kimberley Clark to renew the lease of their distribution warehouse in Chorley. Valuations are beginning to respond to the increasing WAULT across this part of the portfolio with more still to come.
Borrowings and Loan Refinancing
The Group’s borrowings comprise a £260 million term loan with Legal & General Pensions Limited, maturing on 31 December 2024. The Company also has a Barclays £50 million term loan and an undrawn £50 million revolving credit facility which is available to the Company on the satisfaction of certain conditions prior to drawdown. The Barclays facility expires on 31 July 2022, with the option of two further one-year extensions. As at 31 December 2020, the Company’s net loan to value (‘LTV’) was 22.6 per cent.
Dividends
The Company paid seven interim dividends totalling 2.85 pence per share during the year, compared to an annual dividend in 2019 of 6.0 pence per share. In April 2020, due to the uncertainty that the impact of the pandemic would have on future rental receipts, the Board took the difficult decision to temporarily suspend monthly dividend payments in order to strengthen cash reserves and protect the long-term value of the Company for the benefit of all shareholders. Aided by a proactive approach from the Manager, many early agreements were reached to restructure leases or temporarily defer rents, and this supported the reintroduction of monthly dividends at 0.25 pence per share from August 2020. Collection rates continued at levels ahead of those anticipated in April, giving the Board confidence to increase the dividend further to 0.35 pence per share in December 2020.
Whilst there is now greater clarity on the timing of restrictions being lifted as the roll out of the vaccine continues apace, the path of economic recovery remains far from certain. That said, the Board’s expectation is to continue to pay monthly dividends at the current level for the foreseeable future. We are mindful of the requirement to comply with the REIT test of distributing 90 per cent of all net rental receipts and will continue to closely monitor the level of future rental receipts and earnings.
Rent Collection
As highlighted in the Company’s quarterly trading updates, collection of rent in the retail and leisure sectors of the portfolio has been challenging. This is unsurprising given the Government restrictions that have been in place, with the non-essential retail and restaurants at St Christopher’s Place and the cinema and gym at Wimbledon having had limited trading opportunity since March 2020.
Rental collection for the year as a whole was 91.0 per cent, with collection for the nine-month period following the first lockdown standing at 88.2 per cent. The breakdown of our rental collection for the nine-month period by sector is detailed below:
| Rent billed (£m) | Collected (£m) | (%) | |
| Industrial | 9.9 | 9.9 | 99.4 |
| Offices | 20.8 | 20.0 | 96.2 |
| Retail Warehouse | 5.9 | 5.1 | 86.2 |
| Retail | 9.2 | 5.9 | 64.2 |
| Alternatives | 3.3 | 2.5 | 74.7 |
| Total | 49.1 | 43.4 | 88.2 |
Rent collection rates for the first quarter of 2021, a period during which the country has been on full lockdown, is at 84.7 per cent.
The Managers’ continue to engage with tenants to deliver constructive outcomes and provide support where it is deemed appropriate.
Environmental, Social and Governance (ESG)
Whilst the Company’s focus on the social element of ESG was strong during the year, this was not at the expense of environmental aspirations. With the global spotlight on climate change focusing on Glasgow and its hosting of the 26th UN Climate Conference, there is heightened awareness of the need to position the portfolio, so it remains resilient as we transition to the green economy. The Company has been actively progressing its approach to environmental risk and opportunity throughout the year and has been working hard in preparation for setting and publishing its net zero carbon ambition in 2021.
ESG remains a core aspect of the Company’s forward strategy and at the heart of the Manager’s investment process and I am pleased to report that the Company was the highest rated ESG Company in its peer group by GRESB in 2020. We will continue our focus on our environmental and social impacts which remains resolute and we are dedicated to building on this leading position. The Board remains fully committed to this agenda and is pleased to provide a summary of progress in the Annual Report, whilst a deeper review will be shared in the 2020 ESG Report, available on the Company’s website.
Board Composition
I will retire at the AGM in June, having served on the Board for ten years, the last two as Chairman. The strong results delivered to investors in earlier years have sadly been overshadowed by a period of recent underperformance. It has been a demanding yet rewarding experience throughout. I have been privileged to work alongside a great cadre of directors, past and present, and truly believe that the nature of the high-quality portfolio means the Company is well positioned to drive forward strongly from today.
With effect from the date of my retirement, Paul Marcuse will take on the role of Chairman. Paul, who has 40 years’ experience in the real estate and finance sectors has been on the Board since January 2017 and I feel confident that I leave the Company and the Chairmanship in good hands.
I would also like to welcome Hugh Scott-Barrett who joined the Board on 4 January 2021. Hugh brings valuable experience having worked at Board level for over twenty years across real estate, asset management, and banking. In particular, he was Non-Executive Chairman at Capital & Regional plc until May 2020 and was Chief Executive of the Company prior to this from 2008 to 2017. Hugh will take on the role of Senior Independent Director from the AGM date.
Annual General Meeting
Despite significant progress with the UK’s vaccination programme, there remains much uncertainty around the easing of the latest lockdown and the continuation of social distancing in the months ahead. The Company’s articles do not allow the AGM to be held online and there will therefore be an online shareholder meeting on 3 June 2021 at which there will be a presentation by the Manager, which will be followed by a question and answer session with the Board and the Manager.
Until new articles are adopted, the online shareholder meeting needs to be separate from the formal AGM which will be held two weeks later on 17 June 2021. The AGM will be purely functional in format with access limited to two members only, this being the minimum number sufficient to form a quorum. Voting at the AGM will be conducted by way of a poll and we therefore urge shareholders to lodge their votes to arrive by the deadline stated in the notice of meeting, appointing the chairman of the meeting as proxy. A resolution to adopt new articles of incorporation that will provide the Board with the flexibility to hold physical, virtual only and/or hybrid meetings, will be put to shareholders at the forthcoming AGM.
Future Positioning
Notwithstanding the exceptional headwinds of 2020, we have strong conviction in the prospects for the portfolio. Our year-end void rates are low and our Manager is focused on growing income and driving value as a result of numerous asset management initiatives across the portfolio.
Following a thorough review of strategy during 2020 a higher level of transacting can be anticipated in the coming year as we move to recycle capital and adjust sector weightings. Particular priority will be given to using sales proceeds to buy-back the Company's shares if the high level of discount persists and if the Board believes that this course of action is in the best interests of all shareholders. The Board and Managers' look forward to sharing our progress and to actively engaging with shareholders in the coming year.
Martin Moore
Chairman
Managers’ Review
Property Market Review
The benchmark total return for the year, as measured by the MSCI UK Quarterly Property Index (‘MSCI’) was -2.0 per cent. Total returns were substantially lower than in 2019, primarily impacted by the disruption and uncertainty caused by the pandemic, but also the Brexit uncertainty that persisted for a large part of the year and structural problems in the retail sector.
| Key Benchmark Metrics – All Property | ||
|
2020
% |
2019
% |
|
| Total Returns | (2.0) | 1.3 |
| Income Return | 4.5 | 4.5 |
| Capital Return | (6.2) | (3.1) |
| Open Market Rental Value Growth | (3.1) | (0.7) |
| Initial Yield | 4.7 | 4.7 |
| Equivalent Yield | 5.8 | 5.5 |
Source: MSCI Inc
Despite a recovery towards year-end, investment activity in 2020 was lower than in the previous year, with most sectors of the commercial real estate market affected. However, industrial assets, helped by a number of large portfolio deals and strong demand from a wide range of investors, did record a marked annual increase in investment volumes. Net investment from overseas buyers remained positive, but institutions were net sellers of property, along with both listed and private property companies. The year saw investors favouring assets with long-term secure income and if possible, underpinned by alternative use value.
Capital values fell by 6.2 per cent at the all-property level. The market was supported by a 4.5 per cent annual income return.
The market was characterised by a polarisation in sector performance. Retail remained the weakest of the three main sectors, with a -12.3 per cent total return. Shopping centres were the worst affected segment, but the pandemic, lockdowns and subsequent loss of footfall from tourists and workers led to a marked deterioration in retail total returns in the big cities, and Central London retail in particular. Company Voluntary Arrangements (CVAs), administrations and store closures continued, with a focus on department stores and fashion but also spreading to food and beverage. The pandemic hit leisure and hospitality hard and contributed to a -2.0 per cent annual total return for the alternatives sector, outweighing a positive contribution from residential property and healthcare.
Offices delivered a mixed performance, helped by low levels of new supply but there were concerns about the impact of working from home and social distancing in workplaces, which affected sentiment. The sector delivered a -1.4 per cent total return for the year, with modest positive total returns in the City and Rest of UK office markets being outweighed by negative total returns in the West End and Rest of South East. Both occupiers and investors were hesitant to commit in uncertain times and there appears to be a flight to quality in the sector.
Industrials and logistics pulled ahead of the field in 2020 to deliver a total return of 9.4 per cent. The South East, including London, was once again ahead of the regions. Distribution out-performed standard industrials, for the first time since 2013. All segments of the industrial and logistics market experienced stronger performance. The accelerated shift to online retailing and the need for storage space during lockdown boosted take-up to record levels during the year.
The pandemic inevitably depressed GDP, with the first estimate pointing to a 9.9 per cent drop in 2020. With many businesses closed and supplies disrupted, companies have often struggled to raise revenue and pay rent. Rent collection rates have been impacted across the market with offices and industrials relatively resilient but retail and leisure seeing a sharp fall. The government imposed a moratorium on landlord’s actions to enforce payment of rent which has been extended to at least June 2021. MSCI data shows a 4.2 per cent fall in net operating income growth in 2020, with a positive performance from offices and industrials being outweighed by falls in retail and alternatives.
Against a weak economic backdrop, open market value rental growth at the all-property level was -3.1 per cent in 2020, the lowest since the global financial crisis and this reflects long-term structural issues in retail as well as the effects of the pandemic.
MSCI data for standing investments showed modest yield compression during the year at the all-property level despite the economic headwinds. Inward yield movement for industrials and residential contrasted with an outward shift for retail and hotels and broad stability for offices.
Valuation and Portfolio
The total return from the portfolio in the year was -4.8 per cent compared with the MSCI return of -2.0 per cent. The Company’s performance has been affected by valuation falls, primarily on the retail holdings most impacted by Covid and the lockdowns. Broadway, Wimbledon with its exposure to leisure, non-essential retail and hospitality saw its valuation fall by 24.2 per cent as capitalisation rates moved out, rents rebased and the valuation reflected the concessions provided to tenants. St Christopher’s Place Estate, our largest holding fell by 17.0 per cent. Valuers also adopted a blanket assumption on all retail, restaurant and leisure properties of allowing for 3-6 month’s rent as a capital deduction. Elsewhere the valuers moved out capitalisation rates on all properties with short unexpired lease terms and those impacted by Covid. For instance, the valuation of The Leonardo Building, Crawley fell by 22.0 per cent due to the tenant Virgin Atlantic negotiating a rent concession as detailed below and 3 The Square, Stockley Park by 19.0 per cent due to a short unexpired lease term.
| Sector Analysis (% of total property portfolio) | ||
| 2020 (%) |
2019 (%) |
|
| Offices | 42.2 | 40.9 |
| Retail | 18.5 | 21.8 |
| Retail Warehouses | 10.0 | 10.0 |
| Industrial | 19.1 | 17.5 |
| Alternative | 10.2 | 9.8 |
Source: BMO REP Asset Management plc
| Geographical Analysis (% of total property portfolio) | ||
| 2020 (%) |
2019 (%) |
|
| South East | 20.3 | 21.6 |
| London – West End | 35.4 | 36.5 |
| Eastern | 1.7 | 1.9 |
| Midlands | 12.4 | 11.1 |
| Scotland | 13.3 | 13.0 |
| North West | 12.7 | 11.9 |
| Rest of London | 1.6 | 1.5 |
| South West | 2.6 | 2.5 |
Source: BMO REP Asset Management plc
| Lease Expiry Profile | ||
| At 31 December 2020 the weighted average lease length for the portfolio, assuming all break options are exercised, was 6.0 years (2019: 6.6 years) | ||
| % of leases expiring (weighted by rental value) | 2020 (%) |
2019 (%) |
| 0 – 5 years | 47.5 | 45.1 |
| 5 – 10 years | 34.1 | 34.9 |
| 10 – 15 years | 12.0 | 12.6 |
| 15 – 25 years | 6.4 | 7.4 |
Source: BMO REP Asset Management plc
The largest occupiers, based as a percentage of contracted rent, as at 31 December 2020, are summarised as follows:
| Income Concentration | |
| Company name | % of Total Income |
| Artemis Investment Management LLP | 4.3 |
| Apache North Sea Limited | 4.0 |
| GB Gas Holdings Limited | 4.0 |
| CNOOC Petroleum Europe Limited | 4.0 |
| Kimberly-Clark Limited | 3.8 |
| Virgin Atlantic Limited | 3.0 |
| JP Morgan Chase Bank | 3.0 |
| University of Winchester | 2.9 |
| Transocean Drilling UK Limited | 2.8 |
| Mothercare UK Limited* | 2.6 |
| Total | 34.4 |
Source: BMO REP Asset Management plc
*has a rental guarantee from a Mothercare company not in administration. The lease was assigned to Ceva Logistics in March 2021.
Income analysis
We started the year with a vacancy rate of 4.8 per cent and due to the leasing activity detailed in this report we were able to reduce this over the year to 2.9 per cent, excluding property being developed or refurbished. Whilst this rate is extremely low, there is an expectation it will increase as the full economic impact of Covid-19 takes effect.
As Managers, we have been focussed on rent collection with rental collection statistics fast becoming the main metric of the Company’s performance. BMO REP has an in-house team which provides a full service across rent demand, credit control, service charge administration and purchase ledger. The asset managers, supported by this team, have been proactively engaged with many of the Company’s tenants, assessing and responding to requests for support on a case by case basis. There is ‘no one size fits all solution’. It is apparent that these strong and historic relationships, combined with robust controls and processes, have supported rent collection during such challenging times. The Government has provided commercial tenants with well-publicised protection from landlords seeking to take legal action to recover arrears of rent. It has recently been announced that this protection has been extended until 30 June 2021. Unfortunately, there are a small number of tenants with strong businesses who are using this protection not to pay rent or to engage.
At 31 December 2020 the weighted average lease length for the portfolio, assuming all break options are exercised, was 6.0 years (2019: 6.6 years).
Retail
The enforced closure of all non-essential retail has increased the stress on many retailers and has led to a torrid period of increased administrations, CVA's and high-profile failures. At our retail parks the ‘essential retailers’ such as Asda, Lidl, M&S Foodhall, Boots and B&Q have remained open and managed to accommodate customers into their stores by adopting Covid safe practice. Although restricted to selling essential goods with limited customer numbers in store their annual figures, in the main, demonstrate reasonable trade throughout the pandemic. Most non-essential retailers saw a welcome boost in sales following the end of the first lock-down in June 2020. The car parks at Solihull and Newbury were busy and consistently operating at approximately 80 per cent capacity, with figures even higher in December. Hoping that the second lock down in November 2020 would be short-lived was perhaps wishful thinking. Many soon found themselves in Tier 4 and any pre-Christmas recovery was short lived before entering the latest lockdown.
Although revenues are down significantly, in some cases non-essential retailers have managed to prop up sales through increased online orders and click and collect facilities from “shuttered” stores. This was very evident at Newbury Retail Park, by the likes of Mountain Warehouse, Hobbycraft and Currys PC World. Despite these initiatives, in some cases stock supply and logistics issues have hampered sales. However, where our tenants have both retail park and town centre stores, they were anecdotally reporting stronger performance from their retail parks as shoppers favoured an outdoor environment, convenient car parking and larger store formats where it is easier to maintain social distancing.
The welcome news that non-essential retail will be able to re-open on 12 April could not come soon enough. The general consensus appears to be that there will be a repeat of the trading experienced following the lifting of the first lockdown in June 2020 and hopefully even greater propensity for frustrated customers to spend, knowing that the vaccination programme is progressing well and there is light at the end of the tunnel. Newbury and Solihull are quality assets with strong catchment areas that have benefitted from a number of substantial developments and new store openings which should help drive future footfall.
We are able to report the following progress:
Newbury (retail warehouse)
The construction works at Newbury continued throughout lockdown 1.0. and all units completed on programme and budget. The new 19,500 sq. ft. Lidl foodstore was handed over in June and they opened to the public during October. As previously reported Lidl entered into a 25-year lease (break at year 20) with CPI linked reviews at a rent of £430,000 per annum and the rent-free period has expired. Monitoring of the car park revealed a marked increase in vehicle numbers entering the retail park, which can mainly be attributed to the opening of the new Lidl store. The adjoining 9,500 sq. ft. unit has also completed and is being marketed to let.
The store created for Deichmann Shoes (rent £168,000 per annum) is now open and trading, unfortunately the letting of the adjacent unit fell through and it will be remarketed after lockdown 3.0.
Following exhaustive negotiations, we elected not to renew the leases with Next and New Look, the former offering uncompetitive terms and the latter subject to a CVA which resulted in a rent which was linked solely to turnover. These two units adjoin one another and comprise approximately 20,000 sq. ft. of retail space. In February 2021 contracts were exchanged with TJ Morris, trading as Home Bargains, to take both units on a new 20-year lease (no breaks) at a rent of £17.50 per sq. ft. Construction has commenced to combine the units. This new store will be an added attraction to the Park being a further move towards more convenience-based retailing which is expected to be more sustainable in out of town locations. There are other asset management initiatives that are in advanced negotiations and it is hoped that these can be wrapped up as we exit lockdown 3.0.
Solihull (retail warehouse)
The demolition and redevelopment of the former 36,500 sq. ft. Homebase unit progressed throughout the year uninterrupted by Covid restrictions. Marks & Spencer entered into a new 20-year lease (breaks at year 10 and 15) for a redeveloped 35,000 sq. ft. store combined with the adjacent M&S Food Hall. The combined unit creates 82,000 sq. ft. providing a new full provision general merchandise store, a larger food hall and M&S café.
The construction of the new unit and refurbishment of the shopfront of the Food Hall completed on programme and to budget. The new M&S store was handed over to commence shop-fitting on 19 January 2021 and M&S is expected to be ready to open their new flagship store in June 2021. The new lease is at a rent of £1.373 million subject to a rent-free period which expires in May 2021.
M&S have announced they will be closing their town centre store in Solihull and as such this reinforces the strength and draw of Sears Retail Park and we have confidence that upon opening, footfall will increase and other retailers will be attracted to the location.
Broadway, Wimbledon, London SW19 (retail/alternatives)
The capital value of Wimbledon has fallen 24.2 per cent over the year. Rent collection for the asset has been significantly impacted, with a cinema and a gym accounting for 48 per cent of the rental value and being unable to trade for substantial periods of time. Rental concessions and deferred repayment plans have been agreed with both Odeon and Nuffield Gym and further concessions agreed with a number of the other tenants. As a consequence of the latest lockdown it is anticipated further concessions will be required. As an essential retailer, Morrisons continues to trade throughout the lockdowns and this supermarket accounts for 30 per cent of contracted rents.
We continue to work closely with Merton Council in looking at the options for the Company’s ownership, as part of the Wimbledon Town Centre Masterplan. This could provide the Company with a valuable redevelopment opportunity, enhancing future prospects for this asset.
St. Christopher’s Place Estate (retail/office/alternatives)
During the past 12 months footfall across Central London has been severely supressed due to restrictions on movement and unnecessary travel, the decline in both domestic and international tourists and government advice to office workers to work from home. St Christopher’s Place with its added reliance on public transport has been significantly impacted and disrupted by the measures.
The non-essential shops and food and beverage (F&B) tenants are closed at present due to the current Lockdown, with the exception of takeaway and delivery services. The recently announced roadmap out of Lockdown advises that non-essential shops are expected to open ‘not before’ 12th April, with indoor hospitality earmarked for 17th May. There is an opportunity for F&B tenants to offer outside dining from 12th April if conditions allow. Since the first Lockdown non-essential shops will have lost approximately 8 months of trade and restaurants 9 months (excluding the opportunity to trade externally). This includes the busiest time of the year in the run up to Christmas.
When Lockdown 1.0. restrictions were lifted in Summer 2020, the majority of the estate’s tenants opened and footfall levels grew incrementally week on week, reaching around 50 per cent of the previous year’s levels with weekly footfall growth outperforming the rest of the West End. The temporary road closure of James Street to vehicles was a success, providing the estate’s F&B tenants with the opportunity to create additional external dining space and to accommodate safe physical distancing practices, which encouraged people to visit the area. The ‘Eat Out to Help Out’ scheme during August was particularly beneficial to restaurant turnover.
By Autumn 2020, the estate was recovering reasonably well and becoming a vibrant destination once again, particularly with our restaurant offer. However, the second lockdown in November followed by the imposition of Tier 4 controls in London and the introduction of Lockdown 3.0. meant that all non-essential retail and restaurants had to close once more and have remained shut ever since.
Across the estate, rent support has been offered to tenants on a case by case basis with many of the concessionary agreements expected to remain in place until at least the end of this year. It is hoped this support will ensure our tenants will be in a position to benefit from re-opening and the expected bounce back and recovery during the second half of this year.
The capital value of St Christopher’s Place has fallen 17.0 per cent over the year. This is the result of pressure on both the retail and F&B sectors, with both a decline in headline rental values and capitalisation rates moving out. In particular, the holdings on Oxford Street have been hit with a significant rebasing of rents.
The estate is the principal food and beverage destination for the area around the Bond Street/Oxford Street interchange and is a core investment with a history of strong performance. Oxford Street is currently experiencing many challenges with high profile retail failures resulting in increasing vacancy levels, especially amongst larger shops and department stores. Rental values along the street have rebased, falling from a peak of £990 per sf ft. to £750 per sq. ft.
Despite the challenges faced above and looking forward, there are positive developments for the Estate. Westminster City Council are supportive of extending the temporary road closure of James Street and separately, they have reportedly committed £150m to kick start the Oxford Street District Improvement programme, to encourage inward investment in advance of the Elizabeth Line opening in 2022. This investment and focus to support the immediate area surrounding St Christopher’s Place is a positive response to promote the recovery of Oxford Street and London’s West End.
Unsurprisingly, there were some tenant casualties during the year. Of particular note were Carluccios at 3-5 Barrett Street who undertook a CVA with the Administrators securing a buyer for the business. Despite the new buyer, our preference was to agree a new lease with a different operator as reported below. Aldo at 372 Oxford Street is in Administration and the store remains closed and the rent was paid through a bank guarantee until January 2021. Pizza Express: 21-22 Barrett Street has undertaken a CVA but this restaurant is unaffected and will remain open with no impact on rent.
Notwithstanding the challenges highlighted above, there has been a number of important and successful leasing deals centred around the repositioning of James Street which bode well for when the Estate is allowed to re-open.
Letting Activity
• New letting to Flat Iron at 42-44 James Street. Flat Iron is a steak restaurant accessible to all with eight sites in Central London. This offering will complement the existing choice of establishments along James Street.
• 36 James St: following the surrender of the T Burrows lease, a new letting completed to ‘Chrome’ which is a coffee and sweet treats café concept.
• Completed on a new letting to a southern Asia grab & go food concept, ‘Papa-dum’ at 20 James St. in quarter 1 2021.
• The contractor completed building works at 54/56 James St and a new letting to ‘Sidechick’ completed in March 2021. This restaurant is a new concept from the owners of Patty and Bun, an existing tenant on the Estate, and underwrites their support for the location.
• Secured a new letting of office space at 3-5 Barrett Street and completed a number of lease renewals with office tenants.
• A surrender of the Carluccio’s lease was completed at the end of September simultaneously with a re-letting to San Carlo Holdings Ltd (part of the San Carlo restaurant group) on a new 15-year lease at rent in excess of £400,000 pa. This will be a significant new operator for the estate, and it is encouraging that such a high-profile restaurateur recognises the long-term benefits and opportunity presented at the location.
We are encouraged by these new leases which give an indication that some occupiers are looking beyond the short-term challenges presented by Covid for the Estate to the opportunities that should exist longer term.
Offices
The past 12 months have been challenging for the Office sector. Understandably Covid and the Government’s advice to work from home has significantly affected office take up and performance is therefore well down on the long-term average. Availability has increased largely due to the amount of ‘grey space’ being brought to the market by occupiers wanting to reduce their total floor space exposure. Central London has seen availability increase twofold with a vacancy rate in excess of 7 per cent but this is biased towards small floors and poor specification space. More people will work in an agile fashion but the early prognosis of the death of the office appears exaggerated and many large corporates now confirm the expectation of a return to near normal office occupation citing, productivity, collaboration, culture and wellbeing as key reasons. It is expected that offices will be used slightly differently in the future, majoring on collaboration space, wellness, flexibility and a flight to quality.
An office building that has been under the spotlight is The Leonardo Building, Crawley, let to Virgin Atlantic. Much of lockdown 1.0 was spent negotiating with Virgin as part of their corporate financial restructuring. We contracted a legal agreement granting them a 12-month rent free period, spread over 5 years by rebasing the rent from £23.00 to £18.90 per sq. ft. At the end of this 5-year period Virgin have the option to take a 2.5-year reversionary lease on the property or to repay 50 per cent of the monetary value of the concession back to the Company.
Notwithstanding the current challenges, the Company has a high quality and diversified office exposure with a mix of city centre and out of town locations and although the occupational markets were subdued there was some encouraging activity in the portfolio.
Cassini House, London SW1 is now fully occupied following the letting to Mitsui Fudosan in February 2020. This is a refurbished freehold trophy asset in the heart of St James’s providing a high-quality secure income stream.
Substantial progress was made at Watchmoor Park, Camberley where the refurbishment of two floors and the reception completed. These works were fully funded by the settlement of a dilapidations claim with the former tenant. A letting of 7,200 sq. ft. on the second floor completed to Muller (Milk and More) at a rent of £23.00 per sq. ft. for a term of 5 years with a tenant option to renew for a further 10 years. The agreed rent is substantially ahead of the rent paid by the previous tenant of £14.00 per sq. ft. and an uplift on the rents achieved on lettings in 2019. Terms have been agreed to let the remaining 12,500 sq. ft. of vacant space in the property and this is now under offer.
At 2-4 King Street, London SW1, a lease re-gear with one of the tenant’s resulted in a further 5-year term certain on two of the floors. At 17a Curzon Street, London W1 the refurbished fourth floor let during the year. The first and second floors which are also refurbished are still available to let but with renewed interest since the New Year.
Industrial and Logistics
Negotiations with tenants on lease events were delayed during the first lockdown, however, these gained momentum later in the year and we are able to report a number of successful and value accretive outcomes where we have negotiated lease renewals, let properties and removed credit risk from the portfolio.
During the year Mothercare fully honoured their Plc guarantor obligations on their logistics unit at Daventry by completing an assignment of the lease following their UK trading entity’s administration. In June, Clipper Logistics took a short-term sub-lease of this 300,000 sq. ft. facility on behalf of the NHS to provide storage and distribution of PPE. In March 2021 Mothercare assigned their lease to Ceva Logistics, one of the largest third-party logistics operators in Europe. This will enable Ceva Logistics to service a major contract from the property which is highly accessible and adjacent to junction 18 of the M1 motorway. There has been no loss of income to the Company due to Mothercare’s administration.
A reversionary lease completed with the existing tenant at G Park, Liverpool, a 360,000 sq. ft. distribution warehouse. The 10-year lease with DHL Supply Chain Limited from March 2021 has the benefit of a tenant break at the end of the fifth year and the rent contracted at £5.25 sq. ft. reflects an uplift in excess of 10 per cent on the current rent. DHL were granted a 6 months rent-free period by way of 12 months at half rent. This resulted in a valuation uplift of £4.475m and the Company has de-risked the portfolio to its second largest lease expiry in 2021.
In February 2021, a new letting of Hurricane 47, Estuary Business Park contracted to an on-line rug retailer. This is good news as the leasing of this 47,000 sq. ft. unit had taken longer than expected. Kukoon Rugs have entered into a 15-year lease (tenant break at 10 years) at a rent of £290,000 per annum and were granted 6 months’ rent free with a further 6 months by way of 12 months at half rent.
At the Cowdray Centre, Colchester we secured detailed planning consent for the demolition of existing properties and the development of a new trade scheme totalling approximately 30,000 sq. ft. It is expected we will commence the first phase of this development during the course of this year.
Elsewhere we have agreed to defer tenant break clauses for Amazon in Southampton and at Hams Hall, Birmingham where Jaguar Land Rover want the future flexibility to allow them to control and lease property direct.
Good progress has also been made on a number of other leasing events. Terms have been agreed for the lease renewal of Kimberly Clark at their distribution warehouse located in Chorley and solicitors instructed to prepare the new lease which is expected to complete shortly. This lease event is the largest lease expiry due in 2021 and together with the DHL commitment at Liverpool removes a significant amount of risk from the portfolio.
Industrial sale
The sale of Phase 2 of the former Ozalid Works site in Colchester completed to Persimmon Homes at a price of £5.5 million on 30 July 2020. This was a disposal of non-income producing land and obsolete industrial buildings with planning consent for residential development.
The Alternative property sector
Alternatives comprise 10.2 per cent of the portfolio and relate to the purpose-built student accommodation in Winchester, residential properties at St. Christopher’s Place and the leisure units at Wimbledon Broadway. Winchester continues to benefit from a long lease and annual RPI linked rent reviews. The University have paid their rent in full and on time. The occupation of the short-term residential units at St Christopher’s Place was unsurprisingly poor during lockdown.
Outlook
The Company’s largest holding has been severely impacted but we believe Central London will recover and prime West End real estate with strong hospitality linkages such as St Christopher’s Place will benefit from both an initial bounce back when restrictions are lifted and from a longer term recovery. A substantial number of properties in the portfolio have significant asset management opportunities which need to be worked through over the next couple of years. We are confident these will be accretive to both income and value.
As the vaccination rollout becomes more widespread and restrictions are finally eased or lifted, we will see greater certainty returning to the market, lifting confidence and valuations alike. Brexit has been somewhat overshadowed by the pandemic but, now triggered, it is causing some disruption which may be more than frictional. As an asset class, real estate will continue to be supported by a low interest rates environment, providing it with a yield advantage over most other domestic and overseas asset classes.
While the adjustment in retail may have further to go, it is important to distinguish between pandemic-related change and permanent structural change. The Company’s portfolio of retail assets is of high quality, with significant potential for further development as we re-position them to grocery and convenience led retail propositions. The office sector outlook is heavily dependent on the balance struck between home-working and the need for office-based collaborative working and social interaction. The way offices are used will change to a more agile model and to have more collaborative space. There has been much commentary over future demand for offices, but we are now seeing many companies restating the future need of offices to support the wellbeing of staff. The polarisation seen between prime and secondary office stock is likely to become more pronounced. The need for flexibility either in the lease structure, whether manifested as shorter lease lengths or turnover rents, or indeed as re-purposing, is expected to persist. Most importantly, is to acknowledge the variation in performance at the asset as well as sector level. Stock selection and a forensic attention to detail in asset management will be key to delivering performance.
Whilst the portfolio positioning has been challenging during the pandemic, it remains invested in prime real estate with positive ESG credentials which will be further enhanced as ESG becomes critically important and a key determinant of performance. Portfolio positioning will be reviewed, and on the back of a robust investment process a number of targeted sales will be brought forward with proceeds re-invested into sectors and properties which have a long-term structural future.
Richard Kirby and Matthew Howard
Fund Manager
BMO REP Asset Management plc
BMO Commercial Property Trust Limited
Consolidated Statement of Comprehensive Income (audited)
|
Year ended
31 December 2020 |
Year ended
31 December 2019 |
||
| £000 | £000 | ||
| Revenue | |||
| Rental income | 65,273 | 64,380 | |
| --------- | --------- | ||
| Total revenue | 65,273 | 64,380 | |
| (Losses)/gains on investment properties | |||
| Unrealised losses on revaluation of investment properties | (121,306) | (63,045) | |
| (Losses) / Gains on sale of investment properties realised | (22) | 1,321 | |
| ---------- | ---------- | ||
| Total (loss) / income | (56,055) | 2,656 | |
| ---------- | ---------- | ||
| Expenditure | |||
| Investment management fee | (6,692) | (7,446) | |
| Other expenses | (9,448) | (5,877) | |
| ---------- | ---------- | ||
| Total expenditure | (16,140) | (13,323) | |
| ----------- | ----------- | ||
|
Operating loss before finance costs and taxation |
(72,195) |
(10,667) |
|
| ----------- | ----------- | ||
| Net finance costs | |||
| Interest receivable | 49 | 42 | |
| Finance costs | (11,210) | (10,916) | |
| ----------- | ----------- | ||
| (11,161) | (10,874) | ||
| ----------- | ----------- | ||
| Loss before taxation | (83,356) | (21,541) | |
| Taxation | (890) | (934) | |
| ---------- | ---------- | ||
| Loss for the year | (84,246) | (22,475) | |
| ---------- | ---------- | ||
| Other comprehensive income | |||
| Items that are or may be reclassified subsequently to profit or loss | |||
| Movement in fair value of effective interest rate swaps | (20) | (319) | |
| ---------- | ---------- | ||
| Total comprehensive loss for the year, net of tax | (84,266) | (22,794) | |
| ---------- | ---------- | ||
| Basic and diluted earnings per share | (10.5)p | (2.8)p |
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.
BMO Commercial Property Trust Limited
Consolidated Balance Sheet (audited)
| As at 31 December 2020 £000 |
As at 31 December 2019 £000 |
|
| Non-current assets | ||
| Investment properties | 1,205,293 | 1,314,973 |
| Trade and other receivables | 20,593 | 20,816 |
| ------------ | ------------ | |
| 1,225,886 | 1,335,789 | |
| ------------ | ------------ | |
| Current assets | ||
| Investment properties held for sale | - | 5,235 |
| Trade and other receivables | 11,589 | 7,561 |
| Taxation receivable | 134 | 112 |
| Cash and cash equivalents | 34,896 | 25,894 |
| ------------ | ------------ | |
| 46,619 | 38,802 | |
| ------------ | ------------ | |
| Total assets | 1,272,505 | 1,374,591 |
| ------------ | ------------ | |
| Current liabilities | ||
| Trade and other payables | (22,644) | (17,197) |
| ------------ | ------------ | |
| (22,644) | (17,197) | |
| Non-current liabilities | ||
| Trade and other payables | (1,677) | (2,119) |
| Interest-bearing loans | (308,303) | (308,366) |
| Interest rate swaps | (237) | (217) |
| ------------ | ------------ | |
| (310,217) | (310,702) | |
| ------------ | ------------ | |
| Total liabilities | (332,861) | (327,899) |
| ------------ | ------------ | |
| Net assets | 939,644 | 1,046,692 |
| ------------ | ------------ | |
| Represented by: | ||
| Share capital | 7,994 | 7,994 |
| Special reserve | 589,593 | 589,593 |
| Capital reserve – investments sold | (16,720) | (20,725) |
| Capital reserve – investments held | 245,613 | 370,946 |
| Hedging reserve | (237) | (217) |
| Revenue reserve | 113,401 | 99,101 |
| ------------ | ------------ | |
| Equity shareholders’ funds | 939,644 | 1,046,692 |
| ------------ | ------------ | |
| Net asset value per share | 117.5p | 130.9p |
BMO Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2020 (audited)
|
Share Capital £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 2020 | 7,994 | 589,593 | (20,725) | 370,946 | (217) | 99,101 | 1,046,692 |
| Total comprehensive income for the year | |||||||
| Loss for the year | - | - | - | - | - | (84,246) | (84,246) |
| Movement in fair value of interest rate swaps |
- |
- |
- |
- |
(20) |
- |
(20) |
| Transfer in respect of unrealised losses on investment properties |
- |
- |
- |
(121,306) |
- |
121,306 |
- |
| Losses on sale of investment properties realised |
- |
- |
(22) |
- |
- |
22 |
- |
| Transfer of prior years’ revaluations to realised reserve |
- |
- |
4,027 |
(4,027) |
- |
- |
- |
| Total comprehensive income for the year |
- |
- |
4,005 |
(125,333) |
(20) |
37,082 |
(84,266) |
| Transactions with owners of the Company recognised directly in equity | |||||||
| Dividends paid | - | - | - | - | - | (22,782) | (22,782) |
|
At 31 December 2020 |
7,994 |
589,593 |
(16,720) |
245,613 |
(237) |
113,401 |
939,644 |
Consolidated Statement of Changes in Equity
for the year ended 31 December 2019 (audited)
|
Share Capital £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 2019 | 7,994 | 589,593 | 1,708 | 410,237 | 102 | 107,814 | 1,117,448 |
| Total comprehensive income for the year | |||||||
| Loss for the year | - | - | - | - | - | (22,475) | (22,475) |
| Movement in fair value of interest rate swaps |
- |
- |
- |
- |
(319) |
- |
(319) |
| Transfer in respect of unrealised losses on investment properties |
- |
- |
- |
(63,045) |
- |
63,045 |
- |
| Gains on sale of investment properties realised |
- |
- |
1,321 |
- |
- |
(1,321) |
- |
| Transfer of prior years’ revaluations to realised reserve |
- |
- |
(23,754) |
23,754 |
- |
- |
- |
| Total comprehensive income for the year |
- |
- |
(22,433) |
(39,291) |
(319) |
39,249 |
(22,794) |
| Transactions with owners of the Company recognised directly in equity | |||||||
| Dividends paid | - | - | - | - | - | (47,962) | (47,962) |
|
At 31 December 2019 |
7,994 |
589,593 |
(20,725) |
370,946 |
(217) |
99,101 |
1,046,692 |
BMO Commercial Property Trust Limited
Consolidated Statement of Cash Flows (audited)
| Year ended 31 December 2020 | Year ended 31 December 2019 | |
| £000 | £000 | |
| Cash flows from operating activities | ||
| Loss for the year before taxation | (83,356) | (21,541) |
| Adjustments for: | ||
| Finance costs | 11,210 | 10,916 |
| Interest receivable | (49) | (42) |
| Unrealised losses on revaluation of investment properties | 121,306 | 63,045 |
| Losses / (gains) on sale of investment properties realised | 22 | (1,321) |
| Increase in operating trade and other receivables | (3,972) | (2,617) |
| Increase in operating trade and other payables | 5,087 | 1,307 |
| ----------- | ----------- | |
| Cash generated from operations | 50,248 | 49,747 |
| ----------- | ----------- | |
| Interest received | 49 | 42 |
| Interest and bank fees paid | (10,528) | (10,549) |
| Tax paid | (890) | (2,076) |
| ----------- | ----------- | |
| (11,369) | (12,583) | |
| ----------- | ----------- | |
| Net cash inflow from operating activities | 38,879 | 37,164 |
| ----------- | ----------- | |
| Cash flows from investing activities | ||
| Sale of investment properties | 5,585 | 34,428 |
| Capital expenditure on investment properties | (12,080) | (7,863) |
| ----------- | ----------- | |
| Net cash (outflow)/inflow from investing activities | (6,495) | 26,565 |
| ----------- | ----------- | |
| Cash flows from financing activities | ||
| Dividends paid | (22,782) | (47,962) |
| Issue costs for Barclays £100m loan facility extension | (600) | - |
| ----------- | ----------- | |
| Net cash outflow from financing activities | (23,382) | (47,962) |
| ----------- | ----------- | |
| Net increase in cash and cash equivalents | 9,002 | 15,767 |
| Opening cash and cash equivalents | 25,894 | 10,127 |
| ----------- | ----------- | |
| Closing cash and cash equivalents | 34,896 | 25,894 |
| ----------- | ----------- |
BMO 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.
Consideration has been given to the impact from Covid-19 which has had a significant effect on the commercial real estate market. This has resulted in a number of the residual risks increasing as highlighted in the table below.
Principal risks and uncertainties faced by the Company are described below.
• Market – the Company’s assets comprise direct investments in UK commercial property and it is therefore exposed to movements and changes in that market. This includes political and economic factors such as Brexit and the impact of Covid-19.
• 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, climate 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 times. Changes to tax legislation could have an adverse financial impact.
• Operational – The Group outsources its operations to the Managers’ and other third-party service providers. Any failure of those providers internal control systems, and in particular the Managers' accounting systems or general disruption to their businesses, through cyber or other threats could lead to an inability to provide accurate reporting and monitoring control or loss of data, 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, as well as a review by the Audit and Risk Committee of the Internal Control reports prepared in accordance with AAF(01/06).
To mitigate investment and strategic risks the Board regularly monitors the investment environment and the management of the Company’s property portfolio. The Managers seek to mitigate the portfolio 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.
As well as considering current risks quarterly, the Board and the Investment Manager carry out a separate annual assessment of emerging risks when reviewing strategy and evaluate how these could be managed or mitigated. However, the Board considers that the line between current and emerging risks is often blurred and many of the emerging risks identified are already being managed to some degree where their effects are beginning to impact.
The principal emerging risks identified are outlined below:
• The structural changes in the retail market is a significant emerging risk, particularly as the prominence of online shopping continues to increase. Over the last two years the market has experienced a number of high-profile retailers going out of business, downsizing, closing stores and negotiating flexible leases at lower rents. With an increasing number of vacant stores, the challenge is to find different uses for commercial property, whether that’s for residential, leisure, food and beverage, or other alternative uses.
• There is also the potential for structural change in the office market as many companies look to the feasibility of implementing a hybrid model for staff, which would involve them working partly in the office and partly at home. There is uncertainty how this will play out and it continues to be monitored.
• The ESG agenda is a very prominent one and will continue to grow in its importance to shareholders, future investors and our customers. We have already made significant strides in this area and we will continue to do so. The increasing market attention being paid to climate risk and social impact have been notable features of the evolving agenda over the last year, and those need to be considered more explicitly in property investment and management activity than has been the case previously.
• The political climate continues to be uncertain and as well as the ongoing effects of Brexit, there are strong calls for another Scottish referendum. During times of heightened uncertainty, a key benefit to the Company is its closed-ended structure, in that it is not forced to sell property during stressed times.
•Legislative changes are always a risk, particularly where they are politically driven and may cause changes in our property allocation. Such issues might involve some style of rent control or an escalation of regulatory oversight on ESG factors, particularly in responding to the climate emergency.
• The impact of technology increasingly means that things change very quickly which is an opportunity as well as a risk, and it is important that we continue to keep abreast of what is happening in this space. This has been compounded over the last year as the reliance on technology, particularly with regards to home working has increased.
• The effects of Covid-19 has been the dominant risk for the global economy, and by extension the UK property market. The effects have been extensive with significant disruption to all sectors worldwide. This has had an ongoing effect on many of our principal risks and the Board meet regularly with the Manager to assess these risks and how they can be managed. More detail is included in the Chairman’s Statement and the Manager’s Report. Of particular concern has been the Company’s cash flow, given the number of expected defaults from tenants unable to trade or operating at restricted levels. Against this background, the Board took the decision to suspend the monthly dividend in April 2020 to maximise the cash reserves available. Collection rates have been at c.87 per cent since the outbreak, which is ahead of those anticipated and a dividend of 50 per cent of the original monthly rate was reintroduced in August 2020 before being increased to 70 per cent in December 2020. In addition, the Group is in regular contact with its lenders in case the decline in rent collected causes certain covenants to be breached or become close to being breached.
To help manage emerging risks and discuss other wider topics affecting property, the Board invites to Board Meetings various experts to give their views and promote discussion. The Board considers having a clear strategy is the key to managing and mitigating emerging risk.
The highest residual risks encountered during the year, how they are mitigated and actions taken to address these are set out in the table below.
| Highest Residual Risks | Mitigation | Actions taken in the year |
| Unfavourable markets, poor stock selection, inappropriate asset allocation and underperformance against benchmark and/or peer group. This risk may be exacerbated by gearing levels. A challenging retail market where rental growth is generally negative and capital values are falling as capitalisation rates rebase. This market has witnessed many Company Voluntary Arrangements and administrations in the last two years. There is an increased risk of tenant defaults in the retail and leisure sectors since the Covid-19 outbreak, which has put the level of dividend cover at risk. |
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 and is monitored by the Board. The Manager provides regular information on the expected level of rental income that will be generated from 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 Board reviews the Manager’s performance at quarterly Board meetings against key performance indicators and the ongoing strategy is reviewed and agreed. The Board has met on a significantly more frequent basis since the outbreak of Covid-19 where it has received trading updates from the Manager and carefully reviewed cash forecasts. Rental collection in the retail and leisure sectors has been negatively impacted by Covid-19. The Manager is in regular contact with tenants and rental collection is a primary focus. Collection rates since the Covid-19 outbreak have been ahead of original expectations. |
|
Risk increased in the year under review |
||
| The share price has been trading at a discount and this has widened significantly since the Covid-19 outbreak. This imbalance, combined with the recent share price volatility can diminish the attractiveness of the Company to investors. | The discount is reported to and reviewed by the Board at least quarterly. Share buybacks as a means of narrowing the discount or as an attractive investment for the Company are considered and weighed up against the risks. The position is monitored by the Manager on a daily basis and any material changes are investigated and communicated to the Board more regularly. | Investors have access to the Manager and the underlying team who will respond to any queries they have on the discount. The level of discount is kept under constant review and the number of meetings to discuss the discount increased during the year. The use of share buybacks as a method of reducing the discount were regularly considered during the year and it was decided that the priority was the preservation of cash and not being a forced seller of property. The use of share buybacks remain under consideration for the coming year. At the Board’s request there has been increased reporting from the broker on the market and the shareholder feedback they are receiving. |
|
Risk increased in the year under review |
||
| Insufficient cash resources to meet capital commitments or to fund the monthly dividend leading to emergency sale of assets and/or cutting of dividend level. | The Manager reports regularly on ongoing revenue collection, cash forecasting and compliance with banking covenants. The Group performs a solvency test in advance of each dividend payment. A detailed cash flow model is included in the Board papers, as well as a schedule on immediate cash commitments. | The Board have held additional ad-hoc Board Meetings since the Covid-19 outbreak which includes revenue and cash forecasting. A decision was made to suspend the dividend in April 2020 to protect cash resources. Collection levels were ahead of expectations and a monthly dividend of 50 per cent of the original rate was reintroduced in August 2020. A further increase to 70 per cent was introduced from December 2020. The rate and sustainability of the dividend remains under continual review. Compliance with the Group’s banking covenants remain under continual review. All covenant tests attached to the Group’s long-term debt with L&G were met throughout the year. Due to the challenges associated with the pandemic and the impact this has had on rental collection, there was a technical breach on the projected interest cover covenant test under the Barclays £50 million loan facility for the final quarter of 2020. Barclays have been supportive throughout the year and have confirmed that they remain supportive in the current environment and therefore a waiver was provided from this test for that quarter which also covers the first two quarters of 2021. |
|
Risk increased in the year under review |
||
| Improved shareholder communication is key in the current environment with valuations falling and the shares trading at a significant discount. It is important that all shareholders have access to information on how the Company is being run in order to make informed investment decisions, which will help to mitigate widespread selling of the Company’s shares. |
The Investment Manager and broker regularly meet significant shareholders. The Chairman and Senior Independent Director offer to meet the largest shareholder annually and are available to meet other shareholders. The website is kept up to date and contains relevant information; complying with any regulatory requirements. A comprehensive Annual Report is produced, and the consolidated financial statements are independently audited. |
The quality of communication continues to evolve. Actions during the year include: • Further refreshing of the Company’s website which has an enhanced look and feel, providing greater detail on the Company’s portfolio. • Detailed quarterly trading announcements. • An increased number of meetings with investors through meetings arranged by the Manager’s investor relations team. |
| 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 four years, a continuation vote in 2024 and a property portfolio with an average unexpired lease length of 6.0 years. It is believed that it will be possible to satisfactorily refinance the principal loan in 2024 and an assumption is made that the continuation vote is passed. The assessment has been undertaken, taking into account the principal risks and uncertainties faced by the Group, as identified above; 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 Group’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 April 2026, 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 for five years. 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 stress tested with projected returns comparable to the most extreme UK commercial property market downturn experienced in recent history. The model projects a worst case scenario of an equivalent fall in capital and diminution of rental values over the next two years, followed by three years of zero growth. The model demonstrated that even under these extreme circumstances the Group remains viable.
The Group continues to monitor the potential impact of the Covid-19 virus on cash flows. Particular attention is paid to the circumstances of all the tenants in the portfolio and detailed modelling is performed on a day to day basis as events unfold.
Rental collection since the outbreak has been in excess of the levels originally anticipated, with the level of rents collected since March 2020 to March 2021 averaging 87.3 per cent. In order to preserve cash resources, the Board made the decision to suspend the monthly dividend between April 2020 and July 2020 before reintroducing a monthly dividend at 50 per cent of the original level from August 2020 and 70 per cent from December 2020.
Detailed modelling has been performed, which has looked at the impact of the current crisis under increasingly negative scenarios and the modelling demonstrates that the Company remains viable.
The Group's £260 million long-term debt with L&G does not need to be refinanced until December 2024. We calculate that the market value of the properties secured under this loan would have to drop by 39 per cent before breaching the Loan to Value (‘LTV’) test on the facility. The loan interest cover test would only be breached by a fall in rental income of 71 per cent. We are comfortable that these covenants will continue to be met.
The Group’s Barclays £50 million loan facility is due to expire in July 2022 with an option to extend by two further one-year periods on receiving Barclays consent. The LTV test should remain comfortable with a fall of 61 per cent of the market value of the properties secured under this loan being required before breaching. The assets secured under this loan are provided by the St Christopher’s Place Estate and the level of rental income receivable from these assets has been significantly impacted with many tenants in the retail and hospitality sectors unable to trade for large periods since March 2020. There was a technical breach on the projected interest cover covenant test for the final quarter of 2020. Barclays have been supportive throughout the year and have confirmed that they remain supportive in the current environment and therefore a waiver was provided from this test for that quarter which also covers the first two quarters of 2021. The £50 million of borrowings currently drawn down from Barclays are not material to the operation of the Group.
Based on this 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 April 2026. For this reason, the Board also considers it appropriate to continue adopting the going concern basis in preparing the Annual Report and Consolidated Accounts.
BMO Commercial Property Trust Limited
Going Concern
After making enquiries and bearing in mind the nature of the Group’s business and assets, the Directors consider that the Group has adequate resources to continue in operational existence for the next twelve months. In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. They have considered the current cash position of the Group, forecast rental income and other forecast cash flows. Based on this information the Directors believe that the Group has the ability to meet its financial obligations as they fall due for the foreseeable future, which is considered to be for a period of at least twelve months from the date of approval of the accounts. For this reason, they continue to adopt the going concern basis in preparing the accounts.
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 2020, 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 within the Annual Report and Accounts for the year ended 31 December 2020 include details of related party transactions; and
- 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
Martin Moore
Director
BMO Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year ended 31 December 2020
1. Financial Instruments and investment properties
The Group’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 including an assessment of the impact of Covid-19. 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 2.872 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 2020. The revolving credit facility pays an undrawn commitment fee of 0.72 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 0.1 per cent as at 31 December 2020 (2019: 0.75 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.
2. Share Capital
There were 799,366,108 Ordinary Shares in issue at 31 December 2020 (2019: 799,366,108).
At 31 December 2020, the Company did not hold any Ordinary Shares in treasury (2019: nil).
3. Earnings per share
The basic and diluted earnings per Ordinary Share are based on the loss for the year of £84,246,000 (2019: loss £22,475,000) and on 799,366,108 (2019: 799,366,108) Ordinary Shares, being the weighted average number of shares in issue during the year.
4. List of Subsidiaries
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.
5. Capital Commitments
The Group had capital commitments totalling £5,200,000 as at 31 December 2020 (2019: £2,100,000). These commitments related mainly to contracted development work at the Group’s property at Solihull, Sears Retail Park.
6. These are not full statutory accounts. The full audited accounts for the year to 31 December 2020 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: bmocommercialproperty.com
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:
|
2020 |
2019 |
|||
|
£000 |
£000 |
|||
| Loss for the year | (84,246) | (22,475) | ||
| Add back: | Unrealised losses on revaluation of investment properties |
121,306 |
63,045 |
|
| Losses / (Gains) on sales of investment properties realised |
22 |
(1,321) |
||
| Profit before investment gains and losses | (a) | 37,082 | 39,249 | |
| Dividends | (b) | 22,782 | 47,962 | |
| Dividend Cover percentage (c= a/b) | (c) | 162.8% | 81.8% | |
Annualised Dividend Yield – The dividends paid during the year 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: 01481 745436
Fax: 01481 745186
Richard Kirby
BMO REP Asset Management plc
Tel: 0207 016 3577
Graeme Caton
Winterflood Securities Limited
Tel: 0203 100 0268
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