Results for the Year Ended 31 December 2021 (Au...
To: RNS
Date: 19 April 2022
From: BMO Commercial Property Trust Limited (the “Company”)
L.E.I. 213800A2B1H4ULF3K397
Results in Respect of the Year Ended 31 December 2021 (audited)
Headlines
· 37.8* per cent share price total return.
· 15.5* per cent portfolio total return.
· 122.2* per cent dividend cover on a cash basis (94.6 per cent on an accounting basis).
· 4.1* per cent dividend yield.
· 7.1 per cent dividend increase.
· Completed £199.5 million of property disposals as part of the strategy to adjust sector weightings.
· Completed £66 million of property acquisitions as part of the strategy to adjust sector weightings.
· In accordance with the Company’s strategy, the portfolio’s weighting to the industrial and logistics sector has increased to 30.6 per cent as at 31 December 2021 compared to 19.1 per cent at start of the calendar year.
· As at 31 December the Company had 46,260,278 shares held in treasury (5.8 per cent of ordinary shares in issue), acquired at an average discount to Net Asset Value of 22.3 per cent. Accretive to Net Asset Value by 2.2 pence per ordinary share.
· Rent collection currently received since the onset of the pandemic in March 2020 to December 2021 is 94.4 per cent.
· As at 31 December 2021, the void rate was 2.0 per cent, excluding property being developed or refurbished, which compares to a rate of 2.9 per cent at the start of the calendar year.
· 4.6 per cent reduction in absolute carbon emissions since 2019, the baseline year for the Company's net zero carbon pathway.
*see Alternative Performance Measures
Chairman’s Statement
We entered 2022 on a much brighter note with regard to the UK Commercial Property market. At the end of last year, we saw the Government produce its ‘Plan B’ in England with some lighter touch restrictions implemented, but this was short lived, and restrictions have now been fully relaxed as the severity of the Omicron variant saw lower levels of hospitalisations, boosted by the scale of the vaccination programme and so the economic impact should hopefully be more modest.
Very sadly we now face the added economic and geopolitical uncertainties arising from the war in Ukraine and the humanitarian disaster that is unfolding.
There was more activity in the capital markets, providing support to our strategic ambitions of repositioning our portfolio weightings. This included three significant sales at prices all comfortably ahead of valuation at the start of 2021 and raising gross sale proceeds of £199.5 million. At the end of the year, we made two acquisitions in the logistics sector totalling £66 million, with further investment committed over the coming months. Importantly, these properties also have strong environmental characteristics. As a result of both this activity and the strong capital growth experienced in the sector, our weightings to the industrial sector increased from 19.1 per cent at the start of the year to 30.6 per cent at year end and the portfolio now has a more balanced profile.
During 2021 we continued to progress the active asset management of the portfolio with some notable successes during the year especially in the industrial and logistics sector where we completed the renewal of the Company’s two largest lease expiries for the year. We also managed to reduce our void rate from the previous low of 2020 of 2.9 per cent to a new historical low of 2.0 per cent.
Property Market
The last six months have reaffirmed the resilience of the real estate sector in the face of multifaceted challenges. The all-property total return continued to improve significantly with momentum in the fourth quarter 2021 rolling over from the third quarter, with an all-property total return of 16.3 per cent (MSCI quarterly) in the twelve months to December 2021. Performance has been heavily influenced by the industrial sector with a total return of 36.5 per cent in the twelve months to December as structural changes continue to impact and more consumption moved online. Improvements have been noted in the retail sector, more so in retail warehousing and local convenience, and there is perhaps some more clarity emerging on the manner in which, and how frequently, offices will be used, allowing occupiers and investors once again to look for opportunities in this sector.
However, future property trends should be viewed against the economic backdrop of potential tax and interest rate increases, rising energy bills, price increases and upward pressure on inflation which will squeeze household incomes and will likely drag on consumer spending. However, the labour market remains strong with unemployment around 3.8 per cent according to latest ONS data.
Performance for the Year
The share price as at 31 December was 105.0p, a total return of 37.8 per cent for the year. The movement in the share price has been welcome, although the shares were still trading at a discount of 22.3 per cent to the year-end Net Asset Value (NAV) per share of 135.1p (compared to a 31.9 per cent discount as at 31 December 2020). There has been further positive movement in the share price since the year end and, despite continued market volatility, at the time of writing it was 116.2p, a discount of 14.0 per cent. The NAV total return for the year was 18.9 per cent. The total return for the portfolio was 15.5 per cent, compared with a total return of 16.3 per cent from the MSCI UK Quarterly Property Index (MSCI) and our capital return was 9.9 per cent, compared with 11.5 per cent for the Index.
The following table provides an analysis of the movement in the NAV per share for the year:
| Pence per share | |
| NAV per share as at 31 December 2020 | 117.5 |
| Unrealised increase in valuation of property portfolio | 10.9 |
| Realised gain on sale of properties | 4.3 |
| Share buybacks | 2.2 |
| Movement in fair value of interest rate swap | 0.1 |
| Other net revenue | 4.3 |
| Dividends paid | (4.2) |
| NAV per share as at 31 December 2021 | 135.1 |
The industrial and logistics sector was the standout in terms of performance recording a total return of 39.8 per cent over the year, reflecting capital growth of 34.0 per cent. Asset management in this sector was very active and we completed all the initiatives earmarked in this report last year. These included the lease renewals with DHL at G Park in Liverpool, and Kimberly Clark at Chorley and the assignment of Mothercare’s lease to Ceva Logistics at Daventry. Hurricane 47 at Speke, Liverpool was let to Kukoon Rugs and this has given us the confidence to commit to the development of an adjoining unit of 52,000 sq ft. The portfolio is however, still underweight to South East industrials which had a negative impact on relative performance against MSCI.
Our retail warehouses produced a total return of 28.2 per cent over the year, principally driven by the investment that was committed to our two large retail parks where we completed a number of capital projects and saw some new store openings. There was also yield compression due to the large amount of capital seeking to invest into the sector. Of particular note was the construction of a Marks and Spencer store unit at Solihull, which opened in June 2021. The redeveloped 35,000 sq.ft. store was combined with the adjacent M&S Food Hall and we have seen visitor numbers to the park substantially increase on the back of this activity. There are two vacant units on the park, both of which are under offer. At Newbury we completed the amalgamation of two units totalling 20,000 sq ft which enabled our new tenant Home Bargains to open successfully in October.
Our Office portfolio produced a total return of 9.4 per cent for the year, largely driven by the price achieved on the sale of Cassini House. There continued to be activity in leasing vacant space, and it is pleasing to report that properties located in Curzon Street, London and Camberley, both of which had been substantially refurbished, are now fully let.
St Christopher’s Place faced another challenging year with a capital value fall of 4.2 per cent, albeit this is a significant improvement compared to the 17 per cent fall in 2020. The largest valuation impact was once again attributable to the two Oxford Street properties where rents continue to be rebased and yields moved out. It will take time for Oxford Street to recover from the effects of the pandemic but landlords along the street are now appraising significant investment into development and repositioning opportunities. Encouragingly we saw footfall recover in quarter four to 2019 levels and the return of employees to the office. An increase in international travel and the long-awaited opening of the Elizabeth Line later this year should also benefit St Christopher's Place. We saw a number of new openings of which ‘Isola by San Carlo’ should be transformational for the Barrett Street Piazza.
We maintain our conviction in the prospects for the portfolio. Our Managers remain focused on both growing income further and improving capital values through numerous asset management initiatives which are further detailed in the Managers’ Report. Positive progress has been made on recycling capital and repositioning the portfolio. The pace of further repositioning remains under active review, and the Managers will continue to follow a strategy of having a balanced sector exposure, subject to market opportunities, and evaluating any decision to sell assets against the investment case for accretive reinvestment or using sales proceeds to buy back the Company’s shares.
Sales
Consistent with the strategy to recycle capital and adjust sector weightings, the Company sold the retail warehouse located in East Kilbride, Scotland in May 2021 for a total consideration of £19 million, reflecting an increase of 9.2 per cent over the external valuation as at 31 December 2020. The property was let to B&Q Limited for one of its large format stores on a lease due to expire in November 2029.
In September 2021, the Company sold an office, Cassini House, located in St. James’, London. The property is a prime multi-let freehold office building and represented the second largest holding in the portfolio. This was sold for a total consideration of £145.5 million, reflecting a substantial increase of 19 per cent over the year-end valuation as at 31 December 2020. The disposal represented the culmination of a long-term business plan which involved a complete refurbishment, introduction of new tenants and re-gearing of leases.
The Company also sold its holding at Dane Street, Rochdale for a total consideration of £35 million, an increase of 12 per cent over the year-end valuation at 31 December 2020. The asset is a purpose-built supermarket with a 12-pump filling station and an adjacent retail warehouse. The supermarket is let to Asda Stores Limited and the disposal followed the successful re-gearing of the Asda lease and extension of the term expiry date out to December 2038.
Acquisitions
Following the above sales, the Company has looked to increase its exposure to prime, modern industrial and logistics assets in established locations.
The Company acquired Orion One and Two, Markham Vale, Derbyshire for a price of £44.5 million reflecting an initial yield of 3.7 per cent. The two newly built units were completed in April 2021 and are located within Derbyshire’s 200-acre flagship redevelopment scheme adjoining junction 29A of the M1 Motorway. The units have been constructed to institutional standards and benefit from strong environmental characteristics having achieved an EPC rating of A and BREEAM rating of very good.
The Company also acquired Unit 4, Quintus Business Park, Burton- Upon-Trent which is structured as a forward funding to develop a new logistics warehouse of 171,550 sq ft. The purchase price of £21.5 million equated to an initial yield of 4.84 per cent with the property being pre-let. The Company has acquired the land and met certain development costs incurred to date amounting to £5.6 million of the purchase price. The development has achieved planning consent and is expected to complete in July 2022. The unit is targeting strong environmental characteristics with an A rated EPC and a BREEAM excellent rating.
Capital Expenditure
During lockdown the Company delayed uncommitted capital expenditure. In the light of the improving markets and outlook, the Company is now reviewing a number of opportunities in the existing portfolio where there is a clear opportunity to generate value. At this stage we have committed to two larger projects although further projects are being considered.
At Estuary Business Park, Speke, Liverpool the Company has committed to the speculative development of a 52,000 sq ft mid-box logistics unit on land already owned and adjoining an existing ownership. The total construction cost is expected to be in the region of £4.8 million with an income return on cost forecast to be c.6.50 per cent when let. In Colchester, the Company has secured planning consent to demolish an obsolete warehouse unit at the Cowdray Centre and the re-development of c.35,000 sq ft to form a new multi-unit trade counter park. This development will also be undertaken speculatively and will incur expenditure of c.£5.7 million. It is expected a start on site will commence soon and early marketing has identified encouraging tenant demand.
Rent Collection
It has been a difficult time for many of the Company’s tenants as they have navigated their businesses through lockdowns and challenging trading conditions. The Company has a diverse tenant base across the portfolio and the Managers have continued to engage with many of our tenants, assessing and responding to requests for support on a case-by-case basis. We believe that this support has helped, with many now experiencing near normal trading conditions.
Against this background, rent collection statistics are close to pre-pandemic levels and the resolution of historical rent arrears continues to progress. Collection for the year is at 95.5 per cent to date and the last quarter of the year is at 98.4 per cent. The overall collection rate since the impact of Covid-19 came into full force in March 2020 is currently at 94.4 per cent.
Dividends
The Company paid twelve interim dividends totalling 4.25 pence per share during the year. There were ten monthly dividends of 0.35 pence per share, followed by an increase in November 2021 to 0.375 pence per share. Monthly dividends have remained at this rate, however, greater certainty over rent collections has given the Board more confidence to raise the level of dividend and with effect from May 2022, the monthly rate will be increased to 0.4 pence per share, an increase of 6.7 per cent.
Share Buybacks
The Company launched a share buy-back programme in June 2021, using some of the proceeds from the property sales, and purchased 46.3 million shares by the year end at an average discount of 22.3 per cent and a cost of £45.2 million. This has enhanced the NAV by 2.2 pence per share during the year and has provided additional liquidity in the Company’s shares. Consideration will continue to be given to further buybacks if the Board believes that this course of action continues to be in the best interests of shareholders.
Cash and Borrowings
Following the significant sales programme, the Company had £138.1 million of cash reserves at the year end. 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 £50 million term loan and an undrawn £50 million revolving credit facility with Barclays. The Barclays facilities were extended by a year and are due to expire on 31 July 2023, with the option of a further one-year extension. As at 31 December 2021, the Company’s net gearing was 14.4 per cent.
Environmental, Social and Governance (ESG)
The ESG landscape continues to evolve at an extraordinary pace with notable movement towards more stringent disclosure and reporting requirements and expectations. There is the hardening of regulatory obligations and sharpening of standards to encourage and facilitate delivery against global ambitions. Perhaps most significant was the introduction of the UK’s new sustainable investment framework which aims to align the country’s financial mechanisms with its net zero carbon commitment. The Company recently published its Net Zero Carbon Pathway with a target date of 2040 or sooner.
Reflecting on the past year, the Company is pleased to have retained a leading position and be the only three star rated property investment fund amongst its peer group in the influential Global Real Estate Sustainability Benchmark survey. The ten percent improvement in year-on-year score demonstrates the attention which the Board and its Managers have been devoting to this critical area both from a strategic perspective and in delivering impact on the ground.
ESG remains an important consideration in the Company’s forward strategy and the Board remains fully committed and engaged with its Managers in supporting the right approaches and methodologies to enable continued advancement. The Board has taken the decision to establish an Environmental, Social and Governance (ESG) Committee since the year end which will be chaired by Linda Wilding and will ensure continued oversight and governance in this vital area. The Board is pleased to provide a summary of progress in the Annual Report, whilst a deeper review will be shared in the 2021 ESG Report, available on the Company’s website.
Board Composition
Martin Moore retired as Chairman of the Company at the last AGM on 17 June 2021, having served on the Board for just over 10 years. Martin’s contribution was substantial, and I would like to thank him for his dedication and commitment throughout.
I took over as Chairman following Martin’s retirement and look forward to the exciting challenge that lies ahead. Hugh Scott-Barrett who joined the Board on 4 January 2021 has replaced me as Senior Independent Director.
The Managers
Matthew Howard, the Company’s Deputy Fund Manager, has recently accepted a Lead Fund Manager role on another fund managed by our Managers and will be stepping down as our Deputy Fund Manager on appointment to his new role in July this year. The Board has received a commitment from the Managers that an appropriate replacement will be appointed in a timely manner and will work closely with Richard Kirby, our Lead Fund Manager, to ensure an orderly handover of Matthew’s responsibilities. Matthew will continue to work with Richard and the wider team of investment professionals on the management of the Company’s assets while the Board works with the Manager to identify Matthew’s replacement. The Board wish Matthew well in his new role.
I reported at the half year stage that the Bank of Montreal had announced its intention to sell its asset management business covering Europe, the Middle East and Africa to Ameriprise Financial Inc., the parent company of Columbia Threadneedle Investments. The sale transaction was completed on 8 November 2021. The Board’s request for continuity of service from the Managers is being prioritised in the smooth integration of the businesses. Your Board has welcomed the Managers commitment on this but recognises that any move of this nature will inevitably create a degree of risk. It is therefore closely monitoring the integration of the two businesses as it progresses.
Company Name Change
Further to the ownership changes of the Managers, it is no longer appropriate that the Company has BMO in its name. After much consideration, the Board has agreed that the Company name be changed to Balanced Commercial Property Trust, a name which we believe reflects the strategic direction of the Company. This change will take effect in the near future, to coincide with the wider re-branding exercise being conducted by the Managers.
Investment Policy
The Board, together with the Company's Managers, has recently undertaken a review of the Company's investment policy in the light of the strategic direction that the Company has been moving over the last year. As highlighted above, the Company has raised its exposure to industrials, increasing to 30.6 per cent at year end and whilst the current investment policy allows investment in this sector of up to 40 per cent, the Board is of the view that the maximum sector weighting limits in the current investment policy have become unduly restrictive. We are therefore proposing that all sector weighting limits are removed from the Company's investment policy in order to ensure flexibility in managing the existing portfolio and to facilitate appropriate decision making in the future.
Annual General Meeting
The AGM will be held at the offices of BMO Global Asset Management, Exchange House, Primrose Street, London, EC2A 2NY on 27 May 2022 at 2pm. Despite the removal of Covid-19 related restrictions, there is still uncertainty as to what the future will hold and the Company may, in accordance with its Articles of Incorporation, impose entry restrictions on certain persons wishing to attend the AGM or may be required to adjourn the AGM. Other restrictions may be imposed as the Chairman of the meeting may specify in order to ensure the safety of those attending the AGM.
Outlook
After a turbulent two years, we are now more resilient and better equipped to deal with new Covid variants as they emerge. We therefore entered 2022 with a renewed sense of optimism. However, Russia’s invasion of Ukraine and the geopolitical risk and the economic uncertainty surrounding this event places a new shadow over the outlook. Notwithstanding this, the Company has had a strong 2021 and we firmly believe that the portfolio, underpinned by strong core assets, is well positioned for the future.
Undoubtedly the structural changes fast forwarded by the health crisis will continue and technology will be a key disruptor to the real estate industry. Sustainability and the wider ESG agenda are a central theme and remain a priority this year with occupiers and investors, across all sectors, focusing on greener buildings which are increasingly important in investor strategy and asset allocation.
Offices will see a new focus as pent-up demand unfolds buoyed by healthy job growth, but there is a clear focus on high quality buildings and the emergence of a two-tier market. Momentum in the industrial sector continues unabated but the demand and supply imbalance needs to be addressed and there is no quick fix. The embryonic signs of recovery in the retail sector are evident as footfall improves and retail and leisure spend strengthen the occupier market, with retail warehousing leading the way. Residential continues its metamorphosis into a mainstream sector with the breadth of opportunity offering long-term defensive income.
The Company has made good progress with its strategy to re-balance the portfolio and has addressed being significantly underweight to industrials. That said, there is still more to do and further recycling of capital will be a theme of the next twelve to eighteen months. There is significant unlocked value within the portfolio and embarking on further noteworthy capital initiatives over the near to medium term remains a key part of the Company’s strategy.
Paul Marcuse
Chairman
14 April 2022
Managers’ Review
· The Company's portfolio produced a total return 15.5* per cent versus the MSCI UK Quarterly Property Index ('MSCI') return of 16.3 per cent.
· Completed £199.5 million of property disposals and £66 million of property acquisitions as part of the strategy to adjust sector weightings.
· Rent collection currently received since the onset of the pandemic in April 2020 to December 2021 is 94.4 per cent.
· As at 31 December 2021, the void rate was 2.0 per cent which compares to a rate of 2.9 per cent at the start of the calendar year.
· Asset management initiatives across the portfolio driving strong occupancy and value.
· Committed to achieving net zero carbon emissions by 2040 or sooner.
*see Alternative Performance Measures
Property Market Review
The performance of the UK real estate market in 2021 has been impressive, particularly given the challenges faced in dealing with Covid-19. The all-property total return on the MSCI UK Quarterly Property Index (‘MSCI’) in the year to 31 December 2021 was 16.3 per cent as the positive momentum seen in the first half of the year gathered pace and rolled over into the last six months. It is the best annual performance recorded for over six years. The fourth quarter total return was 6.2 per cent, a performance not bettered since the end of 2009.
There are of course sector nuances playing out behind the scenes and industrials was the driving force, with the final quarter producing the largest ever quarterly total return performance of 12.4 per cent and a staggering annual total return performance of 36.5 per cent, a level not seen since 1988. The year was record breaking, with leasing activity in the logistics and industrial sector at the highest level ever reported pushing the national vacancy rate to the lowest ever seen. The strength of the occupational market and current imbalance in supply and demand is driving positive rental growth, which is now underpinning the positive investor sentiment towards the sector at unprecedented levels.
| Key Benchmark Metrics – All Property | ||
|
2021
% |
2020
% |
|
| Total Returns | 16.3 | (2.0) |
| Income Return | 4.3 | 4.5 |
| Capital Return | 11.5 | (6.2) |
| Open Market Rental Value Growth | 1.8 | (3.1) |
| Initial Yield | 4.1 | 4.7 |
| Equivalent Yield | 5.1 | 5.8 |
Source: MSCI Inc
Despite the ongoing shift to buying online leaving its indelible mark and driving structural changes, retail was, perhaps surprisingly, the second-best performing sector, posting total returns of 10.0 per cent. There is more stability on high streets and some liquidity coming back to the shopping centre capital markets, however, the 22.0 per cent total return recorded by retail warehouses made it the standout retail segment. Lifestyle changes brought on by Covid-19 and the shift to hybrid working favours the local, accessible, outdoor space and free parking that retail warehouses offer. Grocery anchors along with essential and convenience retail will structurally support the sector which has proven resilient over the course of the pandemic in terms of both value and footfall.
Appetite for offices is finding its equilibrium with a clear focus on higher quality space in central locations, as companies look to welcome employees back to a more structured hybrid model of operation where strong ESG and wellbeing credentials will be essential. This will be at the expense of lower quality stock and the emergence of a two-tier market is likely, rebasing both capital values and rents. Occupational requirements are increasing, and leasing activity is beginning to pick-up. This has been supported by job growth, the challenge of retaining and attracting talent, along with pent-up demand as corporates reactivate shelved office accommodation plans.
As the vaccine roll out increased and the outlook improved the second half of 2021 saw investment activity shift into a higher gear with £30.7 billion flowing into UK real estate. This was a 12 per cent increase on the first half of the year and brought the annual traded in the year to £58.3 billion. The share of industrial transactions has risen dramatically year-on-year as investors continue to capitalise on the acceleration of the shift to online and realignment of supply chains. Retail has seen a notable rise in interest since the depth of the pandemic, and offices meanwhile are seeing a renewed level of appetite supported by more clarity on how hybrid working will evolve and the future role of the office. There is a clear preference for those sectors that are underpinned by their ability to offer long-term, defensive income plays such as industrial, residential and supermarkets and those offering some hedge to inflation.
Valuation and Portfolio
The total return from the portfolio was 15.5 per cent compared with the MSCI return of 16.3 per cent. Capital growth from the portfolio was 9.9 per cent compared with the MSCI return of 11.5 per cent. In 2021 the dispersion of returns by sector as measured in the quarterly benchmark was the greatest recorded since its inception.
It is unsurprising that the Company’s industrial and logistics properties experienced the strongest capital growth due to a combination of further yield compression and the accretive asset management initiatives detailed below.
The Company’s two retail parks also had a strong year as some significant asset management initiatives completed and sentiment to the retail warehouse sector improved. The Company’s largest asset at St Christopher’s Place Estate experienced another challenging year with the two Oxford Street properties seeing yields move out further as the rents continue to be rebased.
The most significant contribution from the office portfolio came from the sale of Cassini House at a price well in excess of the previous valuation. There were some valuation falls in the South East and regionally on those properties with shorter lease terms.
| Sector Analysis (% of total property portfolio) | ||
| 2021 (%) |
2020 (%) |
|
| Offices | 32.3 | 42.2 |
| Retail | 15.6 | 18.5 |
| Retail Warehouses | 10.9 | 10.0 |
| Industrial | 30.6 | 19.1 |
| Alternative | 10.6 | 10.2 |
Source: BMO REP Asset Management plc
| Geographical Analysis (% of total property portfolio) | ||
| 2021 (%) |
2020 (%) |
|
| South East | 24.0 | 22.0 |
| London – West End | 25.4 | 35.4 |
| Midlands | 21.4 | 12.4 |
| Scotland | 11.7 | 13.3 |
| North West | 13.4 | 12.7 |
| Rest of London | 1.6 | 1.6 |
| South West | 2.5 | 2.6 |
Source: BMO REP Asset Management plc
| Lease Expiry Profile | ||
| At 31 December 2021 the weighted average lease length for the portfolio, assuming all break options are exercised, was 5.2 years (2020: 6.0 years) | ||
| % of leases expiring (weighted by rental value) | 2021 (%) |
2020 (%) |
| 0 – 5 years | 56.0 | 47.5 |
| 5 – 10 years | 29.3 | 34.1 |
| 10 – 15 years | 9.8 | 12.0 |
| 15 – 25 years | 4.9 | 6.4 |
Source: BMO REP Asset Management plc
The largest occupiers, based as a percentage of contracted rent, as at 31 December 2021, are summarised as follows:
| Income Concentration | |
| Company name | % of Total Income |
| Apache North Sea Limited | 4.8 |
| CNOOC Petroleum Europe Limited | 4.7 |
| Canon (Europe) Limited | 4.7 |
| Marks & Spencer plc | 3.7 |
| Virgin Atlantic Limited | 3.6 |
| JP Morgan Chase Bank | 3.6 |
| University of Winchester | 3.5 |
| Transocean Drilling UK Limited | 3.4 |
| Nestle Purina UK Commercial Operators Limited | 3.4 |
| CEVA Logistics Limited | 3.2 |
| Total | 38.6 |
Source: BMO REP Asset Management plc
Income Analysis and Voids
We started the year with a void rate of 2.9 per cent and following leasing activity, many of which is detailed in this report, this has reduced to 2.0 per cent, excluding property being developed or refurbished. As previously reported, there is still an expectation that voids will increase as the full economic impact of Covid-19 and the war in Ukraine takes its toll and there are a number of lease events due in 2022 where we understand the tenant will not renew. These will provide additional asset management opportunities to refurbish space and add value.
The war in Ukraine has heightened the risk of exposure to Russia and sanctions within the Company’s tenant base. The Managers Anti Money Laundering team have a process in place to mitigate against this type of risk and undertake a screening process of the Company’s tenancy schedule against a sanctions list every month. No positive sanctions matches have been identified between the Company’s tenants base and any individuals or entities listed on the sanctions lists in scope for screening.
Since the Government removed Covid-19 restrictions in the summer, we have seen tenants more motivated to seek to resolve their financial situations by reaching agreements combined with a return to ‘more normal’ rent collection patterns across the Company’s portfolio.
Rent collection was 95.5 per cent for the year with further receipts expected and we have now collected 94.4 per cent of the rent demanded since the impact of Covid-19 came into full force.
At the 31 December 2021 the weighted average lease length for the portfolio, assuming all break options are exercised, was 5.2 years (2020: 6.0 years).
Industrial and Logistics
During the year we successfully completed a number of excellent, value accretive asset management opportunities within this segment of the portfolio. This activity combined with the momentum of yield compression led to some significant total return numbers.
Initiatives of note included the completion of the lease re-gear with Kimberly-Clark at their 368,000 sq. ft. logistics facility at Revolution Park, Chorley. This lease was due to expire in June 2021, and the re-gear saw the tenant sign a new 12-year lease (with a break option at the end of the 7th year), and fixed annual uplifts of 2 per cent. This combined with further yield compression saw the valuation increase by 44.3 per cent over the year. At G Park, Liverpool we completed a reversionary lease with DHL Supply Chain Limited on their 360,000 sq. ft. distribution warehouse. A new 10-year lease was agreed from March 2021 with a tenant break at the end of the fifth year and the new rent reflected an uplift in excess of 10 per cent on the previous rent. This property has seen a valuation uplift over the year of 39.2 per cent. These were the two largest lease expires in the Company’s portfolio that were due in 2021 and it is reassuring that both of the existing tenants renewed their leases and the early settlement de-risked the portfolio to these events.
We also negotiated the settlement of the rent review at a 270,000 sq ft facility in Hams Hall, Birmingham, which is Nestlés Purina pet food distribution hub. The review resulted in a 29.3 per cent increase in the passing rent, which gave rise to an immediate valuation increase of 11.0 per cent. The Company also owns two other properties at Hams Hall and the new rental level negotiated had a positive impact on the valuation of these units.
In February 2021, a new letting of Hurricane 47, Estuary Business Park, Liverpool contracted to an online rug retailer. Kukoon Rugs entered into a 15-year lease (tenant break at 10 years) at a rent of £290,000 per annum and were granted 9 months’ rent free.
In March 2021 Mothercare assigned their lease on the distribution warehouse at DIRFT, Daventry to Ceva Logistics, who are one of the largest third-party logistics operators in Europe. The Company has therefore entered into a direct contractual relationship with a tenant that has a superior credit rating and this had a significant impact on value.
During lockdown the Company delayed uncommitted capital expenditure. In light of an improving market outlook a number of opportunities in the existing portfolio have been reviewed and the Company is progressing two larger industrial and logistics projects. At Estuary Business Park, Speke, Liverpool the Company has committed to the speculative development of a 52,000 sq. ft. mid-box logistics unit on land already owned and adjoining an existing ownership. The total construction cost is expected to be in the region of £4.8 million with an income return on cost forecast to be c.6.5 per cent when let. Construction works commenced in February 2022.
At the Cowdray Centre, Colchester we had previously secured planning consent to demolish an obsolete warehouse unit and for the re-development of c.35,000 sq. ft. to form a new multi-unit trade counter park. We are now committing to a speculative start and this development will incur expenditure of c.£5.7million. It is expected a start on site will commence once a revised planning consent has been secured. Our initial marketing has identified encouraging tenant demand.
Retail and Retail Warehouses
Newbury Retail Park (retail warehouse)
In February contracts were exchanged with TJ Morris, trading as Home Bargains, to take 20,000 sq. ft. formerly occupied by New Look and Next on a new 20-year lease (no breaks) at a rent of £17.50 per sq. ft. We completed the construction works to combine the two units on programme and Home Bargains opened the new store in October. This new store is an added attraction to the Park and is definitely supporting a recovery in visitor numbers. The car park management system recorded average daily visits of circa 4,500 people in Q4 2021 with in excess of 6,000 visits on the 20 December. These visitor numbers exceed pre Covid-19 levels. The letting to Home Bargains is a further move towards our strategy of curating the park to convenience-based retailing which is expected to be more sustainable in out-of-town locations.
Other asset management initiatives remain in advanced negotiations or conditional on achieving new planning consents, and where this is the case, supporting planning applications have been submitted to facilitate these.
Solihull Retail Park (retail warehouse)
The construction of the new Marks & Spencer store unit and the refurbishment of the shopfront of the Food Hall completed in January 2021 on programme and to budget. M&S opened this new flagship store in June 2021 and report that the new concept is trading extremely well. The store has attracted an increased footfall to the Park and the car park is operating to near full capacity. The new lease is at a rent of £1.373 million per annum.
We have secured planning consent for a change of use for the vacant former Multi York unit and it is now under offer to a Gym operator which will bring a new use onto the Park. Argos vacated their unit on lease expiry and this unit is now under offer to a national retailer.
St. Christopher’s Place (‘Estate’) (retail/office/alternatives)
The year commenced in a challenging way; London entered Tier 4 restrictions on 20 December 2020, swiftly followed by the implementation of a third national lockdown in early January 2021. After the roadmap out of lockdown was announced, restrictions were initially eased in April, with the opening of non-essential retail and hospitality venues for outside dining. However, restrictions were not fully lifted on restaurants and bars until mid-July.
The lockdown limitations on trade and the work from home requirements, resulted in suppressed footfall on the Estate across the year, which reflected on average 60 per cent of 2019 levels although notably, this is ahead of the wider West End visitor numbers which reported 47 per cent compared to 2019 levels.
In the latter half of the year, footfall levels steadily improved and Quarter 3 reached 66 per cent of the same period in 2019 whilst Quarter 4 was on par, hitting 99 per cent of 2019 visitor numbers. This final quarter is especially encouraging given the drop in visitor levels in the final weeks of the year, due to the emergence of the Omicron variant which halted many visits to Central London whether by office workers, shoppers, or for social gatherings.
The start to 2022 has been encouraging with the return of office workers, albeit a hybrid ‘home/office’ working model appears to be prevalent, and the arrival of some international visitors. Footfall has grown week on week, every week since the start of the year (except during the unusual red weather warnings and the early March tube strikes), which bodes well for a stronger year ahead.
Leasing Activity
· ‘Aldo’ reopened at 372 Oxford Street; an Aldo Franchisee has taken a new lease of the site, following the surrender of the former Aldo lease, after the company appointed Administrators in 2020.
· ‘Emma Hyacinth’ have opened their new, larger shop at 2-3 St Christopher’s Place.
· 14a St Christopher’s Place: Completed a new letting to ‘Festok’.
· Secured a new letting to ‘Platform’ at 28-32 St Christopher’s Place.
· Various pop-up lettings completed throughout the year including, successful activations over the festive period with ‘Fedor Sneaks’ and ‘Aldi Champagne Bar’.
· Completed a new 15-year lease to ‘Cote’ new co, following the surrender of the former Cote lease, after the appointment of Administrators in 2020.
· ‘Isola by San Carlo’ opened their flagship restaurant in the former Carluccios site on the Barrett Street piazza. This is a signature letting for the Estate.
· ‘Crome’ has taken a new 15-year lease of the former T Burrows site, for a new French toast café concept.
· Papa-dum’ and ‘Sidechick’ (by Patty and Bun) opened new restaurants on James Street, adding to the diverse food and beverage offer on the estate.
· Six new office leases completed in the period, with a further 2 new lettings under offer. Several suites are under refurbishment, prior to marketing.
· Across all sectors, various lease renewals and re-gears have been secured and several new lettings and lease negotiations are in hand.
Broadway Wimbledon (retail)
Having experienced a significant fall in valuation during 2020 the valuation stabilised during the year and was only down 0.6 per cent at year end. All units are now open and trading and rent repayment plans which had been put in place to assist a number of the tenants are being honoured.
We have re-engaged with Merton Council to discuss this holding in connection with Merton’s ambitions for the Wimbledon Town Centre Masterplan. As previously stated this could provide the Company with a valuable redevelopment opportunity.
Offices
At Watchmoor Park, Camberley we built upon the back of the successful letting to Muller and let the remaining vacant 12,500 sq. ft. to Siemens Healthcare at a rent of £23 per sq ft for a term of 10 years with a tenant break after 5 years. This building was fully refurbished to a high standard and this last letting culminates in the successful completion of the asset’s business plan.
At Alhambra House in Glasgow the lease extension with JP Morgan until 30 June 2023 was completed. The office building extends to c100,000 sq. ft. and for the period of the lease extension the annualised rent will be £2.5 million, an uplift of £0.5 million on the passing rent. The attention for this year is now centred upon working up plans to extend and refurbish this property and to secure a planning consent to allow the proposed works.
At 17A Curzon Street, London the leasing programme of the available refurbished floor completed with a letting of the 2nd floor to MA Family Office Ltd at a rent of £130,350 per annum on a 5-year lease term and a tenant break after the third year. In February 2022 the final letting of the 1st floor contracted with 65 Equity Partners at a rent of £87.50 per sq. ft. and another 5 year term and tenant break after 3 years. This property is now fully let.
At 82 King Street, Manchester, two rent reviews and one lease renewal completed with a further three rent reviews and one lease renewal currently in negotiation.
The Alternatives property sector
Alternatives 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 continued to pay their rent in full and on time. The occupation levels of the short-term residential units at St Christopher’s Place has continued to improve and are ahead of budget. The longer let units are fully let with no availability and we are now experiencing a recovery in rental levels on these units. The leisure operators at Wimbledon are now able to trade and are honouring their rent re-payment plans.
Sales and Capital Receipts
Consistent with the strategy to recycle capital and adjust sector weightings, the Company completed three property disposals during 2021 raising gross sale proceeds of £199.5 million and realising gains net of sales costs of £34.4 million against last year’s closing valuations.
In May the Company announced the sale of a solus retail warehouse located in East Kilbride, Scotland for a total consideration of £19 million, reflecting an increase of 9.2 per cent over the external valuation at 31 December 2020. The property is let to B&Q Limited for one of its large format stores on a lease due to expire in November 2029.
The second sale was Cassini House, St James Street, London SW1, a prime multi-let freehold office building and the second largest holding in the portfolio. The sale price of £145.5 million represented a net initial yield of 3.2 per cent and reflected an increase of 18.5 per cent over the valuation as at 31 December 2020. The disposal represented the culmination of a long-term business plan which involved a complete refurbishment, introduction of new tenants and re-gearing of leases and a sale into an extremely strong and competitive Central London investment market.
Also in September the Company sold its holding at Dane Street, Rochdale for a total consideration of £35 million, an increase of 12 per cent over the year-end valuation at 31 December 2020. The asset is a purpose-built supermarket with a 12-pump filling station and an adjacent retail warehouse. The supermarket is let to Asda Stores Limited and the disposal follows the successful re-gearing of the Asda lease and extension of the term expiry date out to December 2038.
A capital receipt of £2.4 million was received from the long leaseholder of a number of residential units at St Christopher’s Place as a result of the completion of a statutory lease enfranchisement process to extend the leases. This covered 24 flats located in Greengarden House subject to leases which were due to expire in 2077 at nil rent. Under a statutory process the leases have been extended for a further 90 years until 2167.
Acquisitions
The Company completed two acquisitions in December 2021 totalling £66 million. The first acquisition, a standing investment, is Orion One and Two, Markham Vale, Derbyshire for a price of £44.5 million reflecting an initial yield of 3.7% and a low capital value of £148 per sq. ft. The two newly built units were completed in April 2021 and are located within Derbyshire’s 200-acre flagship redevelopment scheme adjoining junction 29A of the M1 Motorway. Orion One extends to 224,424 sq. ft. and is let to The National Lighting Company Limited on a lease term expiring in August 2031 at a rent of £1.3 million per annum with a rent review at the 5th year, linked to RPI and collared and capped at 1.50 – 3.50 per cent per annum. Orion Two comprises a smaller unit of 75,958 sq. ft. and is let to Smurfit Kappa UK Ltd on a lease expiring October 2031 (tenant break October 2026) at a commencing rent of £0.5 million per annum, subject to a rent review in the fifth year. Both units have rent free periods in place, all of which expire during 2022. The units have been constructed to institutional standards and benefit from strong environmental characteristics having achieved an EPC rating of A and BREEAM rating of very good.
The second acquisition is Unit 4, Quintus Business Park, Burton-Upon-Trent which is structured as a forward funding to develop a new logistics warehouse of 171,550 sq. ft. The property has been pre-let to Werner UK Sales & Distribution Limited on a lease term upon completion of 15 years (tenant break after 10 years) at a rent of £1.1 million per annum, with 5 yearly rent reviews linked to RPI and collared and capped at 2.00 - 4.00 per cent per annum. The purchase price is £21.5 million which equates to an initial yield of 4.84 per cent. The Company has acquired the land and met certain development costs incurred to date which amounts to £5.6 million of the purchase price. The development has achieved planning consent and is expected to complete in June 2022. The unit will have strong environmental characteristics with an A rated EPC and a BREEAM Excellent rating being targeted.
Outlook
The combined weight of capital and strength of appetite for real estate positions us well for a positive 2022. Yields are trending downwards following the outward shift seen at the onset of the health crisis. Annual trading volumes are expected to be in the region of 10 per cent higher than seen in 2021, supported by relatively healthy occupational drivers including demand and supply fundamentals, lower unemployment figures and positive hiring intentions by companies. There is also likely to be increasing convergence between the main sectors as capital values start to rise in some parts of the retail market and the rate of growth slows in the industrial sector.
But there are headwinds, and they should not be ignored. The war in Ukraine, political tensions, soaring energy costs and rising prices as well as the mismatch between jobs and vacancies creating wage pressure in some sectors and this is likely to dominate headlines during the year. Investors and occupiers have gallantly navigated the challenges beset by the health pandemic and the structural changes fast forwarded by the health crisis will continue.
Capturing the impact of long-term trends and industry disruptors remains at the forefront of our thinking, feeding decisions on where and how to allocate capital with some real estate allocations having come into very sharp focus over the past 18 to 24 months.
Environmental, social and governance will remain front and centre for both occupiers and investors across all sectors of the market and will apply pressure on real estate firms to deliver more on the ESG agenda. It will be an increasingly important factor in our due diligence as well as acquisition and disposal strategies. It brings quality into a clear focus, but more than that, interest in alternatives will continue to grow as investors seek out opportunities not just to achieve returns, but equally, if not more important, to create and preserve, fulfilling ESG aspirations.
As highlighted above, there have been some notable successes during 2021 and the Company is well placed to build on these going forward. Our retail warehouse properties performed strongly and the investment we have made in bringing more grocery and convenience operators onto Solihull and Newbury Retail Parks should lay the foundations for these parks to successfully trade post Covid-19. Although the situation at St Christopher’s Place improved over the year it was still very challenging. As the return to the office picks up, visitor numbers to Central London increase and the Elizabeth Line opens in the summer of 2022 it is hoped the recovery will gain momentum.
The Company has made good progress with its strategy to re-balance the portfolio following the completion of £199.5 million of targeted sales and the two acquisitions made at the end of last year. This has taken the weighting to the industrial sector from 19.1 per cent at the start of the year to over 30.6 per cent by year end. Although the industrial and logistics sector have experienced significant yield compression, rental growth is forecast to outperform other sectors and as such the Manger is still actively sourcing opportunities in the sector. We are also seeking to increase the exposure to certain ‘alternatives’ and subject to availability and pricing retail warehouses. We have a robust investment process and are actively sourcing appropriate investments to further reposition the portfolio in the coming months.
There remains significant opportunity to generate strong returns in the Company’s portfolio, not just from the capital initiatives identified above but from further capital projects that are actively being considered and will present themselves over the next two to three years.
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 2021 |
Year ended
31 December 2020 |
||
| £000 | £000 | ||
| Revenue | |||
| Rental income | 55,843 | 65,273 | |
| Other income | 3,008 | - | |
| --------- | --------- | ||
| Total revenue | 58,851 | 65,273 | |
| Gains/(Losses) on investment properties | |||
| Unrealised gains/(losses) on revaluation of investment properties | 86,976 | (121,306) | |
| Gains/(Losses) on sale of investment properties realised | 34,397 | (22) | |
| ---------- | ---------- | ||
| Total income / (loss) | 180,224 | (56,055) | |
| ---------- | ---------- | ||
| Expenditure | |||
| Investment management fee | (7,195) | (6,692) | |
| Other expenses | (4,540) | (9,448) | |
| ---------- | ---------- | ||
| Total expenditure | (11,735) | (16,140) | |
| ----------- | ----------- | ||
|
Operating profit/(loss) before finance costs and taxation |
168,489 |
(72,195) |
|
| ----------- | ----------- | ||
| Net finance costs | |||
| Interest receivable | 1 | 49 | |
| Finance costs | (11,140) | (11,210) | |
| ----------- | ----------- | ||
| (11,139) | (11,161) | ||
| ----------- | ----------- | ||
| Profit/(loss) before taxation | 156,023 | (83,356) | |
| Taxation | (1,327) | (890) | |
| ---------- | ---------- | ||
| Profit/(loss) for the year | 156,023 | (84,246) | |
| ---------- | ---------- | ||
| Other comprehensive income | |||
| Items that are or may be reclassified subsequently to profit or loss | |||
| Movement in fair value of effective interest rate swaps | 544 | (20) | |
| ---------- | ---------- | ||
| Total comprehensive income / (loss) for the year | 156,567 | (84,266) | |
| ---------- | ---------- | ||
| Basic and diluted earnings per share | 19.8p | (10.5)p |
All of the profit and total comprehensive income or losses 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 2021 £000 |
As at 31 December 2020 £000 |
|
| Non-current assets | ||
| Investment properties | 1,180,486 | 1,205,293 |
| Trade and other receivables | 19,319 | 20,593 |
| Interest rate swap asset | 466 | - |
| ------------ | ------------ | |
| 1,200,271 | 1,225,886 | |
| ------------ | ------------ | |
| Current assets | ||
| Trade and other receivables | 8,698 | 11,589 |
| Taxation receivable | 134 | 134 |
| Cash and cash equivalents | 138,081 | 34,896 |
| ------------ | ------------ | |
| 146,913 | 46,619 | |
| ------------ | ------------ | |
| Total assets | 1,347,184 | 1,272,505 |
| ------------ | ------------ | |
| Current liabilities | ||
| Trade and other payables | (18,448) | (22,644) |
| Interest rate swap liability | (159) | (237) |
| ------------ | ------------ | |
| (18,607) | (22,881) | |
| Non-current liabilities | ||
| Trade and other payables | (2,416) | (1,677) |
| Interest-bearing loans | (308,641) | (308,303) |
| ------------ | ------------ | |
| (311,057) | (309,980) | |
| ------------ | ------------ | |
| Total liabilities | (329,664) | (332,861) |
| ------------ | ------------ | |
| Net assets | 1,017,520 | 939,644 |
| ------------ | ------------ | |
| Represented by: | ||
| Share capital | 7,531 | 7,994 |
| Special reserve | 544,813 | 589,593 |
| Capital reserve – investments sold | 75,010 | (16,720) |
| Capital reserve – investments held | 275,256 | 245,613 |
| Hedging reserve | 307 | (237) |
| Revenue reserve | 114,603 | 113,401 |
| ------------ | ------------ | |
| Equity shareholders’ funds | 1,017,520 | 939,644 |
| ------------ | ------------ | |
| Net asset value per share | 135.1p | 117.5p |
BMO Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2021 (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 2021 | 7,994 | 589,593 | (16,720) | 245,613 | (237) | 113,401 | 939,644 |
| Total comprehensive income for the year | |||||||
| Profit for the year | - | - | - | - | - | 156,023 | 156,023 |
| Movement in fair value of interest rate swaps |
- |
- |
- |
- |
544 |
- |
544 |
| Transfer in respect of unrealised gains on investment properties |
- |
- |
- |
86,976 |
- |
(86,976) |
- |
| Gains on sale of investment properties realised |
- |
- |
34,397 |
- |
- |
(34,397) |
- |
| Transfer of prior years’ revaluations to realised reserve |
- |
- |
57,333 |
(57,333) |
- |
- |
- |
| Total comprehensive income for the year |
- |
- |
91,730 |
29,643 |
544 |
34,650 |
156,567 |
| Transactions with owners of the Company recognised directly in equity | |||||||
| Buyback to Treasury | (463) | (44,780) | - | - | - | - | (45,243) |
| Dividends paid | - | - | - | - | - | (33,448) | (33,448) |
|
At 31 December 2021 |
7,531 |
544,813 |
75,010 |
275,256 |
307 |
114,603 |
1,017,520 |
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 loss 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 |
- |
| Loss on sale of investment properties realised |
- |
- |
(22) |
- |
- |
22 |
- |
| Transfer of prior years’ revaluations to realised reserve |
- |
- |
4,027 |
(4,027) |
- |
- |
- |
| Total comprehensive loss 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 |
BMO Commercial Property Trust Limited
Consolidated Statement of Cash Flows (audited)
| Year ended 31 December 2021 | Year ended 31 December 2020 | |
| £000 | £000 | |
| Cash flows from operating activities | ||
| Profit/(loss) for the year before taxation | 157,350 | (83,356) |
| Adjustments for: | ||
| Finance costs | 11,140 | 11,210 |
| Interest receivable | (1) | (49) |
| Unrealised (gains)/losses on revaluation of investment properties |
(86,976) |
121,306 |
| (Gains)/losses on sale of investment properties realised | (34,397) | 22 |
| Decrease/(Increase) in operating trade and other receivables |
4,165 |
(3,972) |
| (Decrease)/Increase in operating trade and other payables | (4,761) | 5,087 |
| ----------- | ----------- | |
| Cash generated from operations | 46,520 | 50,248 |
| ----------- | ----------- | |
| Interest received | 1 | 49 |
| Interest and bank fees paid | (10,063) | (10,528) |
| Taxation paid | (1,327) | (890) |
| ----------- | ----------- | |
| (11,389) | (11,369) | |
| ----------- | ----------- | |
| Net cash inflow from operating activities | 35,131 | 38,879 |
| ----------- | ----------- | |
| Cash flows from investing activities | ||
| Purchase of investment properties | (50,821) | - |
| Sale of investment properties | 201,920 | 5,585 |
| Capital expenditure on investment properties | (4,050) | (12,080) |
| ----------- | ----------- | |
| Net cash inflow/(outflow) from investing activities | 147,049 | (6,495) |
| ----------- | ----------- | |
| Cash flows from financing activities | ||
| Dividends paid | (33,448) | (22,782) |
| Issue costs for Barclays £100m loan facility extension | (304) | (600) |
| Buybacks to Treasury | (45,243) | - |
| ----------- | ----------- | |
| Net cash outflow from financing activities | (78,995) | (23,382) |
| ----------- | ----------- | |
| Net increase in cash and cash equivalents | 103,185 | 9,002 |
| Opening cash and cash equivalents | 34,896 | 25,894 |
| ----------- | ----------- | |
| Closing cash and cash equivalents | 138,081 | 34,896 |
| ----------- | ----------- |
BMO Commercial Property Trust Limited
Principal Risks and Future Prospects
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.
Covid-19 is still with us and its impact continues to be monitored. The effects have been extensive with significant disruption to all sectors worldwide. This has had an ongoing effect on many of our principal risks during the year and the Board met regularly with the Managers to assess these risks and how they could be managed. More detail is included in the Chairman’s Statement and the Manager’s Report. The level of rent collection and its impact on cash flow was seen as a key concern, however, collection rates since the start of the pandemic are at 94.4 per cent which is well in excess of what was originally anticipated.
Risks faced by the Company include market, geopolitical, investment and strategic, regulatory, environmental, taxation, management and control, operational and financial risks. The principal risks and uncertainties faced by the Company are set out in the table on page 16 and in note 17, which provides detailed explanations of the risks associated with the Company’s financial instruments.
The Board seeks to mitigate and manage these risks and uncertainties 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 Managers carry out a separate 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:
· Economic and geopolitical uncertainties leading to inflation and Interest rate increases. This has been compounded by the military invasion of Ukraine by Russia which is clearly a humanitarian tragedy and will also have widespread economic consequences. The Managers initial conclusions are that global markets will remain volatile. From a macro-economic perspective, higher medium-term oil, gas and food prices alongside financial market disruption and sanctions on Russia are likely to lead to an increase in already elevated inflationary pressures, which will in turn weaken the outlook for economic growth. There is also the risk of further interest rate increases. A period of prolonged instability, with impacts for Europe in particular, is now clearly a potential outcome. The situation is uncertain, and changing rapidly, but this could affect real estate valuations across the Company.
· The ESG agenda is a very prominent one and will continue to grow in its importance to shareholders, future investors and our customers. The increasing market attention being paid to climate risk, to net zero carbon ambition and to 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. Failure to respond to the evolving regulatory requirements and public expectations could have a negative effect on property valuations and would be reputationally damaging.
· There is the potential for structural change in the office market brought on by Covid-19. Appetite for offices is finding its equilibrium with a clear focus on higher quality space in central locations, as companies look to welcome employees back to a more structured hybrid model of operation where strong ESG and wellbeing credentials will be essential. This will be at the expense of lower quality stock and the emergence of a two-tier market is likely, rebasing both capital values and rents. There is uncertainty how this will play out and it continues to be monitored.
· The impact of technology increasingly means that working practices and the needs of society 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 two years as the reliance on technology, particularly with regards to home working has increased.
| Principal Risks | Mitigation | Actions taken in the year |
|
Portfolio Performance
Unfavourable markets, poor stock selection, inappropriate asset allocation and underperformance against benchmark and/ or peer group. This risk may be exacerbated by gearing levels. Economic backdrop of inflationary pressures and increasing interest rates (heightened by the Ukraine crisis). |
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. Performance has been positive during 2021. The Company has had an increased level of activity and commenced its strategy to rebalance the portfolio through a sales and acquisition programme. Industrial allocation has increased to 30.6 per cent (2020 – 19.1 per cent). Despite the improved performance, Russia’s invasion of Ukraine and continuing economic and market uncertainty indicates that the level of this risk is unchanged. . |
|
Risk unchanged in the year under review |
||
|
Discount to NAV
The share price is trading at a discount to NAV. This widened significantly at the onset of the Covid-19 outbreak but has subsequently narrowed. This imbalance, combined with the recent share price volatility can diminish the attractiveness of the Company to investors. Improved shareholder communication is key in this environment, ensuring that shareholders have access to information on how the Company is being run in order to make informed decisions which will help to mitigate widespread selling of the Company's shares. |
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 Managers and Broker on a daily basis and any material changes are investigated and communicated to the Board more regularly. | Investors have access to the Managers 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 Company introduced a share buyback scheme in June 2021 to try and help manage this. The discount has narrowed significantly in recent months and therefore the risk has been categorised as reduced. This continues to be closely monitored given the volatile share price following the start of the Ukraine crisis. |
|
Risk decreased in the year under review |
||
|
Service providers and systems security
Covid-19 and the implementation of working from home and increased sophistication of cyber threats have heightened risks of loss through errors, fraud or control failures at service providers or loss of data through business continuity failure. The recent change in ownership of the Managers may cause additional work pressures and risks as the two businesses seek to integrate, which may have an impact on services to the Group. |
The ancillary functions of administration, accounting and marketing services are all carried out by the Managers. The performance of the Managers is kept under continual review, including the impact following change of ownership. Any security issues are reported to the Board on a timely basis. The Management Engagement Committee reviews the performance of third-party service providers on an annual basis and the Managers keeps service levels under constant review. |
The Audit Committee and the Board have regularly reviewed the Company’s risk management framework with the assistance of the Managers. Each key service provider provides a Report on Internal Controls where available (AAF 01/06 or similar). This will include the controls relevant to cyber risk where appropriate. This report is reviewed by the relevant parties and submitted to the Board on an annual basis. The Board is in regular contact with the Board of the Managers to mitigate any problems which may arise following the recent change of ownership. The Managers has maintained regular contact with its key outsourced service providers throughout the Covid-19 pandemic and received assurances regarding the continuity of their operations. Vigilance remains heightened with this risk categorised as unchanged. |
|
Risk unchanged in the year under review |
||
|
ESG
Not recognising and acting upon any future environmental, social and governance risks which exist within the portfolio. Failure to do so creates the risk that the portfolio no longer remains attractive to tenants and will not maintain its value. There is increasing regulation and public interest relating to ESG issues and failure to be proactive could cause serious reputational damage. |
The Managers has a dedicated team that works on this area and has allocated resources over recent years into building a comprehensive ESG plan and gathering accurate data. The Managers also works with external consulting firms who specialise in this area to scrutinise and validate these plans. The Managers liaises with tenants wherever possible to obtain data and to carry out any necessary enhancements. | Regular reporting to the Board on progress with implementing initiatives. Appointed a director responsible for ESG oversight and who meets with the Managers monthly to discuss progress and formulate future agendas. The Board have taken the decision to establish an ESG Committee since the year end which will ensure continued oversight and governance in this vital area. A policy on the Company's net zero carbon pathway has been published on the Company website. The Managers regularly look to engage with tenants on ESG issues. |
| Risk unchanged 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 Group investing in commercial property with a long-term investment outlook. The Group has its primary borrowings secured for a further three years, a continuation vote in 2024 and a property portfolio with an average unexpired lease length of 5.2 years. Based on current market evidence and on recent conversations that have been held with existing lenders to real estate investment companies, it is believed that it will be possible to satisfactorily refinance the principal loan in 2024. 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. A stress test was conducted over the five-year period to April 2027, on very prudent assumptions. The modelling used a foreseeable severe but plausible scenario which took into account the illiquid nature of the Group’s property portfolio, significant future falls in the investment property values, the continuation of the long-term borrowing facility and substantial falls in property income receipts.
The viability assessment modelling used the following assumptions:-
· 44 per cent capital falls in the next two years (based on the largest UK commercial property market downturn experienced in recent history) followed by zero growth for next three years;
· tenant defaults of 15 per cent for the first year, followed by 9 per cent for the following year before returning to normal levels;
· tenant lease breaks to be taken at the earliest opportunity, followed by a substantial void period.
Even under this extreme model the Group remains viable with loan covenant tests passed and the current dividend rate maintained.
In the ordinary course of business, the Board reviews a detailed financial model on a quarterly basis, incorporating forecast returns for the portfolio, projected out for five years. This model uses realistic assumptions and factors in any potential capital commitments.
The Group continues to monitor the potential impact of the Covid-19 virus on cash flows. Rental collection since the outbreak has been in excess of levels originally anticipated, with rents collected from March 2020 to March 2022 averaging 94.4 per cent.
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 34 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 70 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 2023 with an option to extend by a further year on receiving Barclay’s consent. We calculate that the market value of the properties secured under this loan would have to drop by 68 per cent before breaching the LTV test on the facility. The loan interest cover test would only be breached by a fall in rental income of 82 per cent. We are comfortable that these covenants will continue to be met.
The Group has a further £93.4 million of properties which are not secured against any lender which could be transferred to L&G or Barclays to support covenant tests if required.
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 2027. For this reason, the Board also considers it appropriate to continue adopting the going concern basis in preparing the Annual Report and Consolidated Financial Statements.
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 financial statements. For this reason, they continue 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 2021, 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 2021 include details of related party transactions; and
· The Annual Report and consolidated 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
Paul Marcuse
Director
BMO Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year ended 31 December 2021
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 potential 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 a counterparty will default on its contractual obligation and will cause a financial loss for the other party by failing to discharge an obligation, and principally arises from the Group’s receivables from customers. The Group has no significant concentrations of credit risk as the Group has a diverse tenant portfolio. The largest single tenant at the year end accounted for 4.8 per cent (2020: 4.3 per cent) of the current annual rental income.
The Manager has a credit department which has set out policies and procedures for managing exposure to credit. Some of the processes and policies include:
· an assessment of the credit worthiness of the lessee and its ability to pay is performed before lease is granted;
· where appropriate, guarantees and collateral is held against such receivables;
· after granting the credit, the credit department monthly assesses the age analysis and follows up on all outstanding payments;
· management of the credit department determine the appropriate provision, receivables which should be handed over for collection and which amounts should be written off. The default provision is when the receivable is greater than 90 days. The board will approve the procedures and amounts.
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.
Deposits refundable to tenants may be withheld by the Group in part or in whole if receivables due from the tenant are not settled or in case of other breaches of contract.
Cash balances are held and derivatives are agreed only with financial institutions with a 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. The utilisation of credit limits is regularly monitored. As at 31 December 2021, the Group's cash balances are held with Barclays Bank PLC.
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 2.367 per cent per annum until the maturity date of 31 July 2023. 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 2021. 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 0.25 per cent as at 31 December 2021 (2020: 0.1 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 753,105,830 Ordinary Shares in issue at 31 December 2021 (2020: 799,366,108).
At 31 December 2021, the Company held 46,260,278 Ordinary Shares in treasury (2020: nil).
3. Basic and diluted earnings per share
The basic and diluted earnings per Ordinary Share are based on the profit for the year of £156,023,000 (2020: loss £84,246,000) and on 786,825,807 (2020: 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. These are not full statutory accounts. The full audited accounts for the year to 31 December 2021 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 on a cash basis – The percentage by which Profits for the year (less Gains/losses on investment properties) adjusted by capital and rental lease incentives amortisation and interest bearing loans amortisation of set-up costs cover the dividend paid.
| 2021 | 2020 | |||
| £000 | £000 | |||
| Profit /(loss) for the year | 156,023 | (84,246) | ||
| Add back: | Unrealised (gains)/losses on revaluation of investment properties |
(86,976) |
121,306 |
|
| (Gains)/losses on sales of investment properties realised |
(34,397) |
22 |
||
| Capital and rental lease incentives amortisation |
5,575 |
(555) |
||
| Interest bearing loans amortisation of set-up costs |
642 |
686 |
||
| Profit before investment gains and losses and amortisation | (a) | 40,867 | 37,213 | |
| Dividends | (b) | 33,448 | 22,782 | |
| Dividend Cover on a cash basis percentage (c= a/b) | (c) | 122.2% | 163.3% | |
Accounting Dividend Cover – The percentage by which Profits for the year (less Gains/losses on investment properties) cover the dividend paid.
| 2021 | 2020 | |||
| £000 | £000 | |||
| Profit /(loss) for the year | 156,023 | (84,246) | ||
| Add back: | Unrealised (gains)/losses on revaluation of investment properties |
(86,976) |
121,306 |
|
| (Gains)/losses on sales of investment properties realised |
(34,397) |
22 |
||
| Other income | (3,008) | - | ||
| Profit before investment gains and losses | (a) | 31,642 | 37,082 | |
| Dividends | (b) | 33,448 | 22,782 | |
| Accounting Dividend Cover percentage (c= a/b) | (c) | 94.6% | 162.8% | |
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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