Results in Respect of the Year Ended 31 December 2023 (audited)
To: RNS
Date: 26 April 2024
From: Balanced Commercial Property Trust Limited (the “Company”)
L.E.I. 213800A2B1H4ULF3K397
Results in Respect of the Year Ended 31 December 2023 (audited)
The full Annual Report for the year ended 31 December 2023 will be available to view on the Company’s website: balancedcommercialproperty.co.uk
Headlines
- Earnings per Ordinary Share were -3.7 pence per share for the year ended 31 December 2023 (2022: -13.1 pence per share).
- Net asset value per Ordinary Share was 109.8 pence as at 31 December 2023 (2022: 118.5 pence).
- Rental income was £59.2 million for the year ended 31 December 2023 (2022: £58.7 million).
- Net asset value total return of -3.3* per cent for the year ended 31 December 2023 (2022: -9.2 per cent).
- Share price total return of -12.5* per cent for the year ended 31 December 2023 (2022: -11.7 per cent).
- From October 2023, the rate of monthly interim dividends was increased to 0.44 pence per share. This represented an increase of 10.0 per cent compared to the previous monthly dividends.
- Dividend cover on a cash basis was 104.7* per cent for the year ended 31 December 2023 (2022: 104.8 per cent).
- The Company signed up to a new £320 million Debt Facility provided by incumbent lender Barclays and a new lender HSBC.
- Disposed of two office holdings at an aggregate sales price of £14.3 million for the year ended 31 December 2023. A further two office disposals were completed post year-end with an aggregate sales price of £54.6 million. These disposals are part of the strategic repositioning of the portfolio.
- Major development scheme at Strategic Park, Southampton completed, delivering a rent roll in excess of £1.4 million per annum and a 12 month total return of 13.4 per cent.
- 4 per cent increase in Scope 1 and 2 absolute emissions (-26 per cent in 2022). Emissions intensity reduced by 16 per cent (-13 per cent in 2022).
*see Alternative Performance Measures
Chairman’s Statement
The macro-economic risk factors that were prevalent in 2022 began to ease during 2023. While the UK slipped into a shallow technical recession in the second half of the year, this is forecast to be short and inflation, which has weighed heavily on financial markets, fell towards the end of the year.
Uncertainties linger as interest rates remain at a 15-year high, the rate of inflation is still above target, and we are in an environment of significant geo-political risk. The last eighteen months have been challenging for real estate as investment performance suffered due to rising interest rates leading to yield increases and a repricing of the asset class. Investors faced the impact of higher borrowing costs and reduced capital flows as the attractiveness of real estate deteriorated. As a consequence, UK investment volumes were low by recent measures with some properties proving to be highly illiquid. On a positive note, the occupational markets have proven to be more resilient than many expected.
Company Performance
Against this challenging economic and property market backdrop, the Company has delivered a net asset value (‘NAV’) total return of -3.3 per cent for the year. The NAV per share as at 31 December 2023 was 109.8 pence, down 7.3 per cent from 118.5 pence per share as at 31 December 2022.
The share price total return for the year was -12.5 per cent with the discount to NAV standing at 34.0 per cent at the year end, as the negative sentiment towards the commercial real estate sector continued to affect the rating of the shares. The Board has continued its focus on rebalancing the portfolio with the disposal of two office holdings in December 2023 and a further two office sales since the year end, and there has been positive movement in the share price in 2024. At the time of writing the share price is 78.7 pence per share, a discount of 28.3 per cent to the NAV.
The following table provides an analysis of the movement in the NAV per share during the year.
|
| Pence per share * |
| NAV per share as at 31 December 2022 | 118.5 |
| Unrealised decrease in valuation of property portfolio | (8.1) |
| Realised loss on sale of properties | (0.6) |
| Movement in interest rate swap | (0.1) |
| Net revenue | 5.0 |
| Dividends paid | (4.9) |
| NAV per share as at 31 December 2023 | 109.8 |
*Based on the average number of shares in issue during the year.
Portfolio Performance
The Company’s portfolio delivered a total return of -0.7 per cent over the year, outperforming the MSCI UK Quarterly Property Index to December 2023 (‘MSCI’) return of -1.5 per cent. Relative outperformance was driven by an income return of 5.4 per cent against the Index return of 4.7 per cent, with capital returns in line against the Index at -5.9 per cent.
We are at a stage of the cycle where income is driving returns and as such it was pleasing to see the portfolio’s net operating income grow by 5.3 per cent with all sub-sectors delivering rental growth and the completion of 76 leasing initiatives across the portfolio.
Despite the relative outperformance against the Index, the portfolio was negatively impacted by the Company’s exposure to the office sector. This is being addressed with momentum in our sales programme, which as mentioned above has seen the disposal of two office holdings in December 2023 and a further two sales since the year end, raising total proceeds of £68.9 million. The portfolio’s exposure to the office sector has fallen to 22.2 per cent at the time of writing, which is less than the Index weighting (24.2 per cent). We anticipate further sales activity within the capital markets as we continue to recycle capital to improve performance.
Dividends
The Company paid twelve interim dividends totalling 4.92 pence per share during the year, being nine monthly dividends of 0.4 pence per share, followed by a 10 per cent increase and three further monthly dividends at a rate of 0.44 pence per share. The level of dividend cover for the period was 104.7 per cent on a cash basis and the Board will continue to keep the level of dividend under review.
Borrowings
The Company has a £260 million term loan in place with L&G which matures on 31 December 2024. As previously announced, the Company signed up to a new debt facility in September 2023 provided by incumbent lender, Barclays Bank plc, and a new lender, HSBC UK Bank Plc. This facility is in two tranches and includes a committed £260 million Term Loan, which can only be drawn to refinance the existing £260 million L&G Loan. There is also a £60 million Revolving credit facility, £30 million of which was drawn down at the year-end and has subsequently ben repaid.
The new debt facility enables the Company to retain the competitively priced L&G Loan which is fixed at 3.32 per cent up to maturity, whilst also ensuring the future liquidity needs of the Company are fully funded at an acceptable commitment fee.
As at 31 December 2023, the Company’s loan to value, net of cash (‘LTV’) was 24.4 per cent and the weighted average interest rate on the Group’s total current borrowings was 3.8 per cent.
Continuation Vote
In accordance with the Articles of Incorporation, the Directors are required to put an ordinary resolution to shareholders in relation to the continuation of the Company in 2024 (the "Continuation Vote"). If at that meeting such resolution is not passed, the Board shall, within twelve months of such meeting, convene an extraordinary general meeting of the Company at which a special resolution shall be proposed to the members of the Company for the winding up of the Company and/or a special resolution shall be proposed to the members of the Company for the reconstruction of the Company, provided that such resolution for the reconstruction of the Company shall, if passed, provide an option to Shareholders to elect to realise their investment in the Company in full. The Board’s assessment of going concern can be found below.
On 15 April 2024, the Board announced that it has been carefully considering for some time, with its advisers, its strategic options to enhance value for its shareholders, and that it has formalised these deliberations into a strategic review process (the "Strategic Review") (further details of which are set out below).
Once the Strategic Review has been completed, the Board will convene a general meeting of the Company at which the Continuation Vote will be proposed.
Strategic Review
Despite the Company's successful and ongoing strategic disposal programme, which has reduced the portfolio's exposure to the underperforming office sector, and recent improvements in the Company's share rating, its share price remains at a material discount to the Company's net asset value. The Board, together with its advisers, has therefore been carefully considering the Company’s strategic options for some time.
As part of the Strategic Review, the Board will consider all options including, but not limited to, continuing the Company with further actions to narrow the share price discount to NAV; selling the Company's portfolio or subsidiaries (or portion thereof); returning capital to shareholders; changing the Company's investment strategy and/or management arrangements; commencing a managed wind down; selling the entire issued share capital of the Company or undertaking some other form of consolidation, combination, merger or comparable corporate action.
Shareholders are welcome to send their comments to chairmanBCPT@georgeson.com, in particular on their priorities for their investment in the Company and the options described above.
We have commenced this Strategic Review to determine the best way to enhance value for shareholders, after which the independent Board will determine the best way forward for the Company as a whole. The outcome of the Strategic Review is expected to be announced in Q3 2024, and thereafter the Continuation Vote will also be held. The Board looks forward to updating shareholders on the progress of the Strategic Review and will make further announcements in due course, noting that there is currently no certainty as to the outcome of the Strategic Review.
Board Composition
Karima Fahmy was appointed as an independent non-executive Director of the Company with effect from 19 January 2024. Karima is a corporate lawyer with extensive experience of the UK property sector.
Following a significant increase in other time commitments, Hugh Scott-Barrett retired from his role as non-executive Senior Independent Director in February 2024. I would like to thank Hugh for his considerable contribution to the Company and wise counsel over recent years. I am pleased to confirm that Isobel Sharp, who is Audit and Risk Committee Chair, has also assumed the role of Senior Independent Director.
Environmental, Social and Governance (‘ESG’)
Every Board director is a member of the ESG Committee which is established to ensure that the Managers are driving year-on-year improvements in portfolio performance, process and governance. The Board was pleased to note the Company’s return to the top of its Global Real Estate Sustainability Benchmark peer group in 2023, achieving a score of 79/100, conferring a three green star rating.
As work has continued to future-proof the portfolio in line with our Net Zero Carbon target and the Minimum Energy Efficiency Standards, the Company is also focused on the ESG fields of social, biodiversity and transitional risk where we expect to make meaningful progress during the upcoming year. Given the composition and quality of the portfolio, the Board and Managers remain of the view that the Company’s asset base is well-positioned in relation to the evolving ESG landscape.
Outlook
Market participants across real estate and the wider financial sectors have been keenly monitoring the outlook for UK interest rates, with the potential for a cut in the base rate in the second half of 2024. There are also upcoming general elections, most notably in the UK and US, which add an extra layer of complexity to the outlook.
The year ahead will most likely see continued divergence in performance across property sectors, sub-sectors and markets. Asset fundamentals rather than market yield compression should provide a platform for value creation, and we believe that this is an opportune time for a diversified strategy.
Paul Marcuse
Chairman
26 April 2024
This announcement may contain forward-looking statements with respect to the financial condition, results of operations and business of the Company. Such statements involve risk and uncertainty because they relate to future events and circumstances that could cause actual results to differ materially from those expressed or implied by forward-looking statements. The forward-looking statements are based on the Directors’ current view and on information known to them at the date of this document. Nothing should be construed as a profit forecast.
Managers’ Review
Property Headlines over the Year
- A portfolio total return -0.7* per cent over the 12 months to 31 December 2023 versus the MSCI UK Quarterly Property Index ('MSCI') return of -1.5 per cent.
- Relative outperformance delivered through income generation and proactive asset management, driving 5.3 per cent increase in portfolio net operating income.
- Accretive asset management activity delivered underlines strong asset fundamentals, attractive sector exposures and significant latent income growth potential within the portfolio.
- Portfolio offers potential day one income reversion of 16.0 per cent with a further 31.0 per cent of income subject to contractual uplifts guaranteeing additional rental growth.
- The disposal of four office assets completed (two post year-end) as part of the strategic repositioning of the portfolio, raising proceeds of £68.9 million delivered at an aggregate discount to NAV of 2.6 per cent and reducing portfolio exposure to the office sector to 22.2 per cent.
- Major development scheme at Strategic Park, Southampton completed, delivering a rent roll in excess of £1.4 million per annum and a 12-month total return of 13.4 per cent.
*see Alternative Performance Measures
Property Market Review
2023 was a challenging year for UK real estate due to the macro-economic environment and a 15 year high in interest rates. Volatility in financial markets, uncertainty as to the interest rate outlook and persistently high inflation dampened investor appetite and the relative attractiveness of real estate.
UK real estate investment volumes totalled circa £40 billion in 2023, a fall of 40 per cent year on year. Despite the negative headlines around offices, they were the second most traded sector in 2023, accounting for approximately 24 per cent of deal volume. The tentative emergence of counter-cyclical and opportunistic strategies has been supported by an occupational market that continues to display resilience and even growth, albeit this is increasingly nuanced by micro-location and asset fundamentals.
As income has driven returns, we have seen an increasing divergence in performance across the sub-sectors due to differing rental growth prospects. As a result, weaker office segments have lost market share to ‘beds, sheds, and meds’, being the sectors delivering rental growth founded on structural undersupply and positive thematic support. Industrials generated the highest rental growth over the year at 7.1 per cent and were unsurprisingly the most traded sector. Retail warehousing, underpinned by low vacancy and a negligible development pipeline, supported positive rental growth over the year of 1.8 per cent and is expected to gain further momentum in 2024.
All this is to say that delivering relative outperformance has become a more nuanced pursuit founded on disciplined management of both portfolio composition and the standing asset base. The notable absence of the distressed (or even motivated) selling of real estate assets has put the onus on returns being generated through proactive asset management and diversification of income streams. Crystallising rental growth through leasing initiatives, driving capital growth through refurbishments, enhancing occupational and investment prospects through asset repositioning relies heavily on expertise to leverage strong underlying asset and portfolio fundamentals.
Portfolio performance
The total return from the portfolio was -0.7 per cent over the twelve months, compared with the MSCI return of -1.5 per cent, a 74-basis point performance premium.
At a time when returns are driven by income, the Company’s portfolio is generating a yield advantage and the portfolio delivered an income return of 5.4 per cent over the year, a 75-basis point premium over the MSCI. The portfolio’s capital growth was in line with MSCI at -5.9 per cent over the year.
Capital Growth
Over the period, portfolio yields have moved as follows:
|
| Net initial yield (%) | Equivalent yield (%) | Reversionary yield (%) | |||
|
| Dec 23 | Dec 22 | Dec 23 | Dec 22 | Dec 23 | Dec 22 |
| Industrial | 4.5 | 4.5 | 6.0 | 5.9 | 6.3 | 6.2 |
| Offices | 7.4 | 5.8 | 8.2 | 6.9 | 8.4 | 7.0 |
| Retail* | 4.7 | 4.4 | 5.1 | 4.9 | 4.8 | 4.7 |
| Retail Warehousing | 6.3 | 5.7 | 6.2 | 6.1 | 6.1 | 6.0 |
| Alternatives | 4.8 | 4.5 | 4.7 | 4.5 | 4.6 | 4.5 |
| Portfolio | 5.5 | 5.0 | 6.5 | 6.1 | 6.2 | 5.8 |
*including St Christopher’s Place
At the sector level, the Company’s industrial, retail (including retail warehousing) and alternatives holdings all generated material relative capital outperformance over the index.
Performance at the portfolio level was impacted by offices, which delivered relative capital underperformance against the index of 503 basis points. The largest driver behind this was the regional office assets, a sub-sector that faces investment illiquidity, constrained transaction volumes and a muted performance outlook.
|
| Balanced Commercial Property Trust | MSCI UK Quarterly Index | ||
| Sector | Income Return (%) | Capital Return (%) | Total Return (%) | Total Return (%) |
| All Retail | 4.9 | -4.1 | 0.7 | -0.3 |
| Offices | 7.1 | -18.2 | -12.2 | -10.4 |
| Industrial | 4.7 | 3.0 | 7.9 | 3.9 |
| Alternatives | 4.9 | -2.8 | 2.0 | -0.1 |
| All Property | 5.4 | -5.9 | -0.7 | -1.5 |
Income Return
Over the year the portfolio saw net operating income growth of 5.3 per cent and generated ERV growth of 1.9 per cent. The key driver of the increase in passing rent was active asset management across the portfolio, as a total of 76 leasing initiatives completed over the 12 months.
The portfolio vacancy rate rose slightly from 5.9 per cent by Estimated Rental Value (ERV) to 6.7 per cent. 1.0 per cent of the vacant space is now contractually committed and 4.3 per cent relates to Stockley Park in Uxbridge, which is a repositioning opportunity. The uplift in the void rate is primarily linked to two restaurant units at St Christopher’s Place where leases have been forfeited due to the tenants breaching lease obligations, although there is a good level of new tenant interest in these units.
The portfolio has historically sustained a low long-term vacancy, with the average over the last 5 years standing at 5.1 per cent.
The portfolio offers a potential income reversion of 16.0 per cent. It also offers an attractive mix of income duration from its higher yielding assets and the opportunity to realise performance from its growth assets. The portfolio’s WAULT (weighted average unexpired lease term) stands at 4.7 years (to lease breaks). The industrial assets offer the highest income reversion of over 40 per cent, an equivalent yield of 6.0 per cent and a short WAULT of 2.5 years (including rent reviews as lease events), enabling the reversion to be delivered at lease events in the near term.
Approximately 31 per cent of the Company’s income profile is subject to contractual uplifts offering guaranteed income growth. Index-linked rent reviews support 8.8 per cent of the income, while 22.2 per cent is subject to fixed uplifts.
The table below sets out an analysis of the portfolio’s income reversion.
Investment Activity
Despite a challenging investment market, we have successfully completed the sale of four office holdings. Two of these completed in December 2023, with further sales post year end in January and March 2024. Three of the four sales have been in the structurally challenged out-of-town business park sub-sector, with the fourth being a low-yielding, multi-let office in London’s West End. Following the completion of these four disposals (two of these are post year-end), the portfolio’s exposure to the office sector has fallen to 22.2 per cent.
The assets sold are:
- Nevis & Ness House, Edinburgh Park – a 42,000 sq ft headquarters office occupied by Diageo Scotland Limited.
- Building 4, Prime Four Business Park, Aberdeen – a 25,000 sq ft training centre occupied by Maersk Training UK Limited.
- 2-4 King Street, London SW1 – a multi-let holding of 14,600 sq ft in London’s West End sold in January 2024.
- The Leonardo Building, Crawley – a 110,000 sq ft headquarters office occupied by Virgin Atlantic Limited sold in March 2024.
The sales have been completed at an aggregate price of £68.9 million, representing a 2.6 per cent discount to the valuation preceding the sales contracting.
The pricing achieved on these disposals underlines the value in the Company’s investment ethos of focussing on high quality real estate with strong fundamentals, which lends relative resilience and liquidity. We are actively reviewing a pipeline of further disposals from both the office sector and wider portfolio, targeting assets where value can be crystallised following the successful delivery of asset business plans.
Asset Management
Active asset management is the key determinant of relative outperformance, enabling rental growth to be converted into income while also generating capital growth through the enhancement of asset leasing profiles.
Industrial and logistics
The Company’s industrial and logistics assets offer an attractive day one income reversion and have generated rental growth of 2.6 per cent over the twelve months. A number of highly accretive asset management initiatives have been executed over the year, underpinning a 2.8 per cent uplift in passing rent and supporting relative income and capital outperformance.
Notable successes included:
Hurricane 52, Estuary Business Park, Liverpool
The development of a highly specified 52,500 sq ft logistics unit reached practical completion in August 2022. Following a competitive best-bids process, the unit was let in July 2023 to clothing manufacturer Montirex on a 10-year lease (break at year 5) at a rent showing a 7.2 per cent premium to the ERV. The asset recorded a total return of 28.3 per cent over the year.
The Cowdray Centre, Colchester
This multi-let estate continues to see buoyant levels of occupier activity, supported by a phased programme of refurbishments which has driven renewed occupier demand, rental growth and value appreciation.
The asset offers a day one income reversion of 44 per cent and the staggered nature of the leasing profile is crystalising this into performance. Rent reviews with Rexel UK and Jump Street have seen rents increase by 66 per cent and generated additional income totalling £69,500 per annum. Lease renewals completed with The Range (CDS Superstores), Jayar Components and Cowdray Carpet Centre have secured an income stream totalling £425,000 per annum. In February 2024, MKM Building Supplies entered into a new 20-year lease (break year 15) on a new refurbished unit, whilst lease renewal negotiations continue with Pickfords Move Management and Hermes Parcelnet, which will serve to further increase and strengthen the asset’s income profile.
The estate also comprises a development site where planning consent has been secured for a trade-centre scheme and the construction package is currently out to tender.
8 Hams Hall Distribution Park, Birmingham
A bespoke logistics facility of 264,000 sq ft occupied by Nestle Purina until March 2025. In August, Nestle completed a 10-year (break at year 5) reversionary lease from March 2025 in exchange for a 3.5 month rent free period.
Units 1 & 2 Strategic Park, Southampton
The major refurbishment of this two-unit industrial scheme completed in October 2023 and both units have now been let at rents ahead of pro-forma ERV’s. The initiative has delivered:
- Income performance, boosting the Company’s income by in excess of £1.4m per annum and generating an uplift to the previous combined passing rent of 27.5 per cent and bettering the ERV underwritten in the asset business plan by 2.4 per cent.
- Capital performance, as capital growth of 15.7 per cent underpins a total return of 13.4 per cent over a 12-month period, and
- ESG enhancements with A-rated EPCs, a BREEAM Very Good certification and a full solar photovoltaic system installed on the roof. Both tenants have committed to acquire the electricity generated on-site and the solar installation is forecast to produce an additional operational income return of circa 7.5 per cent per annum.
Over the course of 2024, industrial units with an ERV in excess of £5.2m are subject to an upcoming or outstanding lease event (including new leases completed post-period at Colchester and Southampton as referenced above), offering a meaningful opportunity to crystallise further income growth.
Retail Warehousing
A highly successful leasing strategy completed in 2022, securing full occupation of both retail warehouse parks and solidifying a robust grocery, discount and convenience-led tenant roster. This has afforded the holdings an attractive, stable, and growing income profile which has seen the passing rent from the Newbury and Solihull retail parks increase by 9.4 per cent over the year.
We are working to enhance the operational income further through the addition of solar photovoltaic installations across various retail units.
Offices
The Company’s office holdings continue to see robust levels of occupational activity, with six new leases concluded, representing a rent roll of £868,000 per annum, delivered within 1.4 per cent of ERV. There have also been 3 rent reviews settled at a 0.8 per cent premium to the previous passing rents.
7 Birchin Lane, London EC3
The portfolio’s sole City of London holding has been subject to a phased programme of refurbishment, delivering Category A ‘Plug & Play’ space along with upgraded ESG credentials including B-rated EPCs. During the year, four suites have been refurbished, three of which have been let at rents at a 10 per cent premium to the ERV and the most recent letting on the 1st floor concluding at a rent showing a 17.6 per cent uplift to the previous ERV.
King Street, Manchester
This multi-let office remains fully occupied, underlining the continued appeal of this prestigious office building. Over the course of the year, three existing tenants – Foresight Group, Lloyds Bank and Markel Insurance – all committed to new leases, securing a rent roll of £314,000 per annum, at a 0.7 per cent premium to ERV. Markel Insurance also settled the September 2021 rent review on their second suite on the 11th floor at a 1.3 per cent uplift.
Stockley Park, Uxbridge
This is the portfolio’s largest void with an ERV in excess of £3.0m per annum. This former HQ office building is subject to a repositioning strategy to convert the building to a post-operative healthcare use. The local planning authority has been engaged, offering in-principle support to the initiative and a planning application has recently been submitted. During 2024 we expect to achieve a number of milestones allowing for incremental crystallisation of value throughout the process, such as the receipt of planning consent, the contractual commitment of the occupier and the commencement of the development phase.
Retail
St Christopher’s Place (mixed-use Food & Beverage (‘F&B’), retail, residential and offices)
This asset is a unique property; a prime Central London estate comprising 172 lettable units and 40 buildings, diversified across the retail, leisure, residential and office sectors as follows:
| Sector | Exposure (% of asset capital value) |
| Retail | 31.2 |
| Food & beverage | 33.5 |
| Offices | 14.8 |
| Residential | 20.5 |
The estate is valued at a 23.7 per cent discount to its pre-pandemic level and therefore represents a key growth asset as it moves through its recovery phase.
The West End retail market is enjoying a notable recovery, with 2023 footfall up 5 per cent year-on-year, while Oxford Street outperformed and recorded a 12 per cent uplift in footfall year-on-year. The 12 months saw growth in international travel (+31 per cent) and hotel occupancy rates (+6 per cent), all of which served to increase overall spend in the West End by 4 per cent. As a result of an improving market backdrop, Oxford Street saw a record year for new letting activity with some 250,000 sq ft of deals completing, with the candy and tourist shops that have blighted the street in recent years having retrenched and the vast majority of all vacant space to the west of Oxford Circus is either under offer or subject to redevelopment.
The St Christopher’s Place Estate is starting to see the benefits of this wider recovery and over the twelve months we delivered 54 leasing initiatives across the estate, including 43 new leases and tenancy agreements that account for an income stream in excess of £2.3m. As a result of this the annual net operating income increased by 5.1 per cent year-on-year and there are a further 9 occupational deals under offer with legals progressing.
Disappointingly, the tenants of the Estate’s Oxford Street units, Aldo and The Body Shop, have both entered administration and ceased trading from their premises in recent weeks. As a result, both Oxford Street units became empty post-period, albeit remain subject to leases. The units are being actively marketed and have received encouraging levels of occupational interest at this early stage.
In order to drive continued income and capital growth a number of key strategic initiatives are being progressed:
- Enhancing the F&B offering.
The conversion of traditional retail to F&B drives investment fundamentals through superior rents, longer leases and sharper capitalisation rates, while also enhancing the consumer experience and occupier dynamics of the estate. Over the course of the year, F&B has become the dominant use at the estate, increasing from 26.8 per cent to 33.5 per cent as 5 F&B occupational deals completed.
- SCP as a West End office hub.
Occupier demand for smaller floorplates is predominantly centred on fully fitted ‘Plug & Play’ space. Fitted space increases the optionality for occupier demand and materially reduces void periods, rent free periods and achieves higher rents. We are proactively repositioning suites to meet this key source of demand and since the start of 2024, 11 new office tenancies have completed.
- Leveraging improving occupational market dynamics to enhance occupancy and income.
The rebasing of occupational costs on Oxford Street has spurred an increase in retailer demand. The Estate is benefitting from this recovery and over half of the vacant space at SCP is under offer at the time of writing. We are seeking to leverage this momentum to continue to build critical mass across the Estate’s retail, F&B and office elements, with demand tension a key determinant of rental growth.
Alternatives
The portfolio’s alternatives holdings include the purpose-built student accommodation in Winchester (which is subject to a long-term, index-linked lease to the university), residential properties at St Christopher’s Place and the leisure units at Wimbledon Broadway (a gym and cinema).
The residential element of St Christopher’s Place is substantial, accounting for 4.7 per cent of the value of the Company’s portfolio and saw its net operating income increase by 6.6 per cent as occupancy and rental levels recovered.
Strategic Portfolio Initiatives
We believe the future drivers of relative outperformance will become increasingly nuanced. Allocation towards structurally supported growth sectors remains critical, however, the supply-demand dynamics within sub-sectors (such as big-box vs mid-box industrial or discount vs fashion-led retail), micro-locations (availability of workforce and areas of meaningful undersupply such as along key arterial routes or in last mile locations) and at the asset level (the long-term functional relevance of the building) will all dictate the consistent delivery of long-term outperformance.
To that end, we will continue to leverage the portfolio’s strong underlying fundamentals, with its attractive reversionary potential and latent opportunities to deliver consistent income growth as the key driver of total returns. Key strategic initiatives include:
- Income compounding – the portfolio offers an attractive income reversion alongside attributes supporting the conversion of potential into growth. This includes a consistently low void rate, high quality tenant base, exposure to index-linked lease structures, a WAULT facilitating the execution of asset management strategies and a portfolio composition delivering continued rental growth.
- Active asset management – a high quality portfolio offers investment and occupational fundamentals that support the delivery of value-add strategies, which are key drivers of income and capital growth as well as relative outperformance.
- Opportunistic recycling of capital – selective disposals will continue to reduce the portfolio’s exposure to the more challenging sub-markets, increasing the portfolio’s alignment to growth sectors and assets.
Outlook
The macro-economic outlook improved materially towards the end of 2023 driven by a significant fall in the rate of inflation which raised expectations that the Bank of England would cut the interest rate sooner than was expected just a few months previously. However, while inflation has continued to moderate it is still higher than the Bank of England’s 2 per cent target. As a consequence, the Bank may not begin to cut rates until inflation is closer to target and wage growth has cooled further. Financial analysts are expecting to see a cut in the base rate later this year.
Barring not insubstantial geo-political risk, possible interest rate cuts during the year will bode well for property pricing and allow the real estate market to look beyond this period of relative stabilisation to a prospective recovery.
As for whether pricing has now bottomed out, the UK has seen the strongest rebasing of valuations of all major European real estate markets. While there may be some further softening at the market level, we do not expect a substantial valuation correction in 2024. Quality stock will most likely be less affected than secondary assets where any repricing is expected to be more aggressive. Downside risks remain, primarily the potential for refinancing pressures to precipitate distressed selling. However, we have not seen the levels of distress in real estate markets that many had anticipated, and a more stable economic outlook may result in a more manageable financial environment.
Against this background and in a context where outperformance is nuanced, the portfolio’s growth characteristics and high quality, liquid asset base will continue to offer opportunities as we aim to deliver attractive risk-adjusted returns.
| Sector Analysis (% of total property portfolio) | ||
|
| 2023 (%) | 2022 (%) |
| Industrial | 32.3 | 28.9 |
| Offices | 26.5 | 31.6 |
| Retail | 18.4 | 17.4 |
| Retail Warehouses | 12.3 | 11.6 |
| Alternative | 10.5 | 10.5 |
Source: Columbia Threadneedle REP AM plc
| Geographical Analysis (% of total property portfolio) | ||
|
| 2023 (%) | 2022 (%) |
| London – West End | 28.7 | 27.5 |
| South East | 24.2 | 23.4 |
| Midlands | 23.3 | 21.3 |
| North West | 12.5 | 12.2 |
| Scotland | 7.3 | 11.6 |
| South West | 2.2 | 2.3 |
| Rest of London | 1.8 | 1.7 |
Source: Columbia Threadneedle REP AM plc
| Lease Expiry Profile | ||
| At 31 December 2023 the weighted average lease length for the portfolio, assuming all break options are exercised, was 4.7 years (2022: 5.2 years) | ||
| % of leases expiring (weighted by rental value) | 2023 (%) | 2022 (%) |
| 0 – 5 years | 64.9 | 40.1 |
| 5 – 10 years | 24.0 | 36.7 |
| 10 – 15 years | 9.6 | 15.0 |
| 15 – 25 years | 1.5 | 8.2 |
Source: Columbia Threadneedle REP AM plc
The largest occupiers, based as a percentage of contracted rent, as at 31 December 2023, are summarised as follows:
| Income Concentration | |
| Company name | % of Total Income |
| Apache North Sea Limited | 4.6 |
| CNOOC Petroleum Europe Limited | 4.5 |
| JP Morgan Chase Bank, National Association | 4.5 |
| Kimberley-Clark Limited | 3.6 |
| University of Winchester | 3.6 |
| Marks and Spencer plc | 3.6 |
| Virgin Atlantic Limited | 3.5 |
| Nestle Purina UK Commercial Operators Limited | 3.2 |
| Transocean Drilling UK Limited | 3.2 |
| DHL Supply Chain Limited | 3.2 |
| Total | 37.5 |
Source: Columbia Threadneedle REP AM plc
Richard Kirby and Daniel Walsgrove
Columbia Threadneedle REP AM plc
26 April 2024
Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.
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
Columbia Threadneedle REP AM plc
Tel: 0207 499 2244
Innes Urquhart
Winterflood Securities Limited
Tel: 0203 100 0265
Dion Di Miceli / Tom MacDonald / Stuart Muress / James Atkinson
Barclays Bank PLC
Tel: 0207 623 2323
BarclaysInvestmentCompanies@barclays.com
Balanced Commercial Property Trust Limited
Consolidated Statement of Comprehensive Income (audited)
|
| Year ended 31 December 2023 | Year ended 31 December 2022 | |
|
|
| £’000 | £’000 |
| Revenue |
|
|
|
| Rental income |
| 59,228 | 58,676 |
| Other income |
| 119 | 42 |
|
|
| --------- | --------- |
| Total revenue |
| 59,347 | 58,718 |
|
|
|
|
|
| Losses on investment properties |
|
|
|
| Unrealised losses on revaluation of investment properties |
| (56,940) | (129,096) |
| Losses on sale of investment properties realised |
| (4,533) | (5) |
|
|
| ---------- | ---------- |
Total loss |
| (2,126) | (70,383) |
|
|
| ---------- | ---------- |
| Expenditure |
|
|
|
| Investment management fee |
| (5,968) | (6,861) |
| Other expenses |
| (7,336) | (6,479) |
|
|
| ---------- | ---------- |
| Total expenditure |
| (13,304) | (13,340) |
|
|
| ----------- | ----------- |
|
Operating loss before finance costs and taxation |
|
(15,430) |
(83,723) |
|
|
| ----------- | ----------- |
| Net finance costs |
|
|
|
| Interest income |
| 2,051 | 807 |
| Finance costs |
| (12,617) | (11,116) |
|
|
| ----------- | ----------- |
| |
| (10,566) | (10,309) |
| |
| ----------- | ----------- |
Loss before taxation |
| (25,996) | (94,032) |
|
|
|
|
|
| Taxation |
| (71) | (345) |
|
|
| ---------- | ---------- |
Loss for the year |
| (26,067) | (94,377) |
|
|
| ---------- | ---------- |
| Other comprehensive income |
|
|
|
| Items that are or may be reclassified subsequently to profit or loss |
|
|
|
| Movement in fair value of effective interest rate swap |
| (843) | 723 |
|
|
| ---------- | ---------- |
| Total comprehensive loss for the year |
| (26,910) | (93,654) |
|
|
| ---------- | ---------- |
|
|
|
|
|
| Basic and diluted earnings per share |
| (3.7)p | (13.1)p |
| EPRA earnings per share | 5.1p | 4.8p |
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.
Balanced Commercial Property Trust Limited
Consolidated Balance Sheet (audited)
|
| As at 31 December 2023 £’000 | As at 31 December 2022 £’000 |
| Non-current assets |
|
|
| Investment properties | 936,993 | 1,075,082 |
| Trade and other receivables | 14,354 | 20,372 |
|
| ------------ | ------------ |
|
| 951,347 | 1,095,454 |
|
| ------------ | ------------ |
Current assets |
|
|
Investment properties held for sale | 71,277 | - |
| Trade and other receivables | 12,005 | 12,811 |
| Interest rate swap asset | - | 1,030 |
| Cash and cash equivalents | 41,717 | 54,837 |
|
| ------------ | ------------ |
|
| 124,999 | 68,678 |
| | ------------ | ------------ |
Total assets | 1,076,346 | 1,164,132 |
|
| ------------ | ------------ |
|
|
|
|
Current liabilities |
|
|
| Trade and other payables | (17,067) | (21,140) |
| Interest-bearing loan | (259,689) | (49,889) |
| | ------------ | ------------ |
| | (276,756) | (71,029) |
Non-current liabilities |
|
|
Trade and other payables | (2,774) | (2,250) |
| Interest-bearing loans | (26,777) | (259,388) |
|
| ------------ | ------------ |
|
| (29,551) | (261,638) |
|
| ------------ | ------------ |
Total liabilities | (306,307) | (332,667) |
|
| ------------ | ------------ |
Net assets | 770,039 | 831,465 |
|
| ------------ | ------------ |
|
|
|
|
Represented by: |
|
|
| Share capital | 7,994 | 7,994 |
| Special reserve | 485,840 | 485,840 |
| Capital reserve – investments sold | 62,109 | 75,005 |
| Capital reserve – investments held | 97,583 | 146,160 |
| Hedging reserve | - | 1,030 |
| Revenue reserve | 116,513 | 115,436 |
|
| ------------ | ------------ |
Equity shareholders’ funds | 770,039 | 831,465 |
|
| ------------ | ------------ |
Net asset value per share | 109.8p | 118.5p |
| EPRA net tangible assets per share | 109.8p | 118.4p |
Balanced Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2023 (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 2023 |
7,994 |
485,840 |
75,005 |
146,160 |
1,030 |
115,436 |
831,465 |
| Total comprehensive income for the year |
|
|
|
|
|
|
|
| Loss for the year | - | - | - | - | - | (26,067) | (26,067) |
| Transfer of prior years’ revaluation to realised reserve |
- |
- |
(8,363) |
8,363 |
- |
- |
- |
| Transfer in respect of unrealised losses on investment properties |
- |
- |
- |
(56,940) |
- |
56,940 |
- - |
| Losses on sale of investment properties realised |
- |
- |
(4,533) |
- |
- |
4,533 |
- - |
| Movement in fair value of interest rate swap |
- |
- |
- |
- |
(843) |
- |
(843) |
| Transfer of loss on maturity of interest rate swap |
- |
- |
- |
- |
(187) |
187 |
- |
| Total comprehensive income for the year |
- |
- |
(12,896) |
(48,577) |
(1,030) |
35,593 |
(26,910) |
|
|
|
|
|
|
|
|
|
| Transactions with owners of the Company recognised directly in equity |
|
|
|
|
|
|
|
| Dividends paid | - | - | - | - | - | (34,516) | (34,516) |
|
At 31 December 2023 |
7,994 |
485,840 |
62,109 |
97,583 |
- |
116,513 |
770,039 |
Consolidated Statement of Changes in Equity
for the year ended 31 December 2022 (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 2022 | 7,531 | 544,813 | 75,010 | 275,256 | 307 | 114,603 | 1,017,520 |
| Total comprehensive income for the year |
|
|
|
|
|
|
|
| Loss for the year | - | - | - | - | - | (94,377) | (94,377) |
| Movement in fair value of interest rate swap |
- |
- |
- |
- |
723 |
- |
723 |
| Transfer in respect of unrealised losses on investment properties |
- |
- |
- |
(129,096) |
- |
129,096 |
- - |
| Losses on sale of investment properties realised |
- |
- |
(5) |
- |
- |
5 |
- |
| Total comprehensive income for the year |
- |
- |
(5) |
(129,096) |
723 |
34,724 |
(93,654) |
|
|
|
|
|
|
|
|
|
| Transactions with owners of the Company recognised directly in equity |
|
|
|
|
|
|
|
| Transfer from share capital to special reserve | 463 | (463) | - | - | - | - | - |
| Buyback to Treasury | - | (58,510) | - | - | - | - | (58,510) |
| Dividends paid | - | - | - | - | - | (33,891) | (33,891) |
|
At 31 December 2022 |
7,994 |
485,840 |
75,005 |
146,160 |
1,030 |
115,436 |
831,465 |
|
|
|
|
|
|
|
|
|
Balanced Commercial Property Trust Limited
Consolidated Statement of Cash Flows (audited)
|
| Year ended 31 December 2023 | Year ended 31 December 2022 |
|
| £’000 | £’000 |
| Cash flows from operating activities |
|
|
| Loss before taxation | (25,996) | (94,032) |
| Adjustments for: |
|
|
| Finance costs | 12,617 | 11,116 |
| Interest income | (2,051) | (807) |
| Unrealised losses on revaluation of investment properties | 56,940
| 129,096
|
| Losses on sale of investment properties realised | 4,533 | 5 |
| Decrease/(increase) in operating trade and other receivables |
6,840 |
(5,032) |
| (Decrease)/increase in operating trade and other payables | (4,013) | 3,412 |
|
| ----------- | ----------- |
| Cash generated from operations | 48,870 | 43,758 |
|
| ----------- | ----------- |
| Interest received | 2,035 | 807 |
| Interest and bank fees paid | (10,902) | (10,987) |
| Taxation paid | (71) | (345) |
|
| ----------- | ----------- |
|
| (8,938) | (10,525) |
|
| ----------- | ----------- |
| Net cash inflow from operating activities | 39,932 | 33,233 |
|
| ----------- | ----------- |
| Cash flows from investing activities |
|
|
| Purchase of investment properties | (884) | (812) |
| Sale of investment properties | 14,300 | - |
| Capital expenditure on investment properties | (8,021) | (23,258) |
|
| ----------- | ----------- |
| Net cash inflow/(outflow) from investing activities | 5,395 | (24,070) |
|
| ----------- | ----------- |
| Cash flows from financing activities |
|
|
| Dividends paid | (34,516) | (33,891) |
| Issue costs for loan facility extension and Barclays/HSBC agreement | (3,931) | (6) |
| Repayment of Barclays loan | (50,000) | - |
| Drawdown of Barclays/HSBC loan | 30,000 | - |
| Buybacks to Treasury | - | (58,510) |
|
| ----------- | ----------- |
| Net cash outflow from financing activities | (58,447) | (92,407) |
|
| ----------- | ----------- |
| Net decrease in cash and cash equivalents | (13,120) | (83,244) |
| Cash and cash equivalents at the beginning of the year | 54,837 | 138,081 |
|
| ----------- | ----------- |
| Cash and cash equivalents at the end of the year | 41,717 | 54,837 |
|
| ----------- | ----------- |
Balanced 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.
It has been another challenging year, which continues to be marked by an elevated cost-of-living and geopolitical events such as the war in Ukraine and the escalation of tensions in the Middle East. Against this background, we have continued to see higher levels of inflation in the UK, albeit the rate has slowed sharply as monetary policy continues to work through the economy, and it is far from 11.1 per cent peak in October 2022. In response, the Bank of England continued to raise interest rates which at the time of writing have stabilised at 5.25 per cent. This volatile economic environment 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.
The principal risks and uncertainties faced by the Company are set out in the table below.
The Audit and Risk Committee seeks to mitigate and manage these risks and uncertainties through continual review, policy-setting and enforcement of contractual obligations, as well as a review of the Internal Control reports prepared in accordance with ISAE 3402 and AAF(01/20).
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 alleviate the portfolio risks through active asset management, monitoring key risk metrics and carrying out due diligence on prospective tenants and asset acquisitions. All of the properties in the portfolio are insured.
As well as considering current risks, the Audit and Risk Committee, 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. 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 events have been a catalyst for higher levels of inflation and consecutive interest rate rises, which have slowed economic growth. Interest rates have increased from 0.25 per cent to 5.25 per cent in the last two and a half years. The Bank of England held the rate at 5.25 per cent at its September 2023 meeting, breaking the run of 14 consecutive hikes and consensus estimates are currently forecasting a gradual cut in the base rate from the second half of 2024. Against this background, sentiment for real estate as an asset class has been poor, given the high income returns available from cash and fixed income. Property valuations have been marked down to reflect the risk of premium for investing in property (as an illiquid asset) in a higher interest rate environment. In addition, the increased cost of debt has led to weak liquidity in the real estate capital markets.
The ESG agenda is a very prominent one and continues to grow in its importance to shareholders, future investors, our customers and the wider community. We have made significant progress in this area and we intend to continue to do so. 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 recent years and those need to be considered more explicitly in property investment and management activity. Failure to respond to the evolving regulatory requirements and public expectations would be reputationally damaging and could have a negative effect on property valuations leaving some properties difficult to let.
The structural change in the office market continues to evolve following Covid-19. There is a clear focus on higher quality space in central locations, as companies look to offer a more structured hybrid model of operation where strong ESG and wellbeing credentials are essential. This has been at the expense of lower quality stock and a two-tier market has emerged with the rebasing of both capital values and rents. This is still developing and continues to be monitored but investor sentiment to offices is poor with few active buyers in the market, and this is impacting on pricing.
There continues to be an increasing emerging risk from cyber threats. As an externally managed investment company we are dependent on the controls and systems of the Managers and other third-party providers. The Board reviews on an annual basis, the systems and procedures that they have in place to control these threats.
The principal risks and uncertainties faced by the Company, and the Board’s mitigation approach, are described in the table below.
| Highest Risks | Mitigation |
| Investment Performance Risk Unfavourable markets, poor stock selection, including inappropriate asset allocation and underperformance against the benchmark. This risk may be exacerbated by gearing levels. The outlook for the office sector capital markets is challenging. Economic backdrop of inflationary pressures, higher interest rates and the risk of an economic recession. A relatively illiquid investment market. ESG risk attached to the developing regulatory backdrop and capital expenditure required to maintain compliance. | The investment performance, gearing and income forecasts are reviewed with the Investment Managers at each Board Meeting. The Managers provide 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 Company sold £14.3 million of offices during the year and exposure at the year-end was 26.5 per cent. Post year-end, the Company sold a further £54.6 million of offices with the current exposure at 22.2 per cent. The Managers in-house ESG team continually monitor regulatory background and best practice standards, while the overall quality of the portfolio provides some protection against this. All portfolio assets have been subject to Net Zero Carbon assessments alongside modelling of the interventions required to meet hardening Minimum Energy Efficiency Standards thresholds. All actions scheduled for implementation in the 2023 financial year have been delivered or progressed as detailed in the ESG Report. There has been significant leasing activity and a number of lease renewals completed during the year particularly in the industrial portfolio and St Christopher’s Place, which has helped performance during a period of falling valuations. The portfolio offers significant in-built income growth, as evidenced by the reversionary yield of 6.2 per cent.
|
|
Risk increased in the year under review |
| Discount/Premium Risk Share price of the investment company is lower/higher than the NAV. As a result of such imbalances, the attractiveness of the Company to investors is diminished. The discount continues to be wide (34 per cent at the year-end but narrowing to 28.3 per cent on 25 April 2024) in an environment of higher interest rates where high income returns can be achieved through cash and income products. Investor sentiment towards real estate as an asset class is relatively weak, and the office sector in particular. . | The discount is reported to and reviewed by the Board on an ongoing basis. 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 as alternatives. The position is monitored by the Managers and Brokers on a daily basis and any material changes are investigated and communicated to the Board. The Company has paused share buybacks since September 2022, with the preservation of cash and maintaining lower gearing levels taking precedence in current markets. Investors have access to the Managers and the underlying team who will respond to any queries they have on the discount. The Managers engage with the shareholder base on a quarterly basis to update on Net Asset Value performance. The Managers also attend ad hoc meetings with shareholders as required, as well as various industry events to promote the Company to current and prospective investors. The Brokers and the Managers’ sales team liaise with current and prospective investors to try to generate demand for the Company’s shares.
|
| Risk unchanged in the year under review | |
| Financial Risk Management Risk of financial or reputational damage due to a failure to manage appropriately financial risk. This includes management of cash resources and debt. The company’s principal £260 million debt facility expires on 31 December 2024 and a £100 million facility with Barclays was due to expire in July 2024. Early action on this was required.
| The level of cash is continually monitored by the Managers. A financial model is maintained, which includes a five-year cash flow forecast and is reviewed at quarterly Board meetings. The cash position is also reviewed by the Board on a monthly basis as part of the dividend approval process. Loan covenants are monitored carefully by the Managers and reviewed at least quarterly at Board meetings. The Company entered into a two-year £320 million loan agreement in September 2023, with the option of two one-year extensions. This is a two-tiered facility with Barclays and HBSC which includes a £60 million revolving credit facility and a term loan which takes the form of a commitment to provide up to £260 million to repay the existing loan with L&G, which is due to mature in 2024. As part of this process, the £100 million facility with Barclays was paid down and cancelled. In the current interest rate environment, drawing down the new term loan in full will be more expensive than the current debt and the interest would have to be fixed using an interest rate swap. The Company is therefore looking to reduce its gearing exposure through property sales, and the new loan provides optionality on the gearing levels post 2024. |
|
Risk decreased in the year under review |
| Product Strategy Risk Risk that the Product Strategy (including investment guidelines and policies) lacks sustainability or is no longer appealing to the market. Risk that the strategy is not clearly defined/ articulated or directed to the correct target audience. The Company has a Continuation vote in 2024. ESG related initiatives are a core part of the long-term strategy. This was recognised as a significant area of risk for the Company in 2022 and the rating therefore remains unchanged during the year.
| The underlying investment strategy is kept under constant appraisal and the Board has a strategy session annually, in conjunction with the Manager. The strategy is communicated to interested parties on a regular basis via stock exchange announcements, the interim and annual report and investor/consultant calls and visits. The portfolio has a material exposure to the office sector which has underperformed. The Manager has therefore commenced a rebalancing exercise and has sold £68.9 million of office property to date (£54.6 million of which was post year-end), with further sales in this sector anticipated. The Continuation Vote and the Strategic Review, announced following the year end, are covered in the Chairman’s Statement. The Board looks forward to updating shareholders on the progress of the Strategic Review and the arrangements for the Continuation Vote in due course, noting that there is currently no certainty as to the outcome of the Strategic Review
There is significant ongoing work on the Company’s ESG strategy. A peer-group leading GRESB (Global Real Estate Sustainability Benchmark) score in 2023 underlines the efforts made in ensuring ESG is fully integrated into the investment and management process. ESG enhancements form a key element of asset-level strategies including the degasification of buildings, the installation of solar photovoltaic systems and incremental improvements to energy efficiency through cyclical refurbishment of holdings.
|
|
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 Company investing in commercial property with a long-term investment outlook and with an average unexpired lease length of 4.7 years. The Company has its principal borrowings with L&G secured until 31 December 2024 and entered into a new agreement with Barclays and HSBC in September 2023 for a term loan of up to £260 million which can only be used to repay the L&G loan. This new loan is currently available until September 2025 with the option of two one-year extensions.
The Company is also subject to a Continuation Vote in 2024, which will be held after the completion of the Board's Strategic Review (expected to be in Q3 2024). The date of the vote is therefore yet to be determined. If the Continuation Vote is not passed, the Directors are required to put forward proposals for the reconstruction, reorganisation or winding-up of the Company to the shareholders for their approval within twelve months following the date of the Continuation Vote. These proposals may or may not involve winding-up the Company or liquidating all or part of the Company’s then existing portfolio of investments and, accordingly, failure to pass a Continuation Vote in 2024 will not necessarily result in the winding-up of the Company or liquidation of all or some of its investments. There is currently no certainty as to the outcome of the Strategic Review.
The Viability Statement has been prepared on the assumption that the Board recommends continuation of the Company in its current form and that shareholders approve the Board’s recommendation. The assessment also takes into account the principal risks and uncertainties faced by the Company 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 further 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 UK commercial real estate market has experienced a downturn since the second half of 2022, driven by geopolitical challenges, high levels of inflation, rising interest rates and a slowdown of economic growth. There has been significant repricing of property valuations with the sector experiencing capital falls of 21.7 per cent over the eighteen months to 31 December 2023, as measured by the MSCI UK Quarterly Property Index (‘MSCI’).
A stress test was conducted over the five-year period to April 2029, on very prudent assumptions. Taken into account that the portfolio has already experienced a significant valuation adjustment in the last 18 months, the modelling uses a severe but plausible downside scenario which takes into account the illiquid nature of the Company’s property portfolio, further significant future falls in the investment property values, the availability of borrowings and substantial falls in property income receipts.
The viability assessment modelling used the following assumptions:
- The most negative of all property capital returns as measured by MSCI over one to seven years using historic data that goes back to 1985, with capital values falling by as much as 36.6 per cent. This takes into account that the property market has already experienced capital falls of 21.7 per cent in the last 18 months and therefore the most significant fall from the year end is a further 14.9 per cent. Under this approach, there will also be years where a modest recovery is forecast.
- The full £260 million term loan with Barclays and HSBC is drawn down to repay the L&G loan at the end of 2024.
- Debt refinanced at 1 per cent above the current long-term debt forecasts and assumed to be available for the full assessment period.
- Loan covenant tests remain the same as those currently in place following a refinancing of debt.
- Tenant defaults of 10 per cent for the first year, followed by 5 per cent for the following year before returning to normal levels thereafter.
- Tenant lease breaks are exercised at the earliest opportunity, followed by a substantial void period. From between 9 and 37 months (depending on the property).
- Dividends are maintained at current levels.
- Capital expenditure of c.£50 million over the five-year period, £4.5 million per annum relating to ESG related expenditure.
The results of this modelling were as follows:
|
| NAV | Dividend Cover | LTV (Net) |
| 2024 | 90.4p | 67.8% | 26.3% |
| 2025 | 89.8p | 47.6% | 29.1% |
| 2026 | 93.9p | 56.9% | 30.5% |
| 2027 | 92.2p | 82.8% | 31.7% |
| 2028 | 93.2p | 93.4% | 32.0% |
Even under this negative scenario the Company remains viable with loan covenant tests forecast to be passed and the current dividend rate maintained. The level of the NAV remains positive under this negative scenario. The Company continues to have sufficient assets to ensure that it could pay down its debt in an orderly fashion through sales should it choose to do so and would also have the option of reducing the level of dividends to preserve cash.
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 Company's £260 million loan with L&G is available until December 2024. The market value of the properties secured under this loan would have to drop by a further 20 per cent from 31 December 2023 valuations before breaching the Loan to Value (‘LTV’) test on the facility. The loan interest cover test would only be breached by a fall in net rental income of 67 per cent. We are comfortable that these covenants will continue to be met.
The Company’s £60 million revolving credit facility with Barclays and HSBC (£30 million of which was drawn down at the year end and has subsequently been repaid) is forecast to meet covenant tests during 2024. The market value of the properties secured under this loan would have to drop by 36 per cent from 31 December 2023 valuations before breaching the LTV test on the facility. The loan interest cover test would only be breached by a fall in net rental income of 30 per cent. The Board is comfortable that these covenants can continue to be met.
The Company has a further £68 million of properties which are not secured against any lender and could be transferred to the lenders to support covenant tests if required.
Based on this assessment, and in the context of the Company’s business model, strategy and operational arrangements set out above, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the five-year period to April 2029.
Balanced Commercial Property Trust Limited
Going Concern
In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. They have reviewed detailed cash flow, income and expense projections in order to assess the Company’s ability to pay its operational expenses, loan interest and dividends. The Directors have examined significant areas of possible financial risk including cash and cash requirements, refinancing of loans and review of debt covenants, in particular those relating to loan to value and interest cover. At 31 December 2023, the Company was in a net current liability position because the current L&G term loan is due for repayment in December 2024. In September 2023, the Company signed up to a new £260 million term loan with Barclays/HSBC which can only be drawn to repay the current L&G loan. This term loan agreement expires in September 2025 and has the option of two one-year extensions. Furthermore, the Directors note that section 9 of the Association of Investment Companies’ Statement of Recommended Practice states it is usually more appropriate to prepare the financial statements on a going concern basis unless a Continuation Vote has been held and shareholders have voted against continuation. On this basis, the Board believes it is appropriate to adopt the going concern basis in preparing the financial statements.
Although the Board is confident that the Company will have sufficient financial resources to meet its obligations due within twelve months from the date of approval of the financial statements, the Continuation Vote is due to take place in 2024. If the Continuation Vote is not passed by shareholders, then the Board will be required to bring proposals to shareholders that may include a restructuring or wind down of the Company in its current form. The Directors’ note that the ultimate decision on the future state of the Company is outside the control of the Directors’ and will be known only after the Continuation Vote. The uncertain future outcome of the Continuation Vote and the impact this has on the Company’s future state indicates the existence of a material uncertainty that may cast significant doubt on the Company's ability to continue as a going concern. The Company’s longer-term viability is considered in the Viability Assessment and Statement above.
The auditors PwC have drawn attention to the note in the consolidated financial statements discussing the material uncertainty regarding going concern, but their opinion is not modified in respect of this matter.
Statement of Directors' Responsibilities in Respect of the Annual Report and Accounts
In accordance with Chapter 4 of the Disclosures Guidance and Transparency Rule 4.1.12, each of the Directors confirm that to the best of their knowledge:
- The financial statements contained within the Annual Report and Financial Statements for the year ended 31 December 2023, of which this statement of results is an extract, prepared in accordance with International Financial Reporting Standards as adopted by the EU, 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
- Within the Annual Report and Financial Statements for the year ended 31 December 2023, the Strategic Report (comprising the Chairman’s Statement; Business Model and Strategy; Promoting the Success of the Company; Key Performance Indicators, Principal Risks and Future Prospects; Managers’ Review; Property Portfolio and Environmental, Social and Governance) and the Directors’ Report includes 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 and Directors’ Report within the Annual Report and Accounts for the year ended 31 December 2023 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
26 April 2024
Balanced Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year ended 31 December 2023
- Financial Risk Management
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 loans, cash, trade receivables and payables that arise directly from its operations. The Group does not have exposure to any derivative instruments at 31 December 2023. The interest rate swap entered into to hedge the interest paid on the £50 million Barclays term loan expired in July 2023.
The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.
The Board reviews and agrees policies for managing the Group’s risk exposure. These policies are summarised below and have remained unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group’s investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group’s overall risk exposure.
Credit risk
Credit risk is the risk that 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 4.6 per cent (2022: 4.7 per cent) of the current annual rental income.
The Managers have a credit team 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 assesses the age analysis on a monthly basis and follows up on all outstanding payments; and
- management of the credit department determine the appropriate provision and which amounts should be written off.
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. The fair value of cash and cash equivalents as at 31 December 2023 and 31 December 2022 approximates the carrying value.
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 2023, 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 debt obligations. Debt obligations and the interest rate risk they confer to the Group is considered by the Board on a quarterly basis. 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. Up until 14 September 2023, the Group also had a £50 million Barclays term loan on which the rate was fixed through an interest rate swap at 2.367 per cent per annum (the swap expired on 31 July 2023). This loan was repaid and cancelled on 14 September 2023. The Group entered into a new £60 million revolving credit facility (RCF) with Barclays/HSBC in September 2023 and £30 million of this facility was drawn at 31 December 2023. Interest payable on this new RCF is variable and based on SONIA plus 1.80 per cent per annum. The RCF pays an undrawn commitment fee of 0.63 per cent per annum. The Group also entered into a £260 million term loan commitment with Barclays/HSBC which is currently undrawn. This term loan paid an undrawn commitment fee of 0.45 per cent per annum for the period to 31 December 2023.
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 5.25 per cent as at 31 December 2023 (2022: 3.5 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.
- Share Capital
There were 701,550,187 Ordinary Shares in issue at 31 December 2023 (2022: 701,550,187).
At 31 December 2023, the Company held 97,815,921 Ordinary Shares in treasury (2022: 97,815,921).
- Basic and diluted earnings per share
The basic and diluted earnings per Ordinary Share are based on the loss for the year of £26,067,000 (2022: loss £94,377,000) and on 701,550,187 (2022: 720,956,458) Ordinary Shares, being the weighted average number of shares in issue during the year.
- 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.
- These are not full statutory accounts. The full audited accounts for the year to 31 December 2023 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: balancedcommercialproperty.co.uk
- The Annual General Meeting will be held in the building of the Company's UK legal advisers, Dickson Minto WS, at Dashwood House, 69 Old Broad Street, London EC2M 1QS on Thursday 20 June 2024 at 12:30pm.
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.
| |
| 2023 pence | 2022 pence |
Net Asset Value per share | (a) | 109.8 | 118.5 |
| Share price per share (b) | 72.5 | 88.5 | |
| Discount (c = (b-a)/a) (c) | (34.0)% | (25.3)% | |
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 dividends paid.
| |
|
| 2023 | 2022 |
| |
|
| £’000 | £’000 |
| |
|
|
|
|
Loss for the year |
|
| (26,067) | (94,377) |
Add back: | Unrealised losses on revaluation of investment properties |
|
56,940 |
129,096 |
| | Losses on sales of investment properties realised |
|
4,533 |
5 |
| | Loss on maturity of interest rate swap |
|
187 |
- |
| | Capital and rental lease incentives amortisation |
|
3,346 |
155 |
| | Interest bearing loans amortisation of set-up costs |
|
953 |
642 |
| | Set up costs written-off on £100m Barclays loan |
|
167 |
- |
| | Set-up costs of loan extension and £320m Barclays/HSBC loan |
|
(3,931) |
- |
| Profit before investment losses and amortisation | (a) | 36,128 | 35,521 | |
Dividends |
| (b) | 34,516 | 33,891 |
| Dividend Cover on a cash basis (c= a/b) | (c) | 104.7% | 104.8% | |
Accounting Dividend Cover – The percentage by which profits for the year (less gains/losses on investment properties and non-recurring other income) cover the dividend paid.
| |
|
| 2023 | 2022 |
| |
|
| £’000 | £’000 |
| |
|
|
|
|
Loss for the year |
|
| (26,067) | (94,377) |
Add back: | Unrealised losses on revaluation of investment properties |
|
56,940 |
129,096 |
| | Losses on sales of investment properties realised |
|
4,533 |
5 |
| | Loss on maturity of interest rate swap Other income |
|
187 (119) |
- (42) |
| Profit before investment losses and other income | (a) | 35,474 | 34,682 | |
Dividends |
| (b) | 34,516 | 33,891 |
| Accounting Dividend Cover (c= a/b) | (c) | 102.8% | 102.3% | |
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).
|
|
|
2023 |
2022 |
|
|
| £’000 | £’000 |
| Interest bearing loans |
| 290,000 | 310,000 |
| Less cash and cash equivalents |
| (41,717) | (54,837) |
| Total | (a) | 248,283 | 255,163 |
| Total assets less current liabilities and cash (excluding current interest-bearing loan) | (b) | 1,017,562 | 1,088,155
|
| Net Gearing (c=a/b) | (c) | 24.4% | 23.4% |
Ongoing Charges – All operating costs incurred by the Group, expressed as a proportion of its average Net Assets over the reporting year. The costs of buying and selling investments and derivatives are excluded, as are interest costs, taxation, non-recurring costs and the costs of buying back or issuing Ordinary Shares. An additional Ongoing Charge figure is calculated which excludes direct operating property costs as these are variable in nature and tend to be specific to lease events occurring during the year.
| |
| 2023 | 2022 | |||
| |
| £’000 | £’000 | |||
| |
|
|
| |||
Investment management fee |
| 5,968 | 6,861 | |||
Other expenses |
| 7,336 | 6,479 | |||
Less non-recurring costs – impairment provision |
| (538) | 478 | |||
| Less other non-recurring costs | (239) | (30) | ||||
| Total (a) | 12,527 | 13,788 | ||||
| Average net assets (b) | 811,005 | 991,293 | ||||
| Ongoing charges (c=a/b) (c) | 1.54% | 1.39% | ||||
| |
|
|
| |||
| |
| 2023 | 2022 | |||
| |
| £’000 | £’000 | |||
| |
|
|
| |||
Investment management fee |
| 5,968 | 6,861 | |||
Other expenses |
| 7,336 | 6,479 | |||
| Less direct operating property costs | (4,728) | (5,255) |
| |||
Less non-recurring costs – impairment provision |
| (538) | 478 | |||
| Less other non-recurring costs | (239) | (30) |
| |||
| Total (a) | 7,799 | 8,533 |
| |||
| Average net assets (b) | 811,005 | 991,293 |
| |||
| Ongoing charges excluding direct operating (c) property costs (c=a/b) | 0.96% | 0.86% |
| |||
| |
|
|
| |||
Portfolio (Property) Capital Return – The change in property value during the year 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 year 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 year, 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 year 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.
| |
| 2023 | 2022 |
NAV per share at start of year - pence |
| 118.5 | 135.1 |
NAV per share at end of year - pence |
| 109.8 | 118.5 |
Change in the year |
| -7.3% | -12.3% |
Impact of dividend reinvestments |
| +4.0% | +3.1% |
NAV total return for the year |
| -3.3% | -9.2% |
|
|
|
| |
| |
|
|
|
| |
| 2023 | 2022 |
Share price per share at start of year - pence |
| 88.5 | 105.0 |
Share price per share at end of year - pence |
| 72.5 | 88.5 |
Change in the year |
| -18.1% | -15.7% |
Impact of dividend reinvestments |
| +5.6% | +4.0% |
Share price total return for the year |
| -12.5% | -11.7% |
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