Annual Report

To:  RNS

Date:  28 September 2020

From:  BMO Real Estate Investments Limited

LEI:  231801XRCB89W6XTR23
 

· Portfolio ungeared total return* of -0.6 per cent for the year

· NAV total return* of -3.7 per cent for the year

· Dividend of 4.375 pence per share for the year, giving a yield* of 7.8 per cent on the year-end share price

· Dividend cover decreased to 84.3 per cent for the year from 89.4 per cent

* See Alternative Performance Measures

Chairman’s Statement

We are reporting in the midst of the Covid-19 pandemic and the resultant economic disruption. The end of the Brexit transition period is also upon us, with no clarity on a deal. These factors have led to the U.K. commercial property sector having a very difficult 2020.

Against this background, the Group’s net asset value (‘NAV’) total return for the year ended 30 June 2020 was -3.7 per cent with a NAV per share as at 30 June 2020 of 96.6 pence, down from 104.8 pence per share at the prior year-end.

The share price total return for the year was -24.9 per cent with the shares trading at 56.0 pence per share at 30 June, a discount of 42.0 per cent to the NAV. Large discounts have been experienced across the real estate sector in a period of falling NAV’s with many companies either cutting or suspending dividends in a market where rental collection has become challenging.

Property Market

The UK commercial property market delivered a total return of -2.7 per cent as measured by the MSCI UK Quarterly Property Index (‘MSCI’) for all assets in the year to 30 June 2020. Total return performance was marginally positive in the first half of the year, but negative returns were experienced in the second six months following the impact of Covid-19. The annual all-property income return was 4.5 per cent and capital values fell by 6.8 per cent in the year.

The UK property market went into sharp reverse in March as lockdown was imposed but monthly total returns, although negative, have been on a consistently improving trend since then. A material uncertainty clause was applied by valuers in March, which reflects the fact that there is less certainty in the valuations, given the unknown future impact that Covid-19 might have on the real estate market. Valuers are therefore exercising a higher degree of caution and giving less weight to previous market evidence for comparison purposes. This ‘material uncertainty’ clause no longer applies to industrial, logistics and distribution assets.

The downturn has been notable for weakness in the occupational market and reduced rates of rent collection, as well as a decrease in property valuations across most sectors. The impact on performance has been particularly severe for retail, leisure and hospitality where reduced rates of rent collection have been experienced. Industrials, offices, supermarkets and residential have been relatively resilient. Investment activity in the final quarter dropped sharply as sentiment was hit by the scale of economic dislocation. There has been no flight of capital or mass distressed selling, but some transactions have been aborted, others put on long-term hold and very little new stock released. Some deals have gone ahead, especially for long lease indexed supermarket stock and industrial and distribution assets.

Performance

The Group’s property portfolio produced an ungeared total return of -0.6 per cent over the year to June 2020 compared with MSCI which recorded -2.7 per cent over the same period. The portfolio has also outperformed MSCI over three years and as a result, the Manager is eligible for the maximum performance fee. The Board are conscious of the sensitivity of paying performance fees in a market of negative returns and following discussions between the Board and the Manager, a reduction in the performance fee for the year of 50 per cent has been negotiated. It has also been agreed that from 1 July 2020 performance fees will be removed from the investment management fee. 

The relative outperformance has primarily been driven by the allocation to industrial, logistics and distribution assets which accounted for 43.4 per cent of the portfolio at the year end. The portfolio continues to experience a low vacancy rate which currently stands at 3.3 per cent, compared to an average of 7.5 per cent for the index as measured by MSCI. Rent collection has also benefited over recent quarters by the absence of shopping centre, department store, hotel, leisure and student accommodation exposure, and the very small exposure to the food and beverage sector.

The Manager has been engaging with tenants given the challenges faced by many to meet quarterly rental commitments at this time. The trading restrictions put in place by the Government resulted in the closure of many of our retail units, although the vast majority have now commenced trading, albeit with social distancing measures in place. Collection rates for the last two quarters are ahead of expectations and currently stand at 94.1 per cent for the March to June quarter and 90.0 per cent for the June to September quarter.

Both the office assets and the industrial, logistics and distribution assets delivered positive returns over the year of 6.1 per cent and 4.0 per cent respectively, with capital returns of 1.1 per cent for offices and -0.6 per cent for industrials, logistics and distribution. These two sectors now make up 73.2 per cent of the portfolio by value.

The retail market continues to suffer with the pace of valuation falls accelerating further, led by the anticipated rebasing of rents across much of the high street and shopping centre submarkets. Against this background, the Company’s retail portfolio as a whole delivered -12.4 per cent compared to -12.6 per cent for MSCI. A large portion of the Company’s retail exposure is low rented, functional, retail warehouses. The majority of the Company’s tenants in this space were able to remain open throughout lockdown. This was demonstrated by the 94 per cent collection from this part of the portfolio for the March to June quarter, with monthly payment plans having been put in place to assist some tenants with cashflow where justified.

Cash and Borrowings

The Group has approximately £13.7 million of available cash and an undrawn revolving credit facility of £20 million. The Group's £90 million long-term debt with Canada Life and the undrawn loan facility with Barclays do not need to be refinanced until November 2026 and March 2025 respectively. As at 30 June 2020, the Group’s net gearing was 25.6 per cent and there was significant headroom under debt covenants. The weighted average interest rate (including amortisation of refinancing costs) on the Group’s total current borrowings was 3.1 per cent. The Company continues to maintain a prudent attitude to gearing.

Dividend

Two interim dividends of 1.25 pence per share were paid during the year with a third interim dividend of 0.625 pence per share paid on 30 June 2020. This was a 50 per cent reduction on previous quarterly dividends, reflecting the fact that rent collection was likely to be challenging in the coming months and that the Group had been paying a dividend which had not been fully covered over the course of the financial year. The Board therefore considered it prudent to reduce the level of its future quarterly dividend payments in order to protect cash reserves and the long-term value of the Group.

A fourth interim dividend of 0.625 pence per share will be paid on 30 September 2020 and the Board will continue to monitor closely the impact of Covid-19 on rental receipts and earnings and keep the future level of dividends under review.

Environmental, Social and Governance (‘ESG’)

The Company continues to make good progress in advancing its ESG strategy with the improvement demonstrated in a number of key industry indicators. An increase in the Company’s annual Global Real Estate Sustainability Benchmark (GRESB) score is a notable achievement this year and provides a positive independent assessment of the successful results our Property Manager has delivered across a broad array of sustainability related measures.

Our portfolio level successes are driven by many and varied interventions at local property level where we strive for efficiency and impact. When combined, this has created a solid platform from which to drive further progress. As a Board, we continue to give considerable attention to our ESG commitments and support our Property Manager in responding proactively to this important requirement. A more detailed summary of progress is included in the Annual Report, and a full review will be shared in the separate 2020 ESG Report, available on the Company’s website.

Board Composition

Having served 16 years on the Board, Andrew Gulliford had indicated his intention to retire by this year’s AGM. The Board commenced its search for a suitable replacement, but this process was suspended as a result of the Covid-19 pandemic. We consider the stability of the Board to be very important at this time and Andrew’s in-depth knowledge of the Company and its portfolio has been invaluable. The recruitment of a non-executive Director with the appropriate property experience will recommence in due course but meantime, Andrew has agreed to stand for re-election at this year’s AGM and serve on the Board until a new appointment is made. As part of this process, consideration will also be given to the requirement to seek, where appropriate, additional diversity within the Board.

Annual General Meeting

The AGM is currently scheduled to be held on 17 November 2020 at the offices of BMO Global Asset Management, Quartermile 4, 7a Nightingale Way, Edinburgh, EH3 9EG at 12.00pm. Despite the easing of some lockdown measures which were put in place due to Covid-19, some restrictions remain, including guidance on social distancing and given public health concerns, the meeting will not be held in the usual format.

It will be restricted to the formal business of the meeting as set out in the Notice of the Annual General Meeting on pages 77 to 78 of the Annual Report and will follow the minimum legal requirements for an AGM. On this occasion the Fund Manager will not attend the meeting, but a presentation will be made available on the Company’s website together with some frequently asked questions after the AGM.

Shareholders are strongly discouraged from attending the meeting and entry may be restricted and/or refused in accordance with the Articles, the law and/or Government guidance.

Your Board strongly encourage all shareholders to make use of the proxy form or form of direction provided in order that you can lodge your votes. Voting on all resolutions will be held on a poll, the results of which will be announced and posted on the Company’s website following the meeting.

In view of the revised format this year, should shareholders have any questions or comments in advance of the AGM these can be raised with the Company Secretary ([e-mail]).

Outlook

Although the next few months may see positive economic data as some restrictions ease, and growth resumes from a low base, we expect the recovery to be slow. There is likely to be increased unemployment as the furlough scheme ends, which could delay recovery, and further waves of infection and lockdowns cannot be ruled out. It looks probable that there will be a permanent shift in the property market, particularly in retail where online shopping has accelerated and in the office sector where there are and will be increasing numbers working from home.

Although the lockdown measures began to be eased towards the end of our financial year, the economic outlook remains highly uncertain and the trading position of many occupiers is extremely challenged. It will take time for output to return to pre Covid-19 levels and for many businesses the new economic reality will look very different to that prior to the outbreak.

In the short term, securing income due under existing lease contracts remains the Manager’s primary focus. The Company’s diverse occupier base offers some defence in this regard as does the weighting towards industrial, logistics and distribution and offices.

We expect that the Company will continue to be impacted by current uncertain markets for the rest of 2020 and into 2021 and at the time of writing further restrictions have been put in place by the government. However, the portfolio is well balanced in terms of quality, sector and geography. This, combined with sufficient cash resources and comparatively strong rental collection, provides resilience during this difficult period. 

We wish our shareholders well during the coming difficult months.

Vikram Lall
Chairman

Manager’s Review

Portfolio headlines over the year

· The Company portfolio delivered an ungeared total return of -0.6 per cent over the year.

· Outperformance against the MSCI Quarterly Property Universe (“MSCI or ‘the index”) over the year, as well as over the three and five years to June 2020. The portfolio has outperformed the index over the 16 years since inception.

· Outperformance driven by a relatively high income return and weighting to Industrials.

· Income return of 5.2 per cent over the year to June 2020.

· Further sales from the retail portfolio demonstrate the liquidity of the Company asset base.

· Successful completion of asset management initiatives over the year and continued demand for the Company’s properties have held the vacancy rate at 3.3 per cent, well below the MSCI average of 7.6 per cent.

· The structural overweight to Industrials (43 per cent by capital value) and the South East (65 per cent) has been preserved.

· Rental collection for the March-June Quarter of 94.1 per cent with further sums expected. Collection rates to date are in line for the June-September period.

Property Market

The UK commercial property market delivered a total return of -2.7 per cent in the year to June 2020 as measured by the MSCI UK Quarterly Property Universe (“MSCI”). Performance was driven by an annual income return of 4.5 per cent, with capital values falling by 6.8 per cent.

The market was characterised by muted but positive total returns for the majority of the year, with the all-property average dragged lower by weakness in the retail sector. Performance in the final third of the year was hit by the impact of economic lockdown imposed in March 2020, due to the coronavirus pandemic. This produced a deterioration in performance across all sectors of the market and affected both occupier and investment demand. As a result, total returns at the all-property level fell into negative territory by the end of the reporting period.

The global nature of the pandemic has plunged the world economy into recession. The UK economy was delivering muted growth before lockdown was imposed, affected by Brexit concerns. Since then, UK GDP has fallen sharply, and although there was some modest monthly improvement towards the end of the period, as some restrictions were eased, the economy has still recorded a massive loss in output. The downturn is significantly worse than the recession seen during the global financial crisis. Fiscal and monetary policies have been eased dramatically to try to moderate the impact of lockdown on businesses, workers and consumers. The implementation of the job furlough scheme has limited the impact on employment to date. Consumer price inflation decelerated over the course of the year to 0.6 per cent by year-end and interest rates were reduced. The ten-year gilt rate fell to 0.2 per cent by end-June 2020.

There were tentative signs of an improvement in investor sentiment at the start of 2020, following the decisive election result and some emerging clarity on Brexit, and the year has seen major deals complete for industrials, offices, hotels, healthcare and student accommodation. The year to June 2020 saw £51 billion invested in property versus £56 billion in the previous year. This masks a sharp drop in the final quarter of the reporting period. In March 2020, valuers invoked the material uncertainty clause for all property, although there has been some easing subsequently. Open-ended funds have been closed to subscriptions and redemptions and property company dividend payments were in many cases cut or suspended. Some transactions, notably for industrials and long-lease indexed supermarkets have progressed. There has been little sign of distressed selling or a flight of capital from property but many transactions have been put on hold, aborted or subjected to price reductions. Overseas buyers remain net investors in property, while local authorities have been reducing their rate of net investment following public scrutiny of some recent acquisitions. Most sectors recorded lower investment activity compared with the previous year, with alternatives a notable exception. The banks have remained net lenders to commercial property, but there are signs of stress particularly in the retail sector.

Total return performance by segment has generally been lower than in the preceding year but continuing the trend established over recent past reporting periods, remains highly polarised. Industrial and distribution property continued to drive performance delivering a 4.0 per cent benchmark total return and with south-east industrials out-performing at 4.8 per cent. Offices also delivered a positive performance, at 1.4 per cent, led by City offices. All the office segments delivered a positive annual total return. The retail market weakened further over the year to deliver a -12.6 per cent total return. Shopping centres fared worst with a -22.0 per cent total return but retail warehouses also struggled at -14.9 per cent. Standard retail, both in the south east and other regions, saw negative total returns, but to a lesser degree. The Alternatives sector saw a marginally negative total return of -0.1 per cent. In the final three-month period, south east industrials delivered positive total returns, but this was the only standard segment to do so. Even greater pressure has been placed on the retail sector, while Alternative sector performance has been hit by weakness in the leisure and hospitality markets.

The current crisis has been marked by stress in the occupational market and rent collection rates dropped in the latter half of the period, most noticeably for retail and leisure. Rent collection has been impeded by Government emergency legislation. Annual net operating income growth was -1.1 per cent at the all-property level, reflecting a 7.1 per cent fall in the June quarter.

Towards the very end of the period, there have been signs of an easing in lockdown, more businesses opening, valuation constraints easing and some improvement in investment deal flow but considerable uncertainty remains. 

Portfolio

Against this backdrop the Company portfolio delivered an ungeared return of -0.6 per cent over the 12 months to June versus the Index of -2.7 per cent with returns weakening as the period wore on. A positive income return of 5.2 per cent was offset by capital value falls of 5.6 per cent. The portfolio has delivered in excess of the Index over 1, 3, 5, 7 and 16 years since inception.

The relative outperformance has been primarily driven by the high conviction to Industrial, logistics and distribution assets (43 per cent of portfolio weighting by capital value) and the sustained yield premium, assisted by the consistently low vacancy rate which currently stands at 3.3 per cent (versus over 7.6 per cent for the Index). The average lot size of the portfolio, at under £9 million, has aided liquidity and enabled some flexibility in trading throughout a relatively challenging time in the investment market.  Over recent quarters the absence of any allocation to shopping centres, department stores, hotel, leisure and student accommodation, and the very small exposure to the food and beverage sector, has been of benefit to relative performance.

The completion of asset management initiatives and successful negotiation of lease events on the Company’s Office portfolio led to Offices being the portfolios best performing subsector over the year, delivering 6.1 per cent. This was followed by Industrial & logistics assets at 4 per cent and Retail, inclusive of Retail Warehousing, delivering -12 per cent. Industrial and Office assets make up approximately 75 per cent of the portfolio by value.

Retail

Structural change for the retail sector has been accelerated by lockdown as the move towards e-commerce has intensified, initially by necessity and now progressively, by habit. CVAs, business failures, store rationalisations and re-financings continued with high street, shopping centre and leisure tenants in particular demanding a re-basing of rents. Landlords are constrained in their rent collection options when faced with rent arrears on account of the moratorium on affirmative action, and there is now some momentum behind lease reform and a move towards turnover rents in the sector. The problems have affected all parts of the market but mass-market operators, highly leveraged companies, fashion, restaurants and some luxury retailers are worst affected.

Delays to the reform and revaluation of business rates will further impact upon the sector. Although post period we have seen some outlets re-opening, footfall and trading has not fully recovered, and further stress is anticipated. Supermarkets may be relatively resilient where the covenant is strong, and the income stream is both long and indexed. We continue to see merit in appropriately let retail warehousing, particularly in business sectors where occupiers continue to embrace an evolving multi-channel offer and utilise stores for a mixture of sales, delivery and returns. Re-purposing and the proposed changes to permitted development rights (PDRs) may act to support the sector, but the structural adjustment has further to go.

The Company’s Retail assets remain fully let and marginally outperformed the wider market, delivering -12.4 per cent over the year. Although only 11 per cent of the portfolio by weighting, capital write downs for the High Street portfolio have been severe and the market remains under significant pressure with the pace of value falls accelerating as the period drew to a close. A more relative bright spot has been the Company’s retail warehousing assets which also outperformed their peers in the wider market, although still delivering a -9 per cent total return over the 12 months. Fully let and with a high prevalence of ‘essential retailers’ as occupiers, we have seen robust rent collection over the period of lockdown from this segment of the portfolio. The lack of exposure to Shopping Centres, department stores and fashion parks has been to the benefit of relative performance for some time now, as has been the absence of leisure, hotels and student accommodation over recent quarters.

A number of sales have been conducted from the retail portfolio over recent years, predominantly as part of a reweighting exercise and this policy was progressed further over the 12 months to June (see below). While further opportunistic disposals remain under consideration there are no plans for a wholesale exit from the sector.  Notwithstanding the obvious structural challenge to the sector we continue to see significant polarisation in returns within sectors and it remains important to look beyond blunt classification to the underlying fundamentals of any asset. Many of the portfolio’s assets from this sector continue to offer a valuable contribution towards the Company objective, particularly so with regards to the delivery of income from the Retail Warehousing portfolio. Where opportunity for management has arisen, for example in the case of the property assets at Enterprise Way, Luton and Brook Retail Park, Bromsgrove we have generally been able to generate successful outcomes.

Offices

There has been much debate around the ‘future of the Office’ following the adoption of agile working practices as a consequence of the recent lockdown, and the encouragement from both employers and government, initially at least, to work from home. Investor sentiment towards offices fell sharply in the final quarter of the period, however, it was still positive in balance for Central London and Rest of UK offices. The latest RICS survey shows 93 per cent of respondents expecting occupiers to cut their floor space requirements with the majority favouring 5-10 per cent as the likely medium-term readjustment.

The Q2 2020 Central London occupational market data was particularly weak due to lockdown. The outlook is uncertain but 50 per cent of space under construction to 2024 is let or under offer, providing some downside protection. The City appears more exposed in this regard than the West End.  Moving in to Q3, workspace occupancy rates are still low, 30-50 per cent at best, and travelling on public transport remains unpopular with workers, particularly those who feel they can function with a high degree of efficiency remotely. Outside of Central London the core regional markets have less than two years supply and vacancy rates actually indicate under-supply. More than half of the space under construction has been pre-let. Lockdown has affected the market but the fundamentals, outside of the evolving threat from behavioural change appear relatively sound at this time.

Occupiers have been delaying decisions and there has been an emphasis on cutting costs. This is in part down to behavioural changes, not least the concerns around public transportation relevant in many of our large cities, but it is also linked to the correlation between Office performance and GDP growth, expectations for which remain exceptionally weak.  Take-up has also been affected by problems in the flexible office sector, most notably at WeWork. There has been little increase in new supply in the majority of core markets over recent years and vacancy rates remain low by historic standards. Supply is likely to be hit further by lockdown and this, coupled with a loss of tertiary space due to the extension of PDRs could act as support. Nonetheless we expect to see a period of subdued rental growth linked to a softening of aggregate demand. Space requirements, office layout and facilities will change as a result of the pandemic, certainly in the short term, but likely with at least some lasting consequence. The polarisation between prime and secondary stock is likely to persist, with those landlords able to offer service and amenity, build relationships with occupiers and prioritise wellbeing and ESG considerations set to remain most relevant.

The Company’s Office portfolio is geographically diverse with holdings in the West End of London, the wider South East and core regional markets such as Edinburgh. The sector delivered the strongest returns over the year on account of leasing activity and the realisation of value-add initiatives at 6.1 per cent versus 1.4 per cent for the Index peers.

Industrial and Logistics

There was a marked slowdown in returns from the sector as the year wore on but nonetheless the Industrial and Logistics sector continued its recent trend of outperformance, with the South East, which includes London, continuing to out-perform the Rest of the UK.  Standard industrials outperformed logistics warehousing over the year, driven in no small part by sentiment towards London multi let estates. The Company’s Industrial assets delivered in line with their peers at 4.0 per cent versus 3.98 per cent for the Index over the year.

Despite the challenges being faced by the UK economy, sentiment for industrial property is being supported by the belief that a permanent shift to more online retailing will offer sustained benefit to the sector. A move to onshoring, and a reappraisal of supply chains, either due to Brexit or as a response to lockdown is also being viewed as a positive. Supply as a whole remains at favourable levels. The sector is unlikely to escape the effects of UK and global recession but is expected to be among the least impacted.

A feature of the market has been the increase in average deal size over the year led by demand from e-commerce occupiers. Activity has been boosted by Amazon as well as Covid-related demand from supermarkets and the NHS. Despite the expectation of continued buoyant demand, the risk of tenant default also needs to be borne in mind, particularly so the more the market leans on demand from retail and e-commerce in a recessionary environment. Similarly, certain geographies, exposed through supply chains to specific sectors of the economy may prove more vulnerable in the event of a prolonged downturn, while others appear a little more at the mercy of Brexit trade deals. There had been a noticeable supply pickup early in the period regionally and the low level of existing supply in the south east has been compounded by intense competition for land from a wide range of users. By the end of the year the volume of new supply has started to tail off somewhat, reduced in part by lockdown, with developers said to be increasingly cautious. Availability on the whole has remained broadly unchanged, but with a shift towards better quality assets and an overhang of some secondary stock.

The positive performance of the Company’s Industrial, Logistics and Distribution assets was delivered on account of their core, South-East, and predominantly urban locations where we continue to see strong levels of demand, successful outcomes at lease event and the opportunity to actively manage the tenant base. By weighted contribution the assets at Hemel Hempstead, and the multi-let estate at Colnbrook, Heathrow were amongst the top performers over the period, as was the ‘big box’ logistics asset at Echo Park, Banbury. The portfolio’s exposure to the industrial, logistics and distribution segment of the market is now over 43 per cent of assets by value and continues to deliver significant structural benefit. Whilst we remain wary of the compressing of yields across the sector as a whole, occupancy and income growth has continued to justify the sector to date, particularly so on a relative basis given the trials evident in many of the other traditional sectors.

The industrials market is expected to continue to out-perform, but there are signs that the degree of out-performance is moderating. Demand is likely to be supported by the continued growth of online but economic stress and in places, increased supply, could cap rental growth prospects, while Brexit could simultaneously lead to both a shift to warehousing in mainland Europe and some nearshoring / stockpiling within the UK itself. Quality, location, and access to major markets and skill hubs remains critical.

Alternatives

The portfolio does not currently own alternatives, which delivered a marginal negative total return over the year following a significant deterioration in the final quarter. The pandemic has affected hotel and student accommodation occupancy rates and this could take some time to recover. Analyst forecasts for the five years to 2024 have generally been downgraded with severe mark-downs seen for restaurants, leisure and secondary healthcare. Further rental and capital value corrections are in prospect.

Rent collection

Collection for the March to June quarter for the Company is currently 94.1 per cent with the June to September quarter to date currently standing at 90.0 per cent. Monthly payment agreements are set to improve upon this further in the coming weeks. c.50 per cent of the Q2 shortfall is to be recovered in due course via repayment plans and via documented lease extensions, the balance being either rent free concession or sums pending agreement. Agreements to allow occupiers to pay monthly act as a drag on collection statistics, however we are keen to help our tenants manage their cashflow wherever possible at this difficult time. Practical full recovery from Offices and Industrials for March-June and over 91 per cent from retail warehouses for the same period demonstrates the quality of the Company tenant base alongside the hard work of the asset management team. We recognise the challenges being faced by many of our occupiers at present and continue to work with them to seek mutually beneficial outcomes. Negotiations are undertaken on a case by case basis prior to granting any concession to contractually obliged rents. Although June’s recovery is encouraging to date, we expect further challenges ahead as the economy starts to open up.

Asset Management

In an environment where passive rental value growth will be difficult to come by active management will be the key to driving income growth. Whilst the near-term focus has been on the protection of the Company’s balance sheet, there are a number of portfolio initiatives that remain ongoing that are forecast to add meaningful income to the portfolio upon practical completion. Sales earlier in the period have enabled the Company to continue with these initiatives without compromising on financial prudence. The two major capital projects are at the office property at County House, Chelmsford and the retail warehouse at Enterprise Way, Luton. The redevelopment at Luton is entirely pre-let to a discount food store, DIY retailer and drive through pod, with the majority of the new income secured on the basis of long leases with upward only inflation linkages in the rent review mechanisms. Contractors are on site with practical completion of the building works and commencement of the new leases expected mid-2021. In the meantime, the Company continues to receive income from the current occupier. The refurbishment of the office at County House, Chelmsford is ongoing with the first stage of the works to be completed later this year. The Crown Prosecution Service are the existing tenant who are continuing to occupy and pay rent through the delivery phase, having contractually committed to a new 10-year lease on half of the property upon completion of the works. The remainder of the refurbished space will be available to let in the open market. At the time of writing we are in negotiations with an occupier to take one of the floors.

The year has been characterised by positive leasing outcomes on the Industrial assets at Colnbrook Industrial Estate, Heathrow and Airways, Eastleigh. In addition, there was the letting of office suits at 14 Berkeley Street, London and Glory Park, High Wycombe, alongside the new letting over 40,000 sq ft of space to Virgin Media at Bellshill, Glasgow. Encouraging rent review settlements were delivered at the office building let to HSBC in Edinburgh Park.

Transactions

As in the previous reporting period, portfolio turnover and the burden of associated transaction costs were relatively low, the Company having declined to purchase assets late in the cycle following the Covid-19 outbreak.

Turning to sales, the Company continued to reduce its exposure to the retail sector. There was the sale of the parade of shops at Kings Heath, Birmingham for £2.0 million at the start of the year, followed by the successful disposal of two retail assets for a combined

£13.7 million in the final quarter of 2019, the first a multi-let high street block in Leamington Spa and the second a retail warehouse in Rotherham. In aggregate these sales were secured within 1 per cent of the independent market valuation at the time. There have now been 9 disposals from the retail portfolio over the last 4 years. We are wary of continuing to hold exposure to a structurally challenged part of the market but are also alive to the dangers of seeking a wholesale exit at this time with investment demand relatively weak. There remains benefit in some diversification which was brought into sharp focus by the recent downgrades to parts of the leisure and food & beverage market, albeit that diversification must be aligned to structural trends. For example, at current pricing we continue to see merit in ownership of the Company’s functional, generally low rented, retail warehousing assets, well placed for both convenience and multi-channel retailing, where we are seeing live opportunities to unlock value via leasing activity or repurposing.

Cash management

The cash built up through sales originally earmarked to pursue suitable acquisition opportunities or to enhance the existing portfolio via asset management initiatives has served the purpose of bolstering the balance sheet over the past few months, while LTV’s have come under scrutiny and rent collection for the sector has been sluggish. The cash position presents a solid footing with which to approach the challenges inherent in the UK commercial property market at this time, and subject to continued robustness in rent collection, the pursuit, at the right time, of acquisition opportunities. Given competition for quality property and the cautious optimism in forecasts for the market in general throughout much of the period until lockdown, the Company has maintained a measured approach to deployment of capital. This is something which now appears prudent given recent value falls at the All Property level.

The Manager considers that while there is no pressure to invest the remaining cash reserves immediately, opportunities may reveal themselves from stressed or forced sellers in due course. Opportunistic sales from the retail portfolio remain under consideration, although very much subject to pricing.

Outlook

Although the next few months may see positive economic data as restrictions ease, and growth resumes from a low base, there are a number of headwinds. There is likely to be a spike in unemployment as the furlough scheme ends in October, which could delay recovery. Further waves of infection and lockdowns cannot be ruled out. The Brexit negotiations have been slow and the UK remains on course to leave the EU at the end of the year. Although fiscal austerity has been ruled out, at some point, the public accounts will need to move towards stabilisation. The property market will also need to adjust to a probable permanent shift towards more online retailing and increased working from home, affecting prospects across the main sectors. Hospitality and Student accommodation face unique challenges in the short term. Lease structures may also change, as firms demand greater flexibility, and income growth will be patchy. The outlook is uncertain, but on consensus economic forecasts and with no further major lockdowns, we expect a difficult 2020 to be followed by a partial recovery in 2021 and modest positive total returns thereafter, led by the industrials, logistics & distribution sector.

The Company portfolio will not be immune to these market forces, which look likely to weigh on performance in the near term, although it remains relatively well placed to be resilient on the basis of its diversification and quality, sector and geographic bias. In particular, prospects remain encouraging for Industrial, logistics and distribution properties located within the south east, as well as a fit for purpose Office exposure. The company has made a meaningful move to down weight its exposure to the retail market and does not carry a legacy allocation to the Shopping Centre, Leisure and Hospitality sub sectors. Comparably strong rent collection statistics and the minimal impact from CVA or administrations to date has added further comfort.

Peter Lowe
BMO Rep Property Management Limited

BMO Real Estate Investments Limited
Consolidated Statement of Comprehensive Income

	Year ended 30 June 2020	Year ended 30 June 2019
	£000	£000
Revenue
Rental income	17,011	18,606
Total revenue	17,011	18,606
Losses on investment properties
Losses on sale of investment properties realised	(991)	(206)
Unrealised losses on revaluation of investment properties	(17,031)	(7,343)
Total Income	(1,011)	11,057
Expenditure
Investment management fee	(2,261)	(2,286)
Other expenses	(2,146)	(1,757)
Total expenditure	(4,407)	(4,043)
Net operating (loss)/profit before finance costs and taxation	(5,418)	7,014
Net finance costs
Interest receivable	34	13
Finance costs	(3,507)	(3,526)
	(3,473)	(3,513)
Net (loss)/profit from ordinary activities before taxation	(8,891)	3,501
Taxation on profit on ordinary activities	(258)	(295)
(Loss)/profit for the year/total comprehensive income	(9,149)	3,206
Basic and diluted earnings per share	(3.8p)	1.3p

All items in the above statement derive from continuing operations. 

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

BMO Real Estate Investments Limited
Consolidated Balance Sheet

	30 June 2020 £000	30 June 2019 £000
Non-current assets
Investment properties	308,734	339,353
Trade and other receivables	3,788	4,162
	312,522	343,515
Current assets
Trade and other receivables	3,437	2,569
Cash and cash equivalents	13,726	9,858
	17,163	12,427
Total assets	329,685	355,942
Non-current liabilities
Interest-bearing bank loans	(89,542)	(96,505)
Trade and other payables	(960)	(782)
	(90,502)	(97,287)
Current liabilities
Trade and other payables	(6,319)	(6,074)
Tax payable	(258)	(295)
	(6,577)	(6,369)
Total liabilities	(97,079)	(103,656)
Net assets	232,606	252,286
Represented by:
Share capital	2,407	2,407
Special distributable reserve	177,161	177,161
Capital reserve	52,122	70,144
Revenue reserve	916	2,574
Equity shareholders’ funds	232,606	252,286
Net asset value per share	96.6p	104.8p

BMO Real Estate Investments Limited
Consolidated Statement of Changes in Equity
For the year ended 30 June 2020

	Share Capital £000	Special Distributable Reserve £000	Capital Reserve £000	Revenue Reserve £000	Total £000
At 1 July 2019	2,407	177,161	70,144	2,574	252,286
Loss for the year	-	-	-	(9,149)	(9,149)
Total comprehensive income for the year	-	-	-	(9,149)	(9,149)
Dividends paid	-	-	-	(10,531)	(10,531)
Transfer in respect of losses on investment properties	-	-	(18,022)	18,022	-
At 30 June 2020	2,407	177,161	52,122	916	232,606

For the year ended 30 June 2019

	Share Capital £000	Special Distributable Reserve £000	Capital Reserve £000	Revenue Reserve £000	Total £000
At 1 July 2018	2,407	177,161	77,693	3,855	261,116
Profit for the year	-	-	-	3,206	3,206
Total comprehensive income for the year	-	-	-	3,206	3,206
Dividends paid	-	-	-	(12,036)	(12,036)
Transfer in respect of losses on investment properties	-	-	(7,549)	7,549	-
At 30 June 2019	2,407	177,161	70,144	2,574	252,286

BMO Real Estate Investments Limited
Consolidated Statement of Cash Flows

	Year ended 30 June 2020	Year ended 30 June 2019
	£000	£000
Cash flows from operating activities
Net (loss)/profit for the year before taxation	(8,891)	3,501
Adjustments for:
Losses on sale of investment properties realised	991	206
Unrealised losses on revaluation of investment properties	17,031	7,343
Realised capital contribution	(12)	-
Increase in operating trade and other receivables	(494)	(1,758)
Increase in operating trade and other payables	423	1,286
Interest received	(34)	(13)
Finance costs	3,507	3,526
	12,521	14,091
Taxation paid	(295)	(295)
Net cash inflow from operating activities	12,226	13,796
Cash flows from investing activities
Purchase of investment properties	(723)	-
Capital expenditure	(2,070)	(878)
Sale of investment properties	15,402	3,244
Interest received	34	13
Net cash inflow from investing activities	12,643	2,379
Cash flows from financing activities
Dividends paid	(10,531)	(12,035)
Bank loan interest paid	(3,470)	(3,319)
Bank loan repaid, net of costs – Barclays Loan	(7,000)	(6,000)
Net cash outflow from financing activities	(21,001)	(21,354)
Net increase/(decrease) in cash and cash equivalents	3,868	(5,179)
Opening cash and cash equivalents	9,858	15,037
Closing cash and cash equivalents	13,726	9,858

BMO Real Estate Investments Limited

Principal Risks and Future Prospects

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

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

Consideration has been given to the impact from Covid-19 which has had a significant effect on the commercial real estate market. This has resulted in a number of the residual risks increasing as highlighted in the table below.

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

· Market – the Group’s assets comprise of direct investments in UK commercial property and it is therefore exposed to movements and changes in that market. This includes political and economic factors such as Brexit and the impact of Covid-19.

· Investment and strategic – poor investment processes and incorrect strategy, including sector and geographic allocations and use of gearing, could lead to poor returns for shareholders.

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

· Tax structuring and compliance – the Group should ensure compliance with the relevant tax rules and thresholds at all times.  Changes in legislation could result in the Group no longer being a tax efficient investment vehicle for shareholders.

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

· Reporting – valuations of the investment property portfolio require significant judgement by valuers which could lead to a material impact on the net asset value.  Incomplete or inaccurate income recognition could have an adverse effect on the Group’s net asset value, earnings per share and dividend cover.

· Credit – an issuer or counterparty could be unable or unwilling to meet a commitment that it has entered into with the Group.  This may cause the Group’s access to cash to be delayed or limited.

· Operational – failure of the Manager’s accounting systems or disruption to its business, or that of other third-party service providers through error, fraud, cyber-attack or business continuity failure could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders’ confidence.

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

The Board seeks to mitigate and manage these risks through continual review, policy-setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Group’s property portfolio. 

The Manager seeks to mitigate these risks through active asset management initiatives and carrying out due diligence work on potential tenants before entering into any new lease agreements. All properties in the portfolio are insured.

As well as considering current risks quarterly, the Board and the Investment Manager carry out a separate annual assessment of emerging risks when reviewing strategy and evaluate how these could be managed or mitigated. However, the Board considers that the line between current and emerging risks is often blurred and many of the emerging risks identified are already being managed to some degree where their effects are beginning to impact.

The principal emerging risks identified are outlined below:

· The structural and behavioural changes in the market is a significant emerging risk, particularly as the prominence of online shopping continues to increase. Over the last two years the market has experienced a number of high-profile retailers going out of business, downsizing, closing stores and negotiating flexible leases at lower rents. With an increasing number of vacant stores, the challenge is to find different uses for commercial property, whether that’s for residential, leisure, food and beverage, or other alternative uses.

· The ESG agenda is a very prominent one and will continue to grow in its importance to shareholders, future investors and our customers. As discussed in our ESG report, we have already made significant strides in this area and we will continue to do so. The increasing market attention being paid to climate risk and social impact have been notable features of the evolving agenda over the last year, and those need to be considered more explicitly in property investment and management activity than has been the case previously.

· The political climate continues to be uncertain and as well as the ongoing effects of Brexit, there are strong calls for another Scottish referendum. During times of heightened uncertainty, a key benefit to the Company is its closed-ended structure, in that it is not forced to sell property during stressed times.

· Legislative changes are always a risk, particularly where they are politically driven and may cause changes in our property allocation. Such issues might involve some style of rent control or an escalation of regulatory oversight on ESG factors, particularly in responding to the climate emergency.

· The impact of technology increasingly means that things change very quickly which is an opportunity as well as a risk, and it is important that we continue to keep abreast of what is happening in this space.

· The developing threat from Covid-19 is the dominant risk for the global economy, and by extension the UK property market. The severity of the threat is becoming clearer by the day with significant disruption to all sectors worldwide. This threat has an ongoing effect on many of our principal risks and the Board meet regularly with the Manager to assess these risks and how they can be managed. More detail is included in the Chairman’s Statement and the Manager’s Report. Of particular concern is the Company’s cash flow, given the number of expected tenant defaults in the short-term. The Board and the manager review on a daily basis the cash collected and have taken the decision to half the rate of the quarterly dividend to maximise the cash reserves available. In addition, the Group is in regular contact with its lenders in case the decline in rent collected causes certain covenants to be breached or become close to being breached.

To help manage emerging risks and discuss other wider topics affecting property, the Board has an annual strategy meeting. The Board considers having a clear strategy is the key to managing and mitigating emerging risk.

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

Highest Residual Risks	Mitigation	Actions taken in the year
Unfavourable markets, poor stock selection, inappropriate asset allocation and underperformance against benchmark and/or peer group. This risk may be exacerbated by gearing levels. A challenging retail market where rental growth is generally negative and capital values are falling as capitalisation rates rebase. This market has witnessed many company voluntary arrangements and administrations in the last two years. There is an increased risk of tenant defaults in this sector, particularly since the Covid-19 outbreak, which could put the level of dividend cover at risk.	The underlying investment strategy, performance, gearing and income forecasts are reviewed with the Investment Manager at each Board Meeting. The Company’s portfolio is well diversified and of a high quality. Gearing is kept at modest levels and is monitored by the Board. The Manager provides regular information on the expected level of rental income that will be generated from underlying properties. The portfolio is well diversified by geography and sector and the exposure to individual tenants is monitored and managed to ensure there is no over exposure.	The Board reviews the Manager’s performance at quarterly Board meetings against key performance indicators and the ongoing strategy is reviewed and agreed. The Board has met on a significantly more frequent basis since the outbreak of Covid-19 where it has received trading updates from the Manager and carefully reviewed cash forecasts. Rental collection in the retail and retail warehouse sectors has been negatively impacted by Covid-19. The Manager is in regular contact with tenants and rental collection is a primary focus. Collection rates since the Covid-19 outbreak have been ahead of expectations.
Risk increased in the year under review
The share price has been trading at a discount and this has widened significantly since the Covid-19 outbreak. This imbalance, combined with the recent share price volatility can diminish the attractiveness of the Company to investors.	The discount is reported to and reviewed by the Board at least quarterly. Share buybacks as a means of narrowing the discount or as an attractive investment for the Company are considered and weighed up against the risks. The position is monitored by the Manager on a daily basis and any material changes are investigated and communicated to the Board more regularly.	Investors have access to the Manager and the underlying team who will respond to any queries they have on the discount. The level of discount is kept under constant review and the number of meetings to discuss the discount increased during the year. At the Board’s request there has been increased reporting from the broker on the market and the shareholder feedback they are receiving.
Risk increased in the year under review
Insufficient cash resources to meet capital commitments or to fund the quarterly dividend leading to emergency sale of assets and/or cutting of dividend level.	The Manager reports quarterly on ongoing revenue and cash forecasting. The Company performs a solvency test in advance of each dividend payment. A detailed cash flow model and schedule on immediate cash commitments is regularly reviewed by the Board. A £20m revolving credit facility with Barclays (available until March 2025) provides additional flexibility.	The Board have held additional ad-hoc Board Meetings since the Covid-19 outbreak which includes revenue and cash forecasting. The £20m revolving credit facility was extended from November 2020 to March 2025. A decision was made to cut the dividend by 50 per cent in order to protect cash resources. The rate and sustainability of the dividend remains under continual review.
Risk increased in the year under review
Error in the calculation/application of the investment company NAV leads to a material misstatement. Valuers have difficulty in valuing the property assets due to lack of transactional evidence or market uncertainty. The Valuers introduced a material uncertainty clause in their valuations following the Covid-19 outbreak.	External valuers are appointed to value the portfolio on a quarterly basis. There is regular liaison with the valuers regarding all elements of the portfolio. There is regular attendance by Directors at the valuation meetings and the Auditors attend the year end valuation meeting.	The valuations are being closely monitored and compared to other market-based information. There has been more transactional evidence coming to the market post period end and the material uncertainty clause will be removed by the valuers for the September 2020 valuations.
Risk increased in the year under review

Viability Assessment and Statement

The Board conducted this review over a 5-year time horizon, a period thought to be appropriate for a commercial property investment company with a long-term investment outlook, borrowings secured over an extended period and a portfolio with a weighted average unexpired lease length of 5.7 years. The assessment has been undertaken, taking into account the principal risks and uncertainties faced by the Group which could threaten its objective, strategy, future performance, liquidity and solvency.

The major risks identified as relevant to the viability assessment were those relating to a downturn in the UK commercial property market and its resultant effect on the valuation of the investment portfolio, the level of rental income being received and the effect that this would have on cash resources and financial covenants. The Board took into account the illiquid nature of the Group’s portfolio, the existence of the long-term borrowing facilities, the effects of any significant future falls in investment values and income receipts on the ability to repay and re-negotiate borrowings, maintain dividend payments and retain investors. These matters were assessed over an initial period to September 2025, and the Directors will continue to assess viability over 5 year rolling periods, taking account of foreseeable severe but plausible scenarios.

In the ordinary course of business, the Board reviews a detailed financial model on a quarterly basis, incorporating market consensus forecast returns, projected out to the maturity of its principal loan of £90 million which is due to mature in 2026.  This model uses prudent assumptions and factors in any potential capital commitments. For the purpose of assessing the viability of the Group, the model has been adjusted to look at the next five years and is stress tested with projected returns comparable to the most extreme commercial property market downturn experienced historically. The model projects a worst-case scenario of an equivalent fall in capital and income values over the next two years, followed by three years of zero growth. The model demonstrated that even under these extreme circumstances the Group remains viable.

Based on their assessment, and in the context of the Group’s business model, strategy and operational arrangements set out above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the 5-year period to September 2025.  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.

The Company continues to monitor the potential impact of the Covid-19 virus on cash flows. Particular attention is paid to the circumstances of all the tenants in the portfolio and detailed modelling is performed on a day to day basis as events unfold. Rental collection since the outbreak has been in excess of the levels originally anticipated, with the levels of rent collected for the March to June 2020 quarter at 94.1 per cent and collection for the June to September 2020 quarter at 90.0 per cent.  The Board made the decision to cut the level of the quarterly dividend by 50 per cent from June 2020 in order to preserve cash resources.

Detailed modelling has been performed, which has looked at the impact of the current crisis under increasingly negative scenarios and the effect of a suspension in paying out dividends to preserve cash. The modelling demonstrates that the Company remains viable.

BMO Real Estate Investments 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 Group’s ability to pay its operational expenses, bank interest and dividends. The Directors have examined significant areas of possible financial risk including cash and cash requirements and the debt covenants, in particular those relating to loan to value and interest cover. The Directors have not identified any material uncertainties which cast significant doubt on the Group’s ability to continue as a going concern for a period of not less than 12 months from the date of the approval of the consolidated financial statements. The Board believes it is appropriate to adopt the going concern basis in preparing the financial statements.

Directors’ Responsibilities in Respect of the Annual Report & Consolidated Accounts

We confirm that to the best of our knowledge:

· the financial statements, prepared in accordance with IFRS as adopted by the European Union, 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;

· the Strategic Report (comprising the Chairman’s Statement, Business Model and Strategy, Promoting Success, Key Performance Indicators, Principal Risks and Future Prospects, Manager’s Review, Environmental, Social and Governance and Property Portfolio) and the Report of the Directors’ 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 it faces;

· the financial statements and Directors’ Report includes details of related party transactions; and

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

On behalf of the Board
V Lall
Chairman
25 September 2020

BMO Real Estate Investments Limited
Notes to the Consolidated Financial Statements
for the year ended 30 June 2020

1.    The audited results of the Group which were approved by the Board on 22 September 2020 have been prepared on the basis of International Financial Reporting Standards as adopted by the EU, interpretations issued by the IFRS Committee, applicable legal and regulatory requirements of the Companies (Guernsey) Law, 2008 and the Listing Rules of the UK Listing Authority as well as the accounting policies set out in the statutory accounts of the Group for the year ended 30 June 2020.

2.  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 income and capital 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 comprise cash, receivables, interest-bearing loans and payables that arise directly from its operations.

The Group is exposed to various types of risk that are associated with financial instruments. Financial risks are risks arising from financial instruments to which the Group is exposed during or at the end of a reporting period. Financial risk comprises market risk (including currency risk, price risk and interest rate risk), credit risk and liquidity risk. There was no foreign currency risk as at 30 June 2020 or 30 June 2019 as assets and liabilities are maintained in 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.

The primary objectives of the financial risk management policies are to establish risk limits, and then ensure that exposure to risks stays within these limits.

Market risk

Market risk is the risk the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices.

Sensitivities to market risks included below are based on change in one factor while holding all other factors constant. In practice, this is unlikely to occur, and changes in some of the factors may be correlated – for example, changes in interest rate and changes in foreign currency rates.

The Group’s strategy for the management of market risk is driven by the investment policy. The management of market 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.

Price Risk

The Group has no significant exposure to price risk as it does not hold any equity securities or commodities. The Group is exposed to price risk other than in respect of financial instruments, such as property price risk including property rentals risk. Investment 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.

Any changes in market conditions will directly affect the profit/loss reported through the Consolidated Statement of Comprehensive Income. A 10 per cent increase in the value of the investment properties held at 30 June 2020 would have increased net assets available to shareholders and the increased the net income for the year by £30.9 million (2019: £33.9 million); an equal change in the opposite direction would have decreased net assets and decreased net income by an equivalent amount.

The calculations above are based on investment property valuations at the respective balance sheet dates and are not representative of the year as a whole, nor reflective of future market conditions.

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 the Group’s borrowings.  Interest rate risk on the £90 million Canada Life term loan is managed by the loan bearing interest at a fixed rate of 3.36 per cent per annum until maturity on 9 November 2026. 

Credit risk

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

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

The Group has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 30 June 2020 is £2,264,000 (2019: £802,000). The maximum credit risk is stated after deducting an impairment provision of £421,000 (2019: £9,000). Of this amount £nil was subsequently written off and £111,000 has been recovered.

Apart from the rent receivable disclosed above there were no financial assets which were either past due or considered impaired at 30 June 2020 (2019: nil).

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.

All of the cash is placed with financial institutions with a credit rating of A or above.  Bankruptcy or insolvency of these 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, the Manager would move the cash holdings to another financial institution.

The Group can also spread counterparty risk by placing cash balances with more than one financial institution.  The Directors consider the residual credit risk to be minimal.

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 in which the Group invests is not traded in an organised public market and may be illiquid.  As a result, the Group may not be able to quickly liquidate 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 Manager 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.

In certain circumstances, the terms of the Group’s bank loans entitle the lender to require early repayment, for example, if covenants are breached, and in such circumstances the Group’s ability to maintain dividend levels and the net asset value attributable to the Ordinary Shares could be adversely affected. 

3.    The fourth interim dividend of 0.625p will be paid on 30 September 2020 to shareholders on the register on 11 September 2020. The ex-dividend date was 10 September 2020.

4.  There were 240,705,539 Ordinary Shares in issue at 30 June 2020. The earnings per Ordinary Share are based on the net loss for the year of £9,149,000 and on 240,705,539 Ordinary Shares, being the weighted average number of shares in issue during the year.

5.  These are not full statutory accounts. The full audited accounts for the year ended 30 June 2020 will be sent to shareholders in September 2020, and will be available for inspection at Trafalgar Court, Les Banques, St. Peter Port, Guernsey, the registered office of the Company.  The full annual report and consolidated accounts will be available on the Company’s website: www.bmorealestateinvestments.com

6.    The Annual General Meeting will be held on 17 November 2020.

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. If the share price is lower than the NAV per share, the shares are trading at a discount. This usually indicates that there are more sellers than buyers. Shares trading at a price above the NAV per share, are said to be at a premium.

		2020 pence	2019 pence
Net Asset Value per share	(a)	96.6	104.8
Share price per share	(b)	56.0	80.0
Discount (c = (b-a)/a)	(c)	-42.0%	-23.7%

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.

A reconciliation of dividend cover is shown below:

			30 June 2020	30 June 2019
			£000	£000
(Loss)/profit for the year			(9,149)	3,206
Add:	Realised losses		991	206
	Unrealised losses		17,031	7,343
Profit before investment gains and losses		(a)	8,873	10,755
Dividends		(b)	10,531	12,036
Dividend Cover (c=a/b)		(c)	84.3%	89.4%

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

Net Gearing – Borrowings less net current assets divided by value of investment properties.

		30 June 2020	30 June 2019
		£000	£000
Loans		89,542	96,505
Less net current assets		(10,586)	(6,058)
Total	(a)	78,956	90,447
Value of investment properties	(b)	308,734	339,353
Net Gearing (c = a/b)	(c)	25.6%	26.7%

Ongoing Charges – All operating costs incurred by the Company, 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 expenses as these are variable in nature and tend to be specific to lease events occurring during the year.

		30 June 2020		30 June 2019
		£000		£000
Investment management fee		2,261		2,286
Other expenses		2,146		1,757
Less non-recurring bad debts		(413)		15
Less direct property expenses		(852)		(867)
Ongoing charges (excluding direct operating expenses)		3,142		3,191
Ongoing charges (excluding direct operating expenses) as a % of average net assets		1.3%		1.2%
Ongoing charges (including direct operating expenses)		3,994		4,058
Ongoing charges (including direct operating expenses) as a % of average net assets		1.6%		1.6%
Average net assets		244,424		256,408

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.  This 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. This 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. This calculation is carried out by MSCI Inc.

Total Return – The 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.

		2020	2019
NAV per share at start of year - pence		104.8	108.5
NAV per share at end of year - pence		96.6	104.8
Change in the year		-7.8%	-3.4%
Impact of dividend reinvestments		+4.1%	+4.7%
NAV total return for the year		-3.7%	+1.3%

		2020	2019
Share price per share at start of year - pence		80.0	99.8
Share price per share at end of year - pence		56.0	80.0
Change in the year		-30.0%	-19.8%
Impact of dividend reinvestments		+5.1%	+4.6%
Share price total return for the year		-24.9%	-15.2%

All enquiries to:

Peter Lowe
Scott Macrae
BMO Investment Business Limited
Tel: [phone]
The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Limited
PO BOX 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
Tel: [phone]