Trading update and NAV release

To:  Company Announcements

Date:  29 July 2024

Company: Balanced Commercial Property Trust Limited

LEI:  213800A2B1H4ULF3K397

Balanced Commercial Property Trust Limited (the "Company” or “BCPT”)
NAV (unaudited) and Company Update

Headlines

• Net Asset Value total return of -0.8 per cent. for the quarter ended 30 June 2024.

• Share Price total return of -1.1 per cent. for the quarter ended 30 June 2024.

• Disposal of three office assets since the quarter end, raising proceeds of £60.7 million (all disposals announced previously). Since the beginning of December 2023, the Company has executed the disposal of seven office holdings, reducing the portfolio’s exposure to the office sector to 14.4 per cent (29.6 per cent. at 30 June 2023) and raising aggregate proceeds totalling £129.5 million at an average discount to preceding valuations of 4.1 per cent.

• 19 leases and tenancy agreements completed or renewed over the quarter.

Net Asset Value: total return of -0.8 per cent. for the quarter

The unaudited net asset value (‘NAV’) per share of the Company as at 30 June 2024 was 105.1 pence. This represents a decrease of 2.1 per cent. from the audited NAV per share as at 31 March 2024 of 107.3 pence and a NAV total return for the quarter of -0.8 per cent.

The NAV has been calculated under International Financial Reporting Standards (‘IFRS’). It is based on the external valuation of the Company’s property portfolio which has been prepared by CBRE Limited.

The NAV includes all income to 30 June 2024 and is calculated after deduction of all dividends paid prior to that date.

Analysis of Movement in NAV

The following table provides an analysis of the movement in the unaudited NAV per share for the period from 31 March 2024 to 30 June 2024 (including the effect of gearing):

	£m	Pence per share	% of opening NAV per share
NAV as at 31 March 2024	752.5	107.3
Unrealised decrease in valuation of property portfolio	(14.6)	(2.1)	(2.0)
Other net revenue	8.7	1.2	1.1
Dividends paid	(9.3)	(1.3)	(1.2)
NAV as at 30 June 2024	737.3	105.1	(2.1)

The EPRA Net Tangible Assets per share as at 30 June 2024 was 105.1 pence per share (31 March 2024: 107.3 pence per share).

Market Commentary

The second quarter of 2024 has seen the economic pressures that have weighed heavily on the real estate sector begin to ease. Against this more positive backdrop, the MSCI Monthly Index has delivered a total return of 1.7 per cent, the joint strongest quarterly return since June 2022. This has been driven by an income return of 1.5 per cent. led by occupational markets. Over the quarter, all sectors delivered rental value growth, which was 0.8 per cent. at the market level, whilst vacancy rates remained broadly stable at 10.4 per cent.

The MSCI Monthly Index reported capital growth of 0.2 per cent. over the quarter, with April 2024 seeing the end of an 11-month run of consecutive valuation declines at the market level.

Rebased pricing combined with resilient occupational markets is beginning to translate into increasing investor confidence. This is particularly true of the retail warehousing and industrial & logistics sectors, where strong occupational fundamentals are supportive of income resilience and growth. The most notable feature of the investment market continues to be a constrained supply of available stock within these favoured sectors, with preliminary volumes for H1 2024 down circa 10 per cent. against already weak comparatives from H1 2023.

With the exception of offices, all other sectors have delivered positive total returns over the quarter. While the hybrid working model appears to have stabilised, the office sector continues to suffer from weakening investor confidence as occupational markets remain uncertain and obsolescence continues to pose an existential threat to secondary assets. The Company has continued to reduce its exposure to the office sector, as set out below.  

Portfolio valuation

Over the quarter, the Company’s portfolio recorded a capital return of -1.5 per cent, with valuation yields moving as set out below:

Portfolio yield (%)	June 2024	March 2024
Net initial yield	5.2	5.6
Equivalent yield	6.7	6.7

Portfolio performance was dragged by the office assets, which saw a capital return of -9.6 per cent. amid continued weakening in investor sentiment. This is particularly notable in the regional office segment, with the valuation declines on the Company’s holdings in Aberdeen and Manchester equal to the net valuation decline at the portfolio level. The equivalent yield on the office portfolio increased by 95 basis points to 10.0 per cent.

With the exception of the office holdings, the portfolio is generating encouraging capital performance. Most notably, the retail warehouse assets delivered capital growth over the quarter of 3.3 per cent. as the equivalent yield on the holdings sharpened by 19 basis points to 5.9 per cent. These prime holdings remain fully occupied, which is testament to the attractive occupational fundamentals that underpin the sector, while strong investor demand for the asset class, met with a lack of available stock, has driven yield compression at the market level over the quarter.

Amid a notable recovery in the wider West End retail market, the portfolio’s largest asset, St Christopher’s Place in Central London, returned to capital growth and delivered a valuation uplift of 0.5 per cent. over the quarter.

The valuation of the portfolio’s industrial assets remained stable as the equivalent yield on the holdings held at 6.1 per cent. There is strong investor appetite for this sector, offering near-term opportunity for income growth.

The valuation of the Company’s student housing block in Winchester was also stable over the quarter. The asset is subject to a long lease to the University of Winchester, the valuation of which has been closely correlated to movement in wider financial markets and gilt pricing, which have in turn remained relatively flat over the period.

Investment activity

As previously announced, the Company has sold three further office holdings since the June quarter end, reducing its exposure to the office sector.

Office assets sold post-period were:

• 7 Birchin Lane, London EC3 - a City of London office of 22,300 sq. ft. and multi-let to 10 tenants, has completed following the successful delivery of the asset’s business plan.

• 82 King Street, Manchester – a capital intensive, multi-let city-centre office holding of 83,500 sq. ft. and the largest single office remaining in the portfolio. The sale has been exchanged with completion due in September 2024.

• 17A Curzon Street, London W1 – a low yielding, multi-let office of 10,800 sq ft, where a cyclical refurbishment strategy has set a record rental tone for the building, representing an optimal time within the asset’s life cycle to crystallise the value created through the delivery of the holding’s business plan. The sale has been exchanged with completion due in early August 2024.

These three sales achieved an aggregate price of £60.7 million, reflecting a discount to the March 2024 valuations of 5.7 per cent. Since the beginning of December 2023, the Company has now executed the disposal of seven office holdings, reducing the portfolio’s exposure to the office sector to 14.4 per cent and raising aggregate proceeds totalling £129.5 million at an average discount to preceding valuations of 4.1 per cent.

The pricing achieved on these disposals reflects the quality and relative liquidity of the real estate in the portfolio, enabling the sale of holdings across the office sector, including capital-heavy multi-let assets, the structurally challenged regional business park segment and the low-yielding Central London markets.

Asset management update

Over the second quarter, 19 leases and tenancy agreements have been completed or renewed. Notable transactions completed include:

• St Christopher’s Place, Central London – the quarter has seen further momentum in the delivery of the Food & Beverage led strategy at the estate, with Spanish concept Bar Kroketa taking a new 15-year lease.

• Wimbledon Broadway, London SW19 – following the liquidation of former tenant Patisserie Valerie in February 2024, this prominent corner unit has been relet to Gail’s Bakery on a new 15-year lease (break in year 10) at a stepped headline rent averaging a premium to ERV over the first 5 years of the term.

• 17A Curzon Street, London W1 – Isomer Capital have entered into a 3-year reversionary lease, securing the income stream and committing them to the building until 2028. The letting enhanced the asset’s income stream, optimising value on the sale of the building post-period.

• Watchmoor Park, Camberley – Alcon Eye Care have agreed a variation of their lease to extend their commitment to the building for a further two years, delivering additional income of £1.1 million over the additional two-year period.

• Strategic Park, Southampton – the GB Oracle Sailing Team’s 10-year lease of unit 1 completed, bringing this major refurbishment project to a successful conclusion. Over the twelve months to March 2024, this asset has delivered a total return of 18.6 per cent.  

The portfolio vacancy rate increased from 6.8 per cent to 9.4 per cent over the quarter but remained below the market average for the MSCI Monthly Index as at 30 June 2024 (being 10.4 per cent.). The increase in the portfolio's vacancy rate is on account of the former JP Morgan headquarters building at Alhambra House, Glasgow becoming vacant at the end of the quarter. Excluding the two vacant HQ office buildings in Glasgow and Stockley Park, both of which are subject to the execution of asset management strategies, the portfolio vacant rate stands at 1.7 per cent.

Strategic review

On 15 April 2024, the Company announced that it had commenced a strategic review process (the 'Strategic Review Announcement'). A copy of the Strategic Review Announcement has been made available, subject to certain restrictions relating to persons resident in restricted jurisdictions, on the Company's website (https://www.balancedcommercialproperty.co.uk).

As previously announced, the Board is pleased to have received interest from a number of credible third parties who are currently reviewing information in respect of the Company and its portfolio that has been provided to them. The Board continues to pursue actively third party interest, alongside considering other options such as a managed wind down, as part of the strategic review.

The outcome of the strategic review is expected to be announced during the course of the current quarter.

Share Price

As at 30 June 2024, the share price was 79.2 pence per share, which represented a discount of 24.6 per cent to the NAV per share. The share price total return for the quarter to 30 June 2024 was -1.1 per cent.

Cash and Borrowings

The Company had £67.3 million of available cash as at 30 June 2024. All cash balances at 30 June 2024 were held in interest-bearing deposit accounts with competitive variable interest rates. The current rate of interest at the date of this announcement is 4.9 percent.

The Company has a £260 million term loan in place with L&G which matures in December 2024 (the ‘L&G Loan’). The Company signed up to a new debt facility in September 2023 which has been provided by incumbent lender, Barclays Bank plc, and HSBC UK Bank plc. This facility has been structured with two tranches, being (a) a £60 million revolving credit facility (‘RCF’) and (b) a £260 million term loan, which can only be drawn to refinance the existing L&G Loan. The £60 million RCF is currently undrawn.

As at 30 June 2024, the Company’s loan to value, net of cash, was 20.6 per cent.

Dividend

The Company paid three monthly property income distributions at a rate of 0.44 pence per share during the quarter.

Portfolio Analysis – Sector Breakdown

	Portfolio Value at 30 June 2024 £m	% of portfolio at 30 June 2024	% capital return (adjusted for CAPEX)
Industrial	331.9	35.1	0.0
South-East	59.4	6.3	0.3
Rest of UK	272.5	28.8	-0.1
Offices	187.3	19.9	-9.6
West End	53.5	5.7	-2.3
South-East	15.2	1.6	-4.2
South-West	19.1	2.0	-7.3
Rest of UK	80.8	8.6	-16.8
City	18.7	2.0	-0.3
Retail	183.8	19.5	0.3
West End	158.3	16.8	0.2
South-East	25.5	2.7	0.6
Retail Warehouse	133.3	14.1	3.3
Alternatives	107.0	11.4	0.6
Total Property Portfolio	943.3	100.0	-1.5

Portfolio Analysis – Geographic Breakdown

	Portfolio Value at 30 June 2024 £m	% of portfolio at 30 June 2024
West End	259.8	27.5
Midlands	240.7	25.5
South East	223.1	23.7
North West	124.2	13.2
Scotland	57.7	6.1
South West	19.1	2.0
Rest of London	18.7	2.0
Total Property Portfolio	943.3	100.0

Top Ten Investments

	Sector
Properties valued in excess of £200 million
London W1, St Christopher’s Place Estate *	Mixed
Properties valued between £50 million and £70 million
Solihull, Sears Retail Park	Retail Warehouse
Newbury, Newbury Retail Park	Retail Warehouse
Properties valued between £40 million and £50 million
Winchester, Burma Road London SW19, Wimbledon Broadway **	Alternative Mixed
Properties valued between £30 million and £40 million Chorley, Units 6 and 8 Revolution Park Birmingham, Unit 8 Hams Hall Distribution Park Markham Vale, Orion 1 & 2 Liverpool, Unit 1, G.Park, Portal Way Daventry, Site E4, Daventry International Rail Freight Terminal	Industrial Industrial Industrial Industrial Industrial

*  Mixed use property of retail, office and residential space.

** Mixed use property of retail and leisure space.

Summary Balance Sheet

	£m	Pence per share	% of Net Assets
Property Portfolio	943.3	134.6	127.9
Adjustment for lease incentives	(15.1)	(2.2)	(2.0)
Fair Value of Property Portfolio	928.2	132.4	125.9
Trade and other receivables	25.7	3.6	3.5
Cash and cash equivalents	67.3	9.6	9.1
Current liabilities	(20.8)	(3.0)	(2.8)
Current interest-bearing loan	(259.8)	(37.0)	(35.2)
Total Assets less current liabilities	740.6	105.6	100.5
Non-current liabilities	(3.3)	(0.5)	(0.5)
Net Assets at 30 June 2024	737.3	105.1	100.0

The next quarterly valuation of the property portfolio will be conducted by CBRE Limited during September 2024 and it is expected that the unaudited NAV per share as at 30 September 2024 will be announced in October 2024.

Important information

The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014. Upon the publication of this announcement via Regulatory Information Service this inside information is now considered to be in the public domain.

Enquiries:

Richard Kirby

Columbia Threadneedle REP AM plc

Tel: [phone]

Innes Urquhart

Winterflood Securities Limited

Tel: [phone]

Dion Di Miceli / Tom MacDonald / Stuart Muress / James Atkinson

Barclays Bank PLC

Tel: [phone]

[e-mail]

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