TIDMBCPT
To: RNS
Date: 19 April 2022
From: BMO Commercial Property Trust Limited (the "Company")
L.E.I. 213800A2B1H4ULF3K397
Results in Respect of the Year Ended 31 December 2021 (audited)
Headlines
· 37.8* per cent share price total return.
· 15.5* per cent portfolio total return.
· 122.2* per cent dividend cover on a cash basis (94.6 per cent on an
accounting basis).
· 4.1* per cent dividend yield.
· 7.1 per cent dividend increase.
· Completed £199.5 million of property disposals as part of the strategy to
adjust sector weightings.
· Completed £66 million of property acquisitions as part of the strategy to
adjust sector weightings.
· In accordance with the Company's strategy, the portfolio's weighting to
the industrial and logistics sector has increased to 30.6 per cent as at 31
December 2021 compared to 19.1 per cent at start of the calendar year.
· As at 31 December the Company had 46,260,278 shares held in treasury (5.8
per cent of ordinary shares in issue), acquired at an average discount to Net
Asset Value of 22.3 per cent. Accretive to Net Asset Value by 2.2 pence per
ordinary share.
· Rent collection currently received since the onset of the pandemic in
March 2020 to December 2021 is 94.4 per cent.
· As at 31 December 2021, the void rate was 2.0 per cent, excluding property
being developed or refurbished, which compares to a rate of 2.9 per cent at the
start of the calendar year.
· 4.6 per cent reduction in absolute carbon emissions since 2019, the
baseline year for the Company's net zero carbon pathway.
*see Alternative Performance Measures
Chairman's Statement
We entered 2022 on a much brighter note with regard to the UK Commercial
Property market. At the end of last year, we saw the Government produce its
'Plan B' in England with some lighter touch restrictions implemented, but this
was short lived, and restrictions have now been fully relaxed as the severity
of the Omicron variant saw lower levels of hospitalisations, boosted by the
scale of the vaccination programme and so the economic impact should hopefully
be more modest.
Very sadly we now face the added economic and geopolitical uncertainties
arising from the war in Ukraine and the humanitarian disaster that is
unfolding.
There was more activity in the capital markets, providing support to our
strategic ambitions of repositioning our portfolio weightings. This included
three significant sales at prices all comfortably ahead of valuation at the
start of 2021 and raising gross sale proceeds of £199.5 million. At the end of
the year, we made two acquisitions in the logistics sector totalling £66
million, with further investment committed over the coming months. Importantly,
these properties also have strong environmental characteristics. As a result of
both this activity and the strong capital growth experienced in the sector, our
weightings to the industrial sector increased from 19.1 per cent at the start
of the year to 30.6 per cent at year end and the portfolio now has a more
balanced profile.
During 2021 we continued to progress the active asset management of the
portfolio with some notable successes during the year especially in the
industrial and logistics sector where we completed the renewal of the Company's
two largest lease expiries for the year. We also managed to reduce our void
rate from the previous low of 2020 of 2.9 per cent to a new historical low of
2.0 per cent.
Property Market
The last six months have reaffirmed the resilience of the real estate sector in
the face of multifaceted challenges. The all-property total return continued to
improve significantly with momentum in the fourth quarter 2021 rolling over
from the third quarter, with an all-property total return of 16.3 per cent
(MSCI quarterly) in the twelve months to December 2021. Performance has been
heavily influenced by the industrial sector with a total return of 36.5 per
cent in the twelve months to December as structural changes continue to impact
and more consumption moved online. Improvements have been noted in the retail
sector, more so in retail warehousing and local convenience, and there is
perhaps some more clarity emerging on the manner in which, and how frequently,
offices will be used, allowing occupiers and investors once again to look for
opportunities in this sector.
However, future property trends should be viewed against the economic backdrop
of potential tax and interest rate increases, rising energy bills, price
increases and upward pressure on inflation which will squeeze household incomes
and will likely drag on consumer spending. However, the labour market remains
strong with unemployment around 3.8 per cent according to latest ONS data.
Performance for the Year
The share price as at 31 December was 105.0p, a total return of 37.8 per cent
for the year. The movement in the share price has been welcome, although the
shares were still trading at a discount of 22.3 per cent to the year-end Net
Asset Value (NAV) per share of 135.1p (compared to a 31.9 per cent discount as
at 31 December 2020). There has been further positive movement in the share
price since the year end and, despite continued market volatility, at the time
of writing it was 116.2p, a discount of 14.0 per cent. The NAV total return for
the year was 18.9 per cent. The total return for the portfolio was 15.5 per
cent, compared with a total return of 16.3 per cent from the MSCI UK Quarterly
Property Index (MSCI) and our capital return was 9.9 per cent, compared with
11.5 per cent for the Index.
The following table provides an analysis of the movement in the NAV per share
for the year:
Pence per
share
NAV per share as at 31 December 2020 117.5
Unrealised increase in valuation of property portfolio 10.9
Realised gain on sale of properties 4.3
Share buybacks 2.2
Movement in fair value of interest rate swap 0.1
Other net revenue 4.3
Dividends paid (4.2)
NAV per share as at 31 December 2021 135.1
The industrial and logistics sector was the standout in terms of performance
recording a total return of 39.8 per cent over the year, reflecting capital
growth of 34.0 per cent. Asset management in this sector was very active and we
completed all the initiatives earmarked in this report last year. These
included the lease renewals with DHL at G Park in Liverpool, and Kimberly Clark
at Chorley and the assignment of Mothercare's lease to Ceva Logistics at
Daventry. Hurricane 47 at Speke, Liverpool was let to Kukoon Rugs and this has
given us the confidence to commit to the development of an adjoining unit of
52,000 sq ft. The portfolio is however, still underweight to South East
industrials which had a negative impact on relative performance against MSCI.
Our retail warehouses produced a total return of 28.2 per cent over the year,
principally driven by the investment that was committed to our two large retail
parks where we completed a number of capital projects and saw some new store
openings. There was also yield compression due to the large amount of capital
seeking to invest into the sector. Of particular note was the construction of a
Marks and Spencer store unit at Solihull, which opened in June 2021. The
redeveloped 35,000 sq.ft. store was combined with the adjacent M&S Food Hall
and we have seen visitor numbers to the park substantially increase on the back
of this activity. There are two vacant units on the park, both of which are
under offer. At Newbury we completed the amalgamation of two units totalling
20,000 sq ft which enabled our new tenant Home Bargains to open successfully in
October.
Our Office portfolio produced a total return of 9.4 per cent for the year,
largely driven by the price achieved on the sale of Cassini House. There
continued to be activity in leasing vacant space, and it is pleasing to report
that properties located in Curzon Street, London and Camberley, both of which
had been substantially refurbished, are now fully let.
St Christopher's Place faced another challenging year with a capital value fall
of 4.2 per cent, albeit this is a significant improvement compared to the 17
per cent fall in 2020. The largest valuation impact was once again attributable
to the two Oxford Street properties where rents continue to be rebased and
yields moved out. It will take time for Oxford Street to recover from the
effects of the pandemic but landlords along the street are now appraising
significant investment into development and repositioning opportunities.
Encouragingly we saw footfall recover in quarter four to 2019 levels and the
return of employees to the office. An increase in international travel and the
long-awaited opening of the Elizabeth Line later this year should also benefit
St Christopher's Place. We saw a number of new openings of which 'Isola by San
Carlo' should be transformational for the Barrett Street Piazza.
We maintain our conviction in the prospects for the portfolio. Our Managers
remain focused on both growing income further and improving capital values
through numerous asset management initiatives which are further detailed in the
Managers' Report. Positive progress has been made on recycling capital and
repositioning the portfolio. The pace of further repositioning remains under
active review, and the Managers will continue to follow a strategy of having a
balanced sector exposure, subject to market opportunities, and evaluating any
decision to sell assets against the investment case for accretive reinvestment
or using sales proceeds to buy back the Company's shares.
Sales
Consistent with the strategy to recycle capital and adjust sector weightings,
the Company sold the retail warehouse located in East Kilbride, Scotland in May
2021 for a total consideration of £19 million, reflecting an increase of 9.2
per cent over the external valuation as at 31 December 2020. The property was
let to B&Q Limited for one of its large format stores on a lease due to expire
in November 2029.
In September 2021, the Company sold an office, Cassini House, located in St.
James', London. The property is a prime multi-let freehold office building and
represented the second largest holding in the portfolio. This was sold for a
total consideration of £145.5 million, reflecting a substantial increase of 19
per cent over the year-end valuation as at 31 December 2020. The disposal
represented the culmination of a long-term business plan which involved a
complete refurbishment, introduction of new tenants and re-gearing of leases.
The Company also sold its holding at Dane Street, Rochdale for a total
consideration of £35 million, an increase of 12 per cent over the year-end
valuation at 31 December 2020. The asset is a purpose-built supermarket with a
12-pump filling station and an adjacent retail warehouse. The supermarket is
let to Asda Stores Limited and the disposal followed the successful re-gearing
of the Asda lease and extension of the term expiry date out to December 2038.
Acquisitions
Following the above sales, the Company has looked to increase its exposure to
prime, modern industrial and logistics assets in established locations.
The Company acquired Orion One and Two, Markham Vale, Derbyshire for a price of
£44.5 million reflecting an initial yield of 3.7 per cent. The two newly built
units were completed in April 2021 and are located within Derbyshire's 200-acre
flagship redevelopment scheme adjoining junction 29A of the M1 Motorway. The
units have been constructed to institutional standards and benefit from strong
environmental characteristics having achieved an EPC rating of A and BREEAM
rating of very good.
The Company also acquired Unit 4, Quintus Business Park, Burton- Upon-Trent
which is structured as a forward funding to develop a new logistics warehouse
of 171,550 sq ft. The purchase price of £21.5 million equated to an initial
yield of 4.84 per cent with the property being pre-let. The Company has
acquired the land and met certain development costs incurred to date amounting
to £5.6 million of the purchase price. The development has achieved planning
consent and is expected to complete in July 2022. The unit is targeting strong
environmental characteristics with an A rated EPC and a BREEAM excellent
rating.
Capital Expenditure
During lockdown the Company delayed uncommitted capital expenditure. In the
light of the improving markets and outlook, the Company is now reviewing a
number of opportunities in the existing portfolio where there is a clear
opportunity to generate value. At this stage we have committed to two larger
projects although further projects are being considered.
At Estuary Business Park, Speke, Liverpool the Company has committed to the
speculative development of a 52,000 sq ft mid-box logistics unit on land
already owned and adjoining an existing ownership. The total construction cost
is expected to be in the region of £4.8 million with an income return on cost
forecast to be c.6.50 per cent when let. In Colchester, the Company has secured
planning consent to demolish an obsolete warehouse unit at the Cowdray Centre
and the re-development of c.35,000 sq ft to form a new multi-unit trade counter
park. This development will also be undertaken speculatively and will incur
expenditure of c.£5.7 million. It is expected a start on site will commence
soon and early marketing has identified encouraging tenant demand.
Rent Collection
It has been a difficult time for many of the Company's tenants as they have
navigated their businesses through lockdowns and challenging trading
conditions. The Company has a diverse tenant base across the portfolio and the
Managers have continued to engage with many of our tenants, assessing and
responding to requests for support on a case-by-case basis. We believe that
this support has helped, with many now experiencing near normal trading
conditions.
Against this background, rent collection statistics are close to pre-pandemic
levels and the resolution of historical rent arrears continues to progress.
Collection for the year is at 95.5 per cent to date and the last quarter of the
year is at 98.4 per cent. The overall collection rate since the impact of
Covid-19 came into full force in March 2020 is currently at 94.4 per cent.
Dividends
The Company paid twelve interim dividends totalling 4.25 pence per share during
the year. There were ten monthly dividends of 0.35 pence per share, followed by
an increase in November 2021 to 0.375 pence per share. Monthly dividends have
remained at this rate, however, greater certainty over rent collections has
given the Board more confidence to raise the level of dividend and with effect
from May 2022, the monthly rate will be increased to 0.4 pence per share, an
increase of 6.7 per cent.
Share Buybacks
The Company launched a share buy-back programme in June 2021, using some of the
proceeds from the property sales, and purchased 46.3 million shares by the year
end at an average discount of 22.3 per cent and a cost of £45.2 million. This
has enhanced the NAV by 2.2 pence per share during the year and has provided
additional liquidity in the Company's shares. Consideration will continue to be
given to further buybacks if the Board believes that this course of action
continues to be in the best interests of shareholders.
Cash and Borrowings
Following the significant sales programme, the Company had £138.1 million of
cash reserves at the year end. The Group's borrowings comprise a £260 million
term loan with Legal & General Pensions Limited, maturing on 31 December 2024.
The Company also has a £50 million term loan and an undrawn £50 million
revolving credit facility with Barclays. The Barclays facilities were extended
by a year and are due to expire on 31 July 2023, with the option of a further
one-year extension. As at 31 December 2021, the Company's net gearing was 14.4
per cent.
Environmental, Social and Governance (ESG)
The ESG landscape continues to evolve at an extraordinary pace with notable
movement towards more stringent disclosure and reporting requirements and
expectations. There is the hardening of regulatory obligations and sharpening
of standards to encourage and facilitate delivery against global ambitions.
Perhaps most significant was the introduction of the UK's new sustainable
investment framework which aims to align the country's financial mechanisms
with its net zero carbon commitment. The Company recently published its Net
Zero Carbon Pathway with a target date of 2040 or sooner.
Reflecting on the past year, the Company is pleased to have retained a leading
position and be the only three star rated property investment fund amongst its
peer group in the influential Global Real Estate Sustainability Benchmark
survey. The ten percent improvement in year-on-year score demonstrates the
attention which the Board and its Managers have been devoting to this critical
area both from a strategic perspective and in delivering impact on the ground.
ESG remains an important consideration in the Company's forward strategy and
the Board remains fully committed and engaged with its Managers in supporting
the right approaches and methodologies to enable continued advancement. The
Board has taken the decision to establish an Environmental, Social and
Governance (ESG) Committee since the year end which will be chaired by Linda
Wilding and will ensure continued oversight and governance in this vital area.
The Board is pleased to provide a summary of progress in the Annual Report,
whilst a deeper review will be shared in the 2021 ESG Report, available on the
Company's website.
Board Composition
Martin Moore retired as Chairman of the Company at the last AGM on 17 June
2021, having served on the Board for just over 10 years. Martin's contribution
was substantial, and I would like to thank him for his dedication and
commitment throughout.
I took over as Chairman following Martin's retirement and look forward to the
exciting challenge that lies ahead. Hugh Scott-Barrett who joined the Board on
4 January 2021 has replaced me as Senior Independent Director.
The Managers
Matthew Howard, the Company's Deputy Fund Manager, has recently accepted a Lead
Fund Manager role on another fund managed by our Managers and will be stepping
down as our Deputy Fund Manager on appointment to his new role in July this
year. The Board has received a commitment from the Managers that an appropriate
replacement will be appointed in a timely manner and will work closely with
Richard Kirby, our Lead Fund Manager, to ensure an orderly handover of
Matthew's responsibilities. Matthew will continue to work with Richard and the
wider team of investment professionals on the management of the Company's
assets while the Board works with the Manager to identify Matthew's
replacement. The Board wish Matthew well in his new role.
I reported at the half year stage that the Bank of Montreal had announced its
intention to sell its asset management business covering Europe, the Middle
East and Africa to Ameriprise Financial Inc., the parent company of Columbia
Threadneedle Investments. The sale transaction was completed on 8 November
2021. The Board's request for continuity of service from the Managers is being
prioritised in the smooth integration of the businesses. Your Board has
welcomed the Managers commitment on this but recognises that any move of this
nature will inevitably create a degree of risk. It is therefore closely
monitoring the integration of the two businesses as it progresses.
Company Name Change
Further to the ownership changes of the Managers, it is no longer appropriate
that the Company has BMO in its name. After much consideration, the Board has
agreed that the Company name be changed to Balanced Commercial Property Trust,
a name which we believe reflects the strategic direction of the Company. This
change will take effect in the near future, to coincide with the wider
re-branding exercise being conducted by the Managers.
Investment Policy
The Board, together with the Company's Managers, has recently undertaken a
review of the Company's investment policy in the light of the strategic
direction that the Company has been moving over the last year. As highlighted
above, the Company has raised its exposure to industrials, increasing to 30.6
per cent at year end and whilst the current investment policy allows investment
in this sector of up to 40 per cent, the Board is of the view that the maximum
sector weighting limits in the current investment policy have become unduly
restrictive. We are therefore proposing that all sector weighting limits are
removed from the Company's investment policy in order to ensure flexibility in
managing the existing portfolio and to facilitate appropriate decision making
in the future.
Annual General Meeting
The AGM will be held at the offices of BMO Global Asset Management, Exchange
House, Primrose Street, London, EC2A 2NY on 27 May 2022 at 2pm. Despite the
removal of Covid-19 related restrictions, there is still uncertainty as to what
the future will hold and the Company may, in accordance with its Articles of
Incorporation, impose entry restrictions on certain persons wishing to attend
the AGM or may be required to adjourn the AGM. Other restrictions may be
imposed as the Chairman of the meeting may specify in order to ensure the
safety of those attending the AGM.
Outlook
After a turbulent two years, we are now more resilient and better equipped to
deal with new Covid variants as they emerge. We therefore entered 2022 with a
renewed sense of optimism. However, Russia's invasion of Ukraine and the
geopolitical risk and the economic uncertainty surrounding this event places a
new shadow over the outlook. Notwithstanding this, the Company has had a strong
2021 and we firmly believe that the portfolio, underpinned by strong core
assets, is well positioned for the future.
Undoubtedly the structural changes fast forwarded by the health crisis will
continue and technology will be a key disruptor to the real estate industry.
Sustainability and the wider ESG agenda are a central theme and remain a
priority this year with occupiers and investors, across all sectors, focusing
on greener buildings which are increasingly important in investor strategy and
asset allocation.
Offices will see a new focus as pent-up demand unfolds buoyed by healthy job
growth, but there is a clear focus on high quality buildings and the emergence
of a two-tier market. Momentum in the industrial sector continues unabated but
the demand and supply imbalance needs to be addressed and there is no quick
fix. The embryonic signs of recovery in the retail sector are evident as
footfall improves and retail and leisure spend strengthen the occupier market,
with retail warehousing leading the way. Residential continues its
metamorphosis into a mainstream sector with the breadth of opportunity offering
long-term defensive income.
The Company has made good progress with its strategy to re-balance the
portfolio and has addressed being significantly underweight to industrials.
That said, there is still more to do and further recycling of capital will be a
theme of the next twelve to eighteen months. There is significant unlocked
value within the portfolio and embarking on further noteworthy capital
initiatives over the near to medium term remains a key part of the Company's
strategy.
Paul Marcuse
Chairman
14 April 2022
Managers' Review
· The Company's portfolio produced a total return 15.5* per cent versus the
MSCI UK Quarterly Property Index ('MSCI') return of 16.3 per cent.
· Completed £199.5 million of property disposals and £66 million of property
acquisitions as part of the strategy to adjust sector weightings.
· Rent collection currently received since the onset of the pandemic in
April 2020 to December 2021 is 94.4 per cent.
· As at 31 December 2021, the void rate was 2.0 per cent which compares to a
rate of 2.9 per cent at the start of the calendar year.
· Asset management initiatives across the portfolio driving strong occupancy
and value.
· Committed to achieving net zero carbon emissions by 2040 or sooner.
*see Alternative Performance Measures
Property Market Review
The performance of the UK real estate market in 2021 has been impressive,
particularly given the challenges faced in dealing with Covid-19. The
all-property total return on the MSCI UK Quarterly Property Index ('MSCI') in
the year to 31 December 2021 was 16.3 per cent as the positive momentum seen in
the first half of the year gathered pace and rolled over into the last six
months. It is the best annual performance recorded for over six years. The
fourth quarter total return was 6.2 per cent, a performance not bettered since
the end of 2009.
There are of course sector nuances playing out behind the scenes and
industrials was the driving force, with the final quarter producing the largest
ever quarterly total return performance of 12.4 per cent and a staggering
annual total return performance of 36.5 per cent, a level not seen since 1988.
The year was record breaking, with leasing activity in the logistics and
industrial sector at the highest level ever reported pushing the national
vacancy rate to the lowest ever seen. The strength of the occupational market
and current imbalance in supply and demand is driving positive rental growth,
which is now underpinning the positive investor sentiment towards the sector at
unprecedented levels.
Key Benchmark Metrics - All Property
2021 2020
% %
Total Returns 16.3 (2.0)
Income Return 4.3 4.5
Capital Return 11.5 (6.2)
Open Market Rental Value Growth 1.8 (3.1)
Initial Yield 4.1 4.7
Equivalent Yield 5.1 5.8
Source: MSCI Inc
Despite the ongoing shift to buying online leaving its indelible mark and
driving structural changes, retail was, perhaps surprisingly, the second-best
performing sector, posting total returns of 10.0 per cent. There is more
stability on high streets and some liquidity coming back to the shopping centre
capital markets, however, the 22.0 per cent total return recorded by retail
warehouses made it the standout retail segment. Lifestyle changes brought on by
Covid-19 and the shift to hybrid working favours the local, accessible, outdoor
space and free parking that retail warehouses offer. Grocery anchors along with
essential and convenience retail will structurally support the sector which has
proven resilient over the course of the pandemic in terms of both value and
footfall.
Appetite for offices is finding its equilibrium with a clear focus on higher
quality space in central locations, as companies look to welcome employees back
to a more structured hybrid model of operation where strong ESG and wellbeing
credentials will be essential. This will be at the expense of lower quality
stock and the emergence of a two-tier market is likely, rebasing both capital
values and rents. Occupational requirements are increasing, and leasing
activity is beginning to pick-up. This has been supported by job growth, the
challenge of retaining and attracting talent, along with pent-up demand as
corporates reactivate shelved office accommodation plans.
As the vaccine roll out increased and the outlook improved the second half of
2021 saw investment activity shift into a higher gear with £30.7 billion
flowing into UK real estate. This was a 12 per cent increase on the first half
of the year and brought the annual traded in the year to £58.3 billion. The
share of industrial transactions has risen dramatically year-on-year as
investors continue to capitalise on the acceleration of the shift to online and
realignment of supply chains. Retail has seen a notable rise in interest since
the depth of the pandemic, and offices meanwhile are seeing a renewed level of
appetite supported by more clarity on how hybrid working will evolve and the
future role of the office. There is a clear preference for those sectors that
are underpinned by their ability to offer long-term, defensive income plays
such as industrial, residential and supermarkets and those offering some hedge
to inflation.
Valuation and Portfolio
The total return from the portfolio was 15.5 per cent compared with the MSCI
return of 16.3 per cent. Capital growth from the portfolio was 9.9 per cent
compared with the MSCI return of 11.5 per cent. In 2021 the dispersion of
returns by sector as measured in the quarterly benchmark was the greatest
recorded since its inception.
It is unsurprising that the Company's industrial and logistics properties
experienced the strongest capital growth due to a combination of further yield
compression and the accretive asset management initiatives detailed below.
The Company's two retail parks also had a strong year as some significant asset
management initiatives completed and sentiment to the retail warehouse sector
improved. The Company's largest asset at St Christopher's Place Estate
experienced another challenging year with the two Oxford Street properties
seeing yields move out further as the rents continue to be rebased.
The most significant contribution from the office portfolio came from the sale
of Cassini House at a price well in excess of the previous valuation. There
were some valuation falls in the South East and regionally on those properties
with shorter lease terms.
Sector Analysis (% of total property portfolio)
2021 2020
(%) (%)
Offices 32.3 42.2
Retail 15.6 18.5
Retail Warehouses 10.9 10.0
Industrial 30.6 19.1
Alternative 10.6 10.2
Source: BMO REP Asset Management plc
Geographical Analysis (% of total property portfolio)
2021 2020
(%) (%)
South East 24.0 22.0
London - West End 25.4 35.4
Midlands 21.4 12.4
Scotland 11.7 13.3
North West 13.4 12.7
Rest of London 1.6 1.6
South West 2.5 2.6
Source: BMO REP Asset Management plc
Lease Expiry Profile
At 31 December 2021 the weighted average lease length for the portfolio,
assuming all break options are exercised, was 5.2 years (2020: 6.0 years)
% of leases expiring (weighted by rental 2021 2020
value) (%) (%)
0 - 5 years 56.0 47.5
5 - 10 years 29.3 34.1
10 - 15 years 9.8 12.0
15 - 25 years 4.9 6.4
Source: BMO REP Asset Management plc
The largest occupiers, based as a percentage of contracted rent, as at 31
December 2021, are summarised as follows:
Income Concentration
Company name % of Total Income
Apache North Sea Limited 4.8
CNOOC Petroleum Europe Limited 4.7
Canon (Europe) Limited 4.7
Marks & Spencer plc 3.7
Virgin Atlantic Limited 3.6
JP Morgan Chase Bank 3.6
University of Winchester 3.5
Transocean Drilling UK Limited 3.4
Nestle Purina UK Commercial Operators 3.4
Limited
CEVA Logistics Limited 3.2
Total 38.6
Source: BMO REP Asset Management plc
Income Analysis and Voids
We started the year with a void rate of 2.9 per cent and following leasing
activity, many of which is detailed in this report, this has reduced to 2.0 per
cent, excluding property being developed or refurbished. As previously
reported, there is still an expectation that voids will increase as the full
economic impact of Covid-19 and the war in Ukraine takes its toll and there are
a number of lease events due in 2022 where we understand the tenant will not
renew. These will provide additional asset management opportunities to
refurbish space and add value.
The war in Ukraine has heightened the risk of exposure to Russia and sanctions
within the Company's tenant base. The Managers Anti Money Laundering team have
a process in place to mitigate against this type of risk and undertake a
screening process of the Company's tenancy schedule against a sanctions list
every month. No positive sanctions matches have been identified between the
Company's tenants base and any individuals or entities listed on the sanctions
lists in scope for screening.
Since the Government removed Covid-19 restrictions in the summer, we have seen
tenants more motivated to seek to resolve their financial situations by
reaching agreements combined with a return to 'more normal' rent collection
patterns across the Company's portfolio.
Rent collection was 95.5 per cent for the year with further receipts expected
and we have now collected 94.4 per cent of the rent demanded since the impact
of Covid-19 came into full force.
At the 31 December 2021 the weighted average lease length for the portfolio,
assuming all break options are exercised, was 5.2 years (2020: 6.0 years).
Industrial and Logistics
During the year we successfully completed a number of excellent, value
accretive asset management opportunities within this segment of the portfolio.
This activity combined with the momentum of yield compression led to some
significant total return numbers.
Initiatives of note included the completion of the lease re-gear with
Kimberly-Clark at their 368,000 sq. ft. logistics facility at Revolution Park,
Chorley. This lease was due to expire in June 2021, and the re-gear saw the
tenant sign a new 12-year lease (with a break option at the end of the 7th
year), and fixed annual uplifts of 2 per cent. This combined with further yield
compression saw the valuation increase by 44.3 per cent over the year. At G
Park, Liverpool we completed a reversionary lease with DHL Supply Chain Limited
on their 360,000 sq. ft. distribution warehouse. A new 10-year lease was agreed
from March 2021 with a tenant break at the end of the fifth year and the new
rent reflected an uplift in excess of 10 per cent on the previous rent. This
property has seen a valuation uplift over the year of 39.2 per cent. These were
the two largest lease expires in the Company's portfolio that were due in 2021
and it is reassuring that both of the existing tenants renewed their leases and
the early settlement de-risked the portfolio to these events.
We also negotiated the settlement of the rent review at a 270,000 sq ft
facility in Hams Hall, Birmingham, which is Nestlés Purina pet food
distribution hub. The review resulted in a 29.3 per cent increase in the
passing rent, which gave rise to an immediate valuation increase of 11.0 per
cent. The Company also owns two other properties at Hams Hall and the new
rental level negotiated had a positive impact on the valuation of these units.
In February 2021, a new letting of Hurricane 47, Estuary Business Park,
Liverpool contracted to an online rug retailer. Kukoon Rugs entered into a
15-year lease (tenant break at 10 years) at a rent of £290,000 per annum and
were granted 9 months' rent free.
In March 2021 Mothercare assigned their lease on the distribution warehouse at
DIRFT, Daventry to Ceva Logistics, who are one of the largest third-party
logistics operators in Europe. The Company has therefore entered into a direct
contractual relationship with a tenant that has a superior credit rating and
this had a significant impact on value.
During lockdown the Company delayed uncommitted capital expenditure. In light
of an improving market outlook a number of opportunities in the existing
portfolio have been reviewed and the Company is progressing two larger
industrial and logistics projects. At Estuary Business Park, Speke, Liverpool
the Company has committed to the speculative development of a 52,000 sq. ft.
mid-box logistics unit on land already owned and adjoining an existing
ownership. The total construction cost is expected to be in the region of £4.8
million with an income return on cost forecast to be c.6.5 per cent when let.
Construction works commenced in February 2022.
At the Cowdray Centre, Colchester we had previously secured planning consent to
demolish an obsolete warehouse unit and for the re-development of c.35,000 sq.
ft. to form a new multi-unit trade counter park. We are now committing to a
speculative start and this development will incur expenditure of c.£5.7million.
It is expected a start on site will commence once a revised planning consent
has been secured. Our initial marketing has identified encouraging tenant
demand.
Retail and Retail Warehouses
Newbury Retail Park (retail warehouse)
In February contracts were exchanged with TJ Morris, trading as Home Bargains,
to take 20,000 sq. ft. formerly occupied by New Look and Next on a new 20-year
lease (no breaks) at a rent of £17.50 per sq. ft. We completed the construction
works to combine the two units on programme and Home Bargains opened the new
store in October. This new store is an added attraction to the Park and is
definitely supporting a recovery in visitor numbers. The car park management
system recorded average daily visits of circa 4,500 people in Q4 2021 with in
excess of 6,000 visits on the 20 December. These visitor numbers exceed pre
Covid-19 levels. The letting to Home Bargains is a further move towards our
strategy of curating the park to convenience-based retailing which is expected
to be more sustainable in out-of-town locations.
Other asset management initiatives remain in advanced negotiations or
conditional on achieving new planning consents, and where this is the case,
supporting planning applications have been submitted to facilitate these.
Solihull Retail Park (retail warehouse)
The construction of the new Marks & Spencer store unit and the refurbishment of
the shopfront of the Food Hall completed in January 2021 on programme and to
budget. M&S opened this new flagship store in June 2021 and report that the new
concept is trading extremely well. The store has attracted an increased
footfall to the Park and the car park is operating to near full capacity. The
new lease is at a rent of £1.373 million per annum.
We have secured planning consent for a change of use for the vacant former
Multi York unit and it is now under offer to a Gym operator which will bring a
new use onto the Park. Argos vacated their unit on lease expiry and this unit
is now under offer to a national retailer.
St. Christopher's Place ('Estate') (retail/office/alternatives)
The year commenced in a challenging way; London entered Tier 4 restrictions on
20 December 2020, swiftly followed by the implementation of a third national
lockdown in early January 2021. After the roadmap out of lockdown was
announced, restrictions were initially eased in April, with the opening of
non-essential retail and hospitality venues for outside dining. However,
restrictions were not fully lifted on restaurants and bars until mid-July.
The lockdown limitations on trade and the work from home requirements, resulted
in suppressed footfall on the Estate across the year, which reflected on
average 60 per cent of 2019 levels although notably, this is ahead of the wider
West End visitor numbers which reported 47 per cent compared to 2019 levels.
In the latter half of the year, footfall levels steadily improved and Quarter 3
reached 66 per cent of the same period in 2019 whilst Quarter 4 was on par,
hitting 99 per cent of 2019 visitor numbers. This final quarter is especially
encouraging given the drop in visitor levels in the final weeks of the year,
due to the emergence of the Omicron variant which halted many visits to Central
London whether by office workers, shoppers, or for social gatherings.
The start to 2022 has been encouraging with the return of office workers,
albeit a hybrid 'home/office' working model appears to be prevalent, and the
arrival of some international visitors. Footfall has grown week on week, every
week since the start of the year (except during the unusual red weather
warnings and the early March tube strikes), which bodes well for a stronger
year ahead.
Leasing Activity
· 'Aldo' reopened at 372 Oxford Street; an Aldo Franchisee has taken a new
lease of the site, following the surrender of the former Aldo lease, after the
company appointed Administrators in 2020.
· 'Emma Hyacinth' have opened their new, larger shop at 2-3 St Christopher's
Place.
· 14a St Christopher's Place: Completed a new letting to 'Festok'.
· Secured a new letting to 'Platform' at 28-32 St Christopher's Place.
· Various pop-up lettings completed throughout the year including,
successful activations over the festive period with 'Fedor Sneaks' and 'Aldi
Champagne Bar'.
· Completed a new 15-year lease to 'Cote' new co, following the surrender of
the former Cote lease, after the appointment of Administrators in 2020.
· 'Isola by San Carlo' opened their flagship restaurant in the former
Carluccios site on the Barrett Street piazza. This is a signature letting for
the Estate.
· 'Crome' has taken a new 15-year lease of the former T Burrows site, for a
new French toast café concept.
· Papa-dum' and 'Sidechick' (by Patty and Bun) opened new restaurants on
James Street, adding to the diverse food and beverage offer on the estate.
· Six new office leases completed in the period, with a further 2 new
lettings under offer. Several suites are under refurbishment, prior to
marketing.
· Across all sectors, various lease renewals and re-gears have been secured
and several new lettings and lease negotiations are in hand.
Broadway Wimbledon (retail)
Having experienced a significant fall in valuation during 2020 the valuation
stabilised during the year and was only down 0.6 per cent at year end. All
units are now open and trading and rent repayment plans which had been put in
place to assist a number of the tenants are being honoured.
We have re-engaged with Merton Council to discuss this holding in connection
with Merton's ambitions for the Wimbledon Town Centre Masterplan. As previously
stated this could provide the Company with a valuable redevelopment
opportunity.
Offices
At Watchmoor Park, Camberley we built upon the back of the successful letting
to Muller and let the remaining vacant 12,500 sq. ft. to Siemens Healthcare at
a rent of £23 per sq ft for a term of 10 years with a tenant break after 5
years. This building was fully refurbished to a high standard and this last
letting culminates in the successful completion of the asset's business plan.
At Alhambra House in Glasgow the lease extension with JP Morgan until 30 June
2023 was completed. The office building extends to c100,000 sq. ft. and for the
period of the lease extension the annualised rent will be £2.5 million, an
uplift of £0.5 million on the passing rent. The attention for this year is now
centred upon working up plans to extend and refurbish this property and to
secure a planning consent to allow the proposed works.
At 17A Curzon Street, London the leasing programme of the available refurbished
floor completed with a letting of the 2nd floor to MA Family Office Ltd at a
rent of £130,350 per annum on a 5-year lease term and a tenant break after the
third year. In February 2022 the final letting of the 1st floor contracted with
65 Equity Partners at a rent of £87.50 per sq. ft. and another 5 year term and
tenant break after 3 years. This property is now fully let.
At 82 King Street, Manchester, two rent reviews and one lease renewal completed
with a further three rent reviews and one lease renewal currently in
negotiation.
The Alternatives property sector
Alternatives relate to the purpose-built student accommodation in Winchester,
residential properties at St. Christopher's Place and the leisure units at
Wimbledon Broadway. Winchester continues to benefit from a long lease and
annual RPI linked rent reviews. The University have continued to pay their rent
in full and on time. The occupation levels of the short-term residential units
at St Christopher's Place has continued to improve and are ahead of budget. The
longer let units are fully let with no availability and we are now experiencing
a recovery in rental levels on these units. The leisure operators at Wimbledon
are now able to trade and are honouring their rent re-payment plans.
Sales and Capital Receipts
Consistent with the strategy to recycle capital and adjust sector weightings,
the Company completed three property disposals during 2021 raising gross sale
proceeds of £199.5 million and realising gains net of sales costs of £34.4
million against last year's closing valuations.
In May the Company announced the sale of a solus retail warehouse located in
East Kilbride, Scotland for a total consideration of £19 million, reflecting an
increase of 9.2 per cent over the external valuation at 31 December 2020. The
property is let to B&Q Limited for one of its large format stores on a lease
due to expire in November 2029.
The second sale was Cassini House, St James Street, London SW1, a prime
multi-let freehold office building and the second largest holding in the
portfolio. The sale price of £145.5 million represented a net initial yield of
3.2 per cent and reflected an increase of 18.5 per cent over the valuation as
at 31 December 2020. The disposal represented the culmination of a long-term
business plan which involved a complete refurbishment, introduction of new
tenants and re-gearing of leases and a sale into an extremely strong and
competitive Central London investment market.
Also in September the Company sold its holding at Dane Street, Rochdale for a
total consideration of £35 million, an increase of 12 per cent over the
year-end valuation at 31 December 2020. The asset is a purpose-built
supermarket with a 12-pump filling station and an adjacent retail warehouse.
The supermarket is let to Asda Stores Limited and the disposal follows the
successful re-gearing of the Asda lease and extension of the term expiry date
out to December 2038.
A capital receipt of £2.4 million was received from the long leaseholder of a
number of residential units at St Christopher's Place as a result of the
completion of a statutory lease enfranchisement process to extend the leases.
This covered 24 flats located in Greengarden House subject to leases which were
due to expire in 2077 at nil rent. Under a statutory process the leases have
been extended for a further 90 years until 2167.
Acquisitions
The Company completed two acquisitions in December 2021 totalling £66 million.
The first acquisition, a standing investment, is Orion One and Two, Markham
Vale, Derbyshire for a price of £44.5 million reflecting an initial yield of
3.7% and a low capital value of £148 per sq. ft. The two newly built units were
completed in April 2021 and are located within Derbyshire's 200-acre flagship
redevelopment scheme adjoining junction 29A of the M1 Motorway. Orion One
extends to 224,424 sq. ft. and is let to The National Lighting Company Limited
on a lease term expiring in August 2031 at a rent of £1.3 million per annum
with a rent review at the 5th year, linked to RPI and collared and capped at
1.50 - 3.50 per cent per annum. Orion Two comprises a smaller unit of 75,958
sq. ft. and is let to Smurfit Kappa UK Ltd on a lease expiring October 2031
(tenant break October 2026) at a commencing rent of £0.5 million per annum,
subject to a rent review in the fifth year. Both units have rent free periods
in place, all of which expire during 2022. The units have been constructed to
institutional standards and benefit from strong environmental characteristics
having achieved an EPC rating of A and BREEAM rating of very good.
The second acquisition is Unit 4, Quintus Business Park, Burton-Upon-Trent
which is structured as a forward funding to develop a new logistics warehouse
of 171,550 sq. ft. The property has been pre-let to Werner UK Sales &
Distribution Limited on a lease term upon completion of 15 years (tenant break
after 10 years) at a rent of £1.1 million per annum, with 5 yearly rent reviews
linked to RPI and collared and capped at 2.00 - 4.00 per cent per annum. The
purchase price is £21.5 million which equates to an initial yield of 4.84 per
cent. The Company has acquired the land and met certain development costs
incurred to date which amounts to £5.6 million of the purchase price. The
development has achieved planning consent and is expected to complete in June
2022. The unit will have strong environmental characteristics with an A rated
EPC and a BREEAM Excellent rating being targeted.
Outlook
The combined weight of capital and strength of appetite for real estate
positions us well for a positive 2022. Yields are trending downwards following
the outward shift seen at the onset of the health crisis. Annual trading
volumes are expected to be in the region of 10 per cent higher than seen in
2021, supported by relatively healthy occupational drivers including demand and
supply fundamentals, lower unemployment figures and positive hiring intentions
by companies. There is also likely to be increasing convergence between the
main sectors as capital values start to rise in some parts of the retail market
and the rate of growth slows in the industrial sector.
But there are headwinds, and they should not be ignored. The war in Ukraine,
political tensions, soaring energy costs and rising prices as well as the
mismatch between jobs and vacancies creating wage pressure in some sectors and
this is likely to dominate headlines during the year. Investors and occupiers
have gallantly navigated the challenges beset by the health pandemic and the
structural changes fast forwarded by the health crisis will continue.
Capturing the impact of long-term trends and industry disruptors remains at the
forefront of our thinking, feeding decisions on where and how to allocate
capital with some real estate allocations having come into very sharp focus
over the past 18 to 24 months.
Environmental, social and governance will remain front and centre for both
occupiers and investors across all sectors of the market and will apply
pressure on real estate firms to deliver more on the ESG agenda. It will be an
increasingly important factor in our due diligence as well as acquisition and
disposal strategies. It brings quality into a clear focus, but more than that,
interest in alternatives will continue to grow as investors seek out
opportunities not just to achieve returns, but equally, if not more important,
to create and preserve, fulfilling ESG aspirations.
As highlighted above, there have been some notable successes during 2021 and
the Company is well placed to build on these going forward. Our retail
warehouse properties performed strongly and the investment we have made in
bringing more grocery and convenience operators onto Solihull and Newbury
Retail Parks should lay the foundations for these parks to successfully trade
post Covid-19. Although the situation at St Christopher's Place improved over
the year it was still very challenging. As the return to the office picks up,
visitor numbers to Central London increase and the Elizabeth Line opens in the
summer of 2022 it is hoped the recovery will gain momentum.
The Company has made good progress with its strategy to re-balance the
portfolio following the completion of £199.5 million of targeted sales and the
two acquisitions made at the end of last year. This has taken the weighting to
the industrial sector from 19.1 per cent at the start of the year to over 30.6
per cent by year end. Although the industrial and logistics sector have
experienced significant yield compression, rental growth is forecast to
outperform other sectors and as such the Manger is still actively sourcing
opportunities in the sector. We are also seeking to increase the exposure to
certain 'alternatives' and subject to availability and pricing retail
warehouses. We have a robust investment process and are actively sourcing
appropriate investments to further reposition the portfolio in the coming
months.
There remains significant opportunity to generate strong returns in the
Company's portfolio, not just from the capital initiatives identified above but
from further capital projects that are actively being considered and will
present themselves over the next two to three years.
Richard Kirby and Matthew Howard
Fund Manager
BMO REP Asset Management plc
BMO Commercial Property Trust Limited
Consolidated Statement of Comprehensive Income (audited)
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Revenue
Rental income 55,843 65,273
Other income 3,008 -
--------- ---------
Total revenue 58,851 65,273
Gains/(Losses) on investment properties
Unrealised gains/(losses) on revaluation of 86,976 (121,306)
investment properties
Gains/(Losses) on sale of investment properties 34,397 (22)
realised
---------- ----------
Total income / (loss) 180,224 (56,055)
---------- ----------
Expenditure
Investment management fee (7,195) (6,692)
Other expenses (4,540) (9,448)
---------- ----------
Total expenditure (11,735) (16,140)
----------- -----------
Operating profit/(loss) before finance costs and 168,489 (72,195)
taxation
----------- -----------
Net finance costs
Interest receivable 1 49
Finance costs (11,140) (11,210)
----------- -----------
(11,139) (11,161)
----------- -----------
Profit/(loss) before taxation 156,023 (83,356)
Taxation (1,327) (890)
---------- ----------
Profit/(loss) for the year 156,023 (84,246)
---------- ----------
Other comprehensive income
Items that are or may be reclassified
subsequently to profit or loss
Movement in fair value of effective interest 544 (20)
rate swaps
---------- ----------
Total comprehensive income / (loss) for the year 156,567 (84,266)
---------- ----------
Basic and diluted earnings per share 19.8p (10.5)p
All of the profit and total comprehensive income or losses for the year is
attributable to the owners of the Group.
All items in the above statement derive from continuing operations.
BMO Commercial Property Trust Limited
Consolidated Balance Sheet (audited)
As at As at
31 December 31 December
2021 2020
£'000 £'000
Non-current assets
Investment properties 1,180,486 1,205,293
Trade and other receivables 19,319 20,593
Interest rate swap asset 466 -
------------ ------------
1,200,271 1,225,886
------------ ------------
Current assets
Trade and other receivables 8,698 11,589
Taxation receivable 134 134
Cash and cash equivalents 138,081 34,896
------------ ------------
146,913 46,619
------------ ------------
Total assets 1,347,184 1,272,505
------------ ------------
Current liabilities
Trade and other payables (18,448) (22,644)
Interest rate swap liability (159) (237)
------------ ------------
(18,607) (22,881)
Non-current liabilities
Trade and other payables (2,416) (1,677)
Interest-bearing loans (308,641) (308,303)
------------ ------------
(311,057) (309,980)
------------ ------------
Total liabilities (329,664) (332,861)
------------ ------------
Net assets 1,017,520 939,644
------------ ------------
Represented by:
Share capital 7,531 7,994
Special reserve 544,813 589,593
Capital reserve - investments sold 75,010 (16,720)
Capital reserve - investments held 275,256 245,613
Hedging reserve 307 (237)
Revenue reserve 114,603 113,401
------------ ------------
Equity shareholders' funds 1,017,520 939,644
------------ ------------
Net asset value per share 135.1p 117.5p
BMO Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2021 (audited)
Capital Capital
Reserve - Reserve -
Share Special Investments Investments Hedging Revenue
Capital Reserve Sold Held Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 1 January 2021 7,994 589,593 (16,720) 245,613 (237) 113,401 939,644
Total
comprehensive
income for the
year
Profit for the - - - - - 156,023 156,023
year
Movement in fair
value of interest - - - - 544 - 544
rate swaps
Transfer in
respect of
unrealised gains - - - 86,976 - (86,976) -
on investment
properties
Gains on sale of
investment - - 34,397 - - (34,397) -
properties
realised
Transfer of prior
years'
revaluations to - - 57,333 (57,333) - - -
realised reserve
Total
comprehensive - - 91,730 29,643 544 34,650 156,567
income for the
year
Transactions with
owners of the
Company recognised
directly in equity
Buyback to (463) (44,780) - - - - (45,243)
Treasury
Dividends paid - - - - - (33,448) (33,448)
At 31 December 7,531 544,813 75,010 275,256 307 114,603 1,017,520
2021
Consolidated Statement of Changes in Equity
for the year ended 31 December 2020 (audited)
Capital Capital
Reserve - Reserve -
Share Special Investments Investments Hedging Revenue
Capital Reserve Sold Held Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 1 January 2020 7,994 589,593 (20,725) 370,946 (217) 99,101 1,046,692
Total
comprehensive loss
for the year
Loss for the year - - - - - (84,246) (84,246)
Movement in fair
value of interest - - - - (20) - (20)
rate swaps
Transfer in
respect of
unrealised losses - - - (121,306) - 121,306 -
on investment
properties
Loss on sale of
investment - - (22) - - 22 -
properties
realised
Transfer of prior
years'
revaluations to - - 4,027 (4,027) - - -
realised reserve
Total
comprehensive loss - - 4,005 (125,333) (20) 37,082 (84,266)
for the year
Transactions with
owners of the
Company recognised
directly in equity
Dividends paid - - - - - (22,782) (22,782)
At 31 December 7,994 589,593 (16,720) 245,613 (237) 113,401 939,644
2020
BMO Commercial Property Trust Limited
Consolidated Statement of Cash Flows (audited)
Year ended Year ended
31 December 31 December
2021 2020
£'000 £'000
Cash flows from operating activities
Profit/(loss) for the year before taxation 157,350 (83,356)
Adjustments for:
Finance costs 11,140 11,210
Interest receivable (1) (49)
Unrealised (gains)/losses on revaluation of
investment properties (86,976) 121,306
(Gains)/losses on sale of investment (34,397) 22
properties realised
Decrease/(Increase) in operating trade and
other receivables 4,165 (3,972)
(Decrease)/Increase in operating trade and (4,761) 5,087
other payables
----------- -----------
Cash generated from operations 46,520 50,248
----------- -----------
Interest received 1 49
Interest and bank fees paid (10,063) (10,528)
Taxation paid (1,327) (890)
----------- -----------
(11,389) (11,369)
----------- -----------
Net cash inflow from operating activities 35,131 38,879
----------- -----------
Cash flows from investing activities
Purchase of investment properties (50,821) -
Sale of investment properties 201,920 5,585
Capital expenditure on investment properties (4,050) (12,080)
----------- -----------
Net cash inflow/(outflow) from investing activities 147,049 (6,495)
----------- -----------
Cash flows from financing activities
Dividends paid (33,448) (22,782)
Issue costs for Barclays £100m loan facility (304) (600)
extension
Buybacks to Treasury (45,243) -
----------- -----------
Net cash outflow from financing activities (78,995) (23,382)
----------- -----------
Net increase in cash and cash equivalents 103,185 9,002
Opening cash and cash equivalents 34,896 25,894
----------- -----------
Closing cash and cash equivalents 138,081 34,896
----------- -----------
BMO Commercial Property Trust Limited
Principal Risks and Future Prospects
The Board applies the principles detailed in the internal control guidance
issued by the Financial Reporting Council and has established an ongoing
process designed to meet the particular needs of the Company in managing the
risks and uncertainties to which it is exposed.
Covid-19 is still with us and its impact continues to be monitored. The effects
have been extensive with significant disruption to all sectors worldwide. This
has had an ongoing effect on many of our principal risks during the year and
the Board met regularly with the Managers to assess these risks and how they
could be managed. More detail is included in the Chairman's Statement and the
Manager's Report. The level of rent collection and its impact on cash flow was
seen as a key concern, however, collection rates since the start of the
pandemic are at 94.4 per cent which is well in excess of what was originally
anticipated.
Risks faced by the Company include market, geopolitical, investment and
strategic, regulatory, environmental, taxation, management and control,
operational and financial risks. The principal risks and uncertainties faced by
the Company are set out in the table on page 16 and in note 17, which provides
detailed explanations of the risks associated with the Company's financial
instruments.
The Board seeks to mitigate and manage these risks and uncertainties through
continual review, policy-setting and enforcement of contractual obligations, as
well as a review by the Audit and Risk Committee of the Internal Control
reports prepared in accordance with AAF(01/06).
To mitigate investment and strategic risks the Board regularly monitors the
investment environment and the management of the Company's property portfolio.
The Managers seek to mitigate the portfolio risks through active asset
management initiatives and carrying out due diligence work on potential tenants
before entering into any new lease agreements. All of the properties in the
portfolio are insured.
As well as considering current risks quarterly, the Board and the Investment
Managers carry out a separate assessment of emerging risks when reviewing
strategy and evaluate how these could be managed or mitigated. However, the
Board considers that the line between current and emerging risks is often
blurred and many of the emerging risks identified are already being managed to
some degree where their effects are beginning to impact.
The principal emerging risks identified are outlined below:
· Economic and geopolitical uncertainties leading to inflation and Interest
rate increases. This has been compounded by the military invasion of Ukraine by
Russia which is clearly a humanitarian tragedy and will also have widespread
economic consequences. The Managers initial conclusions are that global markets
will remain volatile. From a macro-economic perspective, higher medium-term
oil, gas and food prices alongside financial market disruption and sanctions on
Russia are likely to lead to an increase in already elevated inflationary
pressures, which will in turn weaken the outlook for economic growth. There is
also the risk of further interest rate increases. A period of prolonged
instability, with impacts for Europe in particular, is now clearly a potential
outcome. The situation is uncertain, and changing rapidly, but this could
affect real estate valuations across the Company.
· The ESG agenda is a very prominent one and will continue to grow in its
importance to shareholders, future investors and our customers. The increasing
market attention being paid to climate risk, to net zero carbon ambition and to
social impact have been notable features of the evolving agenda over the last
year, and those need to be considered more explicitly in property investment
and management activity than has been the case previously. Failure to respond
to the evolving regulatory requirements and public expectations could have a
negative effect on property valuations and would be reputationally damaging.
· There is the potential for structural change in the office market brought
on by Covid-19. Appetite for offices is finding its equilibrium with a clear
focus on higher quality space in central locations, as companies look to
welcome employees back to a more structured hybrid model of operation where
strong ESG and wellbeing credentials will be essential. This will be at the
expense of lower quality stock and the emergence of a two-tier market is
likely, rebasing both capital values and rents. There is uncertainty how this
will play out and it continues to be monitored.
· The impact of technology increasingly means that working practices and the
needs of society change very quickly which is an opportunity as well as a risk,
and it is important that we continue to keep abreast of what is happening in
this space. This has been compounded over the last two years as the reliance on
technology, particularly with regards to home working has increased.
Principal Risks Mitigation Actions taken in the year
Portfolio Performance The underlying investment The Board reviews the
strategy, performance, Manager's performance at
Unfavourable markets, poor gearing and income quarterly Board meetings
stock selection, forecasts are reviewed with against key performance
inappropriate asset the Investment Manager at indicators and the ongoing
allocation and each Board Meeting. The strategy is reviewed and
underperformance against Company's portfolio is well agreed.
benchmark and/ or peer diversified and of a high Performance has been
group. This risk may be quality. Gearing is kept at positive during 2021. The
exacerbated by gearing modest levels and is Company has had an
levels. monitored by the Board. increased level of activity
Economic backdrop of The Manager provides and commenced its strategy
inflationary pressures and regular information on the to rebalance the portfolio
increasing interest rates expected level of rental through a sales and
(heightened by the Ukraine income that will be acquisition programme.
crisis). generated from underlying Industrial allocation has
properties. The portfolio increased to 30.6 per cent
is well diversified by (2020 - 19.1 per cent).
geography and sector and Despite the improved
the exposure to individual performance, Russia's
tenants is monitored and invasion of Ukraine and
Risk unchanged in the year managed to ensure there is continuing economic and
under review no over exposure. market uncertainty
indicates that the level of
this risk is unchanged.
.
Discount to NAV The discount is reported to Investors have access to
The share price is trading and reviewed by the Board the Managers and the
at a discount to NAV. This at least quarterly. Share underlying team who will
widened significantly at the buybacks as a means of respond to any queries they
onset of the Covid-19 narrowing the discount or have on the discount. The
outbreak but has as an attractive investment level of discount is kept
subsequently narrowed. This for the Company are under constant review and
imbalance, combined with the considered and weighed up the Company introduced a
recent share price against the risks. The share buyback scheme in
volatility can diminish the position is monitored by June 2021 to try and help
attractiveness of the the Managers and Broker on manage this. The discount
Company to investors. a daily basis and any has narrowed significantly
Improved shareholder material changes are in recent months and
communication is key in this investigated and therefore the risk has been
environment, ensuring that communicated to the Board categorised as reduced.
shareholders have access to more regularly. This continues to be
information on how the closely monitored given the
Company is being run in volatile share price
order to make informed following the start of the
decisions which will help to Ukraine crisis.
mitigate widespread selling
of the Company's shares.
Risk decreased in the year
under review
Service providers and The ancillary functions of The Audit Committee and the
systems security administration, accounting Board have regularly
Covid-19 and the and marketing services are reviewed the Company's risk
implementation of working all carried out by the management framework with
from home and increased Managers. The performance the assistance of the
sophistication of cyber of the Managers is kept Managers.
threats have heightened under continual review, Each key service provider
risks of loss through including the impact provides a Report on
errors, fraud or control following change of Internal Controls where
failures at service ownership. Any security available (AAF 01/06 or
providers or loss of data issues are reported to the similar). This will include
through business continuity Board on a timely basis. the controls relevant to
failure. The Management Engagement cyber risk where
The recent change in Committee reviews the appropriate. This report is
ownership of the Managers performance of third-party reviewed by the relevant
may cause additional work service providers on an parties and submitted to
pressures and risks as the annual basis and the the Board on an annual
two businesses seek to Managers keeps service basis. The Board is in
integrate, which may have an levels under constant regular contact with the
impact on services to the review. Board of the Managers to
Group. mitigate any problems which
may arise following the
recent change of ownership.
The Managers has maintained
regular contact with its
key outsourced service
providers throughout the
Covid-19 pandemic and
Risk unchanged in the year received assurances
under review regarding the continuity of
their operations.
Vigilance remains
heightened with this risk
categorised as unchanged.
ESG The Managers has a Regular reporting to the
Not recognising and acting dedicated team that works Board on progress with
upon any future on this area and has implementing initiatives.
environmental, social and allocated resources over Appointed a director
governance risks which exist recent years into building responsible for ESG
within the portfolio. a comprehensive ESG plan oversight and who meets
Failure to do so creates the and gathering accurate with the Managers monthly
risk that the portfolio no data. The Managers also to discuss progress and
longer remains attractive to works with external formulate future agendas.
tenants and will not consulting firms who The Board have taken the
maintain its value. specialise in this area to decision to establish an
There is increasing scrutinise and validate ESG Committee since the
regulation and public these plans. The Managers year end which will ensure
interest relating to ESG liaises with tenants continued oversight and
issues and failure to be wherever possible to obtain governance in this vital
proactive could cause data and to carry out any area.
serious reputational damage. necessary enhancements. A policy on the Company's
net zero carbon pathway has
been published on the
Company website.
Risk unchanged in the year The Managers regularly look
under review to engage with tenants on
ESG issues.
Viability Assessment and Statement
The Board conducted this review over a five year time horizon, a period thought
to be appropriate for a Group investing in commercial property with a long-term
investment outlook. The Group has its primary borrowings secured for a further
three years, a continuation vote in 2024 and a property portfolio with an
average unexpired lease length of 5.2 years. Based on current market evidence
and on recent conversations that have been held with existing lenders to real
estate investment companies, it is believed that it will be possible to
satisfactorily refinance the principal loan in 2024. The assessment has been
undertaken, taking into account the principal risks and uncertainties faced by
the Group which could threaten its objective, strategy, future performance,
liquidity and solvency.
The major risks identified as relevant to the viability assessment were those
relating to a downturn in the UK commercial property market and its resultant
effect on the valuation of the investment property portfolio, the level of
rental income being received and the effect that this would have on cash
resources and financial covenants. A stress test was conducted over the
five-year period to April 2027, on very prudent assumptions. The modelling used
a foreseeable severe but plausible scenario which took into account the
illiquid nature of the Group's property portfolio, significant future falls in
the investment property values, the continuation of the long-term borrowing
facility and substantial falls in property income receipts.
The viability assessment modelling used the following assumptions:-
· 44 per cent capital falls in the next two years (based on the largest UK
commercial property market downturn experienced in recent history) followed by
zero growth for next three years;
· tenant defaults of 15 per cent for the first year, followed by 9 per cent
for the following year before returning to normal levels;
· tenant lease breaks to be taken at the earliest opportunity, followed by a
substantial void period.
Even under this extreme model the Group remains viable with loan covenant tests
passed and the current dividend rate maintained.
In the ordinary course of business, the Board reviews a detailed financial
model on a quarterly basis, incorporating forecast returns for the portfolio,
projected out for five years. This model uses realistic assumptions and factors
in any potential capital commitments.
The Group continues to monitor the potential impact of the Covid-19 virus on
cash flows. Rental collection since the outbreak has been in excess of levels
originally anticipated, with rents collected from March 2020 to March 2022
averaging 94.4 per cent.
The Group's £260 million long-term debt with L&G does not need to be refinanced
until December 2024. We calculate that the market value of the properties
secured under this loan would have to drop by 34 per cent before breaching the
Loan to Value ('LTV') test on the facility. The loan interest cover test would
only be breached by a fall in rental income of 70 per cent. We are comfortable
that these covenants will continue to be met.
The Group's Barclays £50 million loan facility is due to expire in July 2023
with an option to extend by a further year on receiving Barclay's consent. We
calculate that the market value of the properties secured under this loan would
have to drop by 68 per cent before breaching the LTV test on the facility. The
loan interest cover test would only be breached by a fall in rental income of
82 per cent. We are comfortable that these covenants will continue to be met.
The Group has a further £93.4 million of properties which are not secured
against any lender which could be transferred to L&G or Barclays to support
covenant tests if required.
Based on this assessment, and in the context of the Group's business model,
strategy and operational arrangements set out above, the Directors have a
reasonable expectation that the Group will be able to continue in operation and
meet its liabilities as they fall due over the five year period to April 2027.
For this reason, the Board also considers it appropriate to continue adopting
the going concern basis in preparing the Annual Report and Consolidated
Financial Statements.
BMO Commercial Property Trust Limited
Going Concern
After making enquiries, and bearing in mind the nature of the Group's business
and assets, the Directors consider that the Group has adequate resources to
continue in operational existence for the next twelve months. In assessing the
going concern basis of accounting the Directors have had regard to the guidance
issued by the Financial Reporting Council. They have considered the current
cash position of the Group, forecast rental income and other forecast cash
flows. Based on this information the Directors believe that the Group has the
ability to meet its financial obligations as they fall due for the foreseeable
future, which is considered to be for a period of at least twelve months from
the date of approval of the financial statements. For this reason, they
continue to adopt the going concern basis in preparing the financial
statements.
Statement of Directors' Responsibilities in Respect of the Annual Report and
Accounts
In accordance with Chapter 4 of the Disclosure and Transparency Rules, we
confirm that to the best of our knowledge:
· The financial statements contained within the Annual Report and Accounts
for the year ended 31 December 2021, of which this statement of results is an
extract, have been prepared in accordance with applicable International
Financial Reporting Standards as adopted by the EU, on a going concern basis,
and give a true and fair view of the assets, liabilities, financial position
and profit or loss of the Group and the undertakings included in the
consolidation taken as a whole and comply with The Companies (Guernsey) Law,
2008; and
· The Chairman's Statement and Managers' Review include a fair review of
the development and performance of the business and the position of the Group
and the undertakings included in the consolidation taken as a whole, together
with a description of the principal risks and uncertainties that they face; and
· The consolidated financial statements within the Annual Report and
Accounts for the year ended 31 December 2021 include details of related party
transactions; and
· The Annual Report and consolidated financial statements, taken as a
whole, are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group's position and performance,
business model and strategy.
On behalf of the Board
Paul Marcuse
Director
BMO Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year ended 31 December 2021
1. Financial Instruments and investment properties
The Group's investment objective is to provide ordinary shareholders with an
attractive level of income together with the potential for capital and income
growth from investing in a diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial property
investments. In addition, the Group's financial instruments during the year
comprised interest-bearing bank loans, cash and receivables and payables that
arise directly from its operations. The Group does not have exposure to any
derivative instruments other than the interest rate swap entered into to hedge
the interest paid on the Barclays interest-bearing bank loan.
The Group is exposed to various types of risk that are associated with
financial instruments. The most important types are credit risk, liquidity
risk, interest rate risk and market price risk. There is no foreign currency
risk as all assets and liabilities of the Group are maintained in pounds
sterling.
The Board reviews and agrees policies for managing the Group's risk exposure
including an assessment of the potential impact of Covid-19. These policies are
summarised below and have remained unchanged for the year under review. These
disclosures include, where appropriate, consideration of the Group's investment
properties which, whilst not constituting financial instruments as defined by
IFRS, are considered by the Board to be integral to the Group's overall risk
exposure.
Credit risk
Credit risk is the risk that a counterparty will default on its contractual
obligation and will cause a financial loss for the other party by failing to
discharge an obligation, and principally arises from the Group's receivables
from customers. The Group has no significant concentrations of credit risk as
the Group has a diverse tenant portfolio. The largest single tenant at the year
end accounted for 4.8 per cent (2020: 4.3 per cent) of the current annual
rental income.
The Manager has a credit department which has set out policies and procedures
for managing exposure to credit. Some of the processes and policies include:
· an assessment of the credit worthiness of the lessee and its ability to
pay is performed before lease is granted;
· where appropriate, guarantees and collateral is held against such
receivables;
· after granting the credit, the credit department monthly assesses the age
analysis and follows up on all outstanding payments;
· management of the credit department determine the appropriate provision,
receivables which should be handed over for collection and which amounts should
be written off. The default provision is when the receivable is greater than 90
days. The board will approve the procedures and amounts.
In the event of default by an occupational tenant, the Group will suffer a
rental shortfall and incur additional costs, including legal expenses, in
maintaining, insuring and re-letting the property.
Deposits refundable to tenants may be withheld by the Group in part or in whole
if receivables due from the tenant are not settled or in case of other breaches
of contract.
Cash balances are held and derivatives are agreed only with financial
institutions with a credit rating of A or better. Bankruptcy or insolvency of
such financial institutions may cause the Group's ability to access cash placed
on deposit to be delayed or limited. Should the credit quality or the financial
position of the banks currently employed significantly deteriorate, cash
holdings would be moved to another bank. The utilisation of credit limits is
regularly monitored. As at 31 December 2021, the Group's cash balances are held
with Barclays Bank PLC.
Liquidity risk
Liquidity risk is the risk that the Group will encounter in realising assets or
otherwise raising funds to meet financial commitments. The Group's investments
comprise UK commercial property. Property and property-related assets in which
the Group invests are not traded in an organised public market and may be
illiquid. As a result, the Group may not be able to liquidate quickly its
investments in these properties at an amount close to their fair value in order
to meet its liquidity requirements.
The Group's liquidity risk is managed on an ongoing basis by the Managers and
monitored on a quarterly basis by the Board. In order to mitigate liquidity
risk, the Group aims to have sufficient cash balances (including the expected
proceeds of any property sales) to meet its obligations for a period of at
least twelve months.
Interest rate risk
Some of the Group's financial instruments are interest bearing. They are a mix
of both fixed and variable rate instruments with differing maturities. As a
consequence, the Group is exposed to interest rate risk due to fluctuations in
the prevailing market rate.
The Group's exposure to interest rate risk relates primarily to its long-term
debt obligations. Interest rate risk on long-term debt obligations is managed
by fixing the interest rate on such borrowings, either directly or through
interest rate swaps for the same notional value and duration. Long-term debt
obligations and the interest rate risk they confer to the Group is considered
by the Board on a quarterly basis. Long term debt obligations consist of a £260
million L&G loan on which the rate has been fixed at 3.32 per cent until the
maturity date of 31 December 2024. The Group also has a £50 million
interest-bearing bank loan with Barclays on which the rate has been fixed
through an interest rate swap at 2.367 per cent per annum until the maturity
date of 31 July 2023. The Group has agreed an additional revolving credit
facility of £50 million with Barclays over the same period, which has not been
drawn down as at 31 December 2021. The revolving credit facility pays an
undrawn commitment fee of 0.72 per cent per annum.
When the Group retains cash balances, they are ordinarily held on
interest-bearing deposit accounts. The benchmark which determines the interest
income received on interest bearing cash balances is the bank base rate of the
Bank of England which was 0.25 per cent as at 31 December 2021 (2020: 0.1 per
cent). The Company's policy is to hold cash in variable rate or short-term
fixed rate bank accounts and not usually in fixed rate securities with a term
greater than three months.
Market price risk
The Group's strategy for the management of market price risk is driven by the
investment policy. The management of market price risk is part of the
investment management process and is typical of commercial property investment.
The portfolio is managed with an awareness of the effects of adverse valuation
movements through detailed and continuing analysis, with an objective of
maximising overall returns to shareholders. Investments in property and
property-related assets are inherently difficult to value due to the individual
nature of each property. As a result, valuations are subject to substantial
uncertainty. There is no assurance that the estimates resulting from the
valuation process will reflect the actual sales price even where such sales
occur shortly after the valuation date. Such risk is minimised through the
appointment of external property valuers.
2. Share Capital
There were 753,105,830 Ordinary Shares in issue at 31 December 2021 (2020:
799,366,108).
At 31 December 2021, the Company held 46,260,278 Ordinary Shares in treasury
(2020: nil).
3. Basic and diluted earnings per share
The basic and diluted earnings per Ordinary Share are based on the profit for
the year of £156,023,000 (2020: loss £84,246,000) and on 786,825,807 (2020:
799,366,108) Ordinary Shares, being the weighted average number of shares in
issue during the year.
4. List of Subsidiaries
The Company owns 100 per cent of the issued ordinary share capital of FCPT
Holdings Limited, a company registered in Guernsey. The principal activity of
FCPT Holdings Limited is to act as a holding company and it owns 100 per cent
of the ordinary share capital of F&C Commercial Property Holdings Limited, a
company registered in Guernsey whose principal business is that of an
investment and property company, and 100 per cent of the ordinary share capital
of Winchester Burma Limited, a company registered in Guernsey whose principal
business is that of an investment and property company.
The Company owns 100 per cent of the issued ordinary share capital of SCP
Estate Holdings Limited, a company registered in Guernsey. The principal
activity of SCP Estate Holdings Limited is to act as a holding company and it
owns 100 per cent of the ordinary share capital of SCP Estate Limited, a
company registered in Guernsey whose principal business is that of an
investment and property company, and 100 per cent of the ordinary share capital
of Prime Four Limited, a company registered in Guernsey whose principal
business is that of an investment and property company.
The Company owns 100 per cent of the issued ordinary share capital of Leonardo
Crawley Limited, a company registered in Guernsey whose principal business is
that of an investment and property company.
The results of the above entities are consolidated within the Group financial
statements.
5. These are not full statutory accounts. The full audited accounts for
the year to 31 December 2021 will be sent to shareholders and will be available
for inspection at Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1
3QL, the registered office of the Company, and from the Company's website:
bmocommercialproperty.com
Alternative Performance Measures
The Company uses the following Alternative Performance Measures ('APMs'). APMs
do not have a standard meaning prescribed by GAAP and therefore may not be
comparable to similar measures presented by other entities.
Discount or Premium - the share price of an Investment Company is derived from
buyers and sellers trading their shares on the stock market. This price is not
identical to the NAV. If the share price is lower than the NAV per share, the
shares are trading at a discount. This could indicate that there are more
sellers than buyers. Shares trading at a price above the NAV per share, are
said to be at a premium.
Dividend Cover on a cash basis - The percentage by which Profits for the year
(less Gains/losses on investment properties) adjusted by capital and rental
lease incentives amortisation and interest bearing loans amortisation of set-up
costs cover the dividend paid.
2021 2020
£'000 £'000
Profit /(loss) for 156,023 (84,246)
the year
Add back: Unrealised (gains)/losses on
revaluation of investment (86,976) 121,306
properties
(Gains)/losses on sales of
investment properties (34,397) 22
realised
Capital and rental lease
incentives amortisation 5,575 (555)
Interest bearing loans
amortisation of set-up costs 642 686
Profit before investment gains and losses and (a) 40,867 37,213
amortisation
Dividends (b) 33,448 22,782
Dividend Cover on a cash basis percentage (c= a/b) (c) 122.2% 163.3%
Accounting Dividend Cover - The percentage by which Profits for the year (less
Gains/losses on investment properties) cover the dividend paid.
2021 2020
£'000 £'000
Profit /(loss) for 156,023 (84,246)
the year
Add back: Unrealised (gains)/losses on
revaluation of investment (86,976) 121,306
properties
(Gains)/losses on sales of
investment properties (34,397) 22
realised
Other income (3,008) -
Profit before investment gains and losses (a) 31,642 37,082
Dividends (b) 33,448 22,782
Accounting Dividend Cover percentage (c= a/b) (c) 94.6% 162.8%
Dividend Yield - The dividends paid during the year divided by the share price
at the year end.
Net Gearing - Borrowings less cash divided by total assets (less current
liabilities and cash).
Portfolio (Property) Capital Return - The change in property value during the
period after taking account of property purchases and sales and capital
expenditure, calculated on a quarterly time-weighted basis. The calculation is
carried out by MSCI Inc.
Portfolio (Property) Income Return - The income derived from a property during
the period as a percentage of the property value, taking account of direct
property expenditure, calculated on a quarterly time-weighted basis. The
calculation is carried out by MSCI Inc.
Portfolio (Property) Total Return - Combining the Portfolio Capital Return and
Portfolio Income Return over the period, calculated on a quarterly
time-weighted basis. The calculation is carried out by MSCI Inc.
Total Return - The theoretical return to shareholders calculated on a per share
basis by adding dividends paid in the period to the increase or decrease in the
Share Price or NAV. The dividends are assumed to have been reinvested in the
form of Ordinary Shares or Net Assets, respectively, on the date on which they
were quoted ex-dividend.
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration (Guernsey) Limited
Trafalgar Court
Les Banques
St. Peter Port
Guernsey GY1 3QL
Tel: 01481 745436
Fax: 01481 745186
Richard Kirby
BMO REP Asset Management plc
Tel: 0207 016 3577
Graeme Caton
Winterflood Securities Limited
Tel: 0203 100 0268
END
(END) Dow Jones Newswires
April 19, 2022 02:00 ET (06:00 GMT)
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