To
RNS
Date
20 September 2019
From
BMO Real Estate Investments Limited
LEI
231801XRCB89W6XTR23
- Portfolio ungeared total return* of 2.9 per cent for the
year
- NAV total return* of 1.3 per cent for the year
- Dividend of 5.0 pence per share
for the year, giving a yield* of 6.3 per cent on the year-end share
price
* See Alternative Performance Measures
Chairman’s Statement
The Group’s net asset value (‘NAV’) total return for the year
was 1.3 per cent. The NAV per share as at 30
June 2019 was 104.8 pence,
down from 108.5 pence per share at
the prior year-end, after dividends of 5.0
pence per share.
The share price total return for the year was -15.2 per cent
with the shares trading at 80.0 pence
per share at the year-end, a discount of 23.7 per cent to the NAV.
It is disappointing that the share price has fallen, which is
largely attributable to a lack of demand for the Company’s shares
in a market which has been impacted by the political and economic
uncertainties surrounding Brexit as well as sector specific
concerns linked to challenges faced by the retail market in
particular. The Company’s shares traded at a discount to NAV for
most of the year with some noticeable weakness over the latter half
of the year resulting in a widening of the discount by the year end
and significant volatility in the share price over the period.
Property Market
The UK commercial property market delivered a total return of
3.3 per cent as measured by the MSCI UK Quarterly Property Universe
(‘MSCI’) for all assets in the year to 30
June 2019. Total return performance was positive throughout
the year, but the pace slowed when compared with the previous year.
The annual all-property income return was 4.4 per cent and capital
values fell by 1.1 per cent in the year, hit by weakness in the
retail segment.
Performance was again driven by Industrial and Distribution
property with south east industrials out-performing within that
sector. Although the all-property return was depressed by the
negative performance from retail, all sectors recorded a slowing in
total returns compared with the previous year. In the year to
30 June 2019, open market rental
value growth at the all-property level was -0.1 per cent, with
falls in the retail sector offsetting a positive performance
elsewhere in the market. Investment activity was lower, and that
trend intensified in the latter part of the year, moving beyond
retail to affect all sectors. Initial yields edged slightly higher
over the year as higher retail yields were counterbalanced by yield
compression in parts of the office and industrial markets.
Portfolio
The Group’s property portfolio produced an ungeared total return
of 2.9 per cent over the year to June
2019, a significant slowdown from 2018 when the portfolio
delivered 11.7 per cent and below MSCI which recorded 3.3 per cent
over the same period.
In an environment of valuation falls, both at the market and
portfolio level, performance was income driven. Capital falls for
the portfolio of 2.2 per cent were offset by a 5.3 per cent income
return. The portfolio continues to deliver an above market income
yield, with the void rate reducing to 0.1 per cent at year end
following the successful completion of leasing initiatives. Average
unexpired lease length has remained steady over the period at
approximately 6 years.
The Company’s portfolio has outperformed MSCI over three years
and the Investment Manager has been paid a performance fee of
£182,000, as this outperformance was in excess of the 115 per cent
total return hurdle which is required before such a fee begins to
accrue. Further details of the fee arrangements can be found in
note 2 to the Consolidated Financial Statements in the Annual
Report.
The portfolio’s Industrial and Distribution assets were the key
contributors to Company performance over the year delivering a 10.3
per cent total return. The portfolio’s exposure to this segment of
the market is approximately 40 per cent of assets by value.
Positive contributions were made by the Group’s Rest of UK
Offices, led by asset management initiatives at Lochside Way,
Edinburgh and Standard Hill,
Nottingham, let to HSBC and The
College of Law respectively. There were also positive returns from
West End Offices, where vacant floors at the Company’s largest
asset at 14 Berkeley Street, London W1 were let.
The Company’s Retail assets underperformed the wider market.
Despite being fully let, capital falls were greater for the
portfolio than for the Index peers. The Company was impacted by the
Company Voluntary Arrangement (‘CVA’) of Homebase who are tenants
at three properties in the portfolio. The management of these is
covered in detail in the Manager’s Review and the widespread use of
CVA’s continues to impact on the marketplace. The Company did,
however, benefit from having no exposure to Shopping Centres which
was the poorest performing retail sector during the year.
The Company’s Retail portfolio remains under continual review
given the structural challenges currently faced by this segment of
the market, with further sales undertaken over the year at
Gateshead and Swindon. The Company has disposed of seven
retail assets over the past three years in order to reposition the
portfolio.
Given competition for quality property and more cautious
near-term forecasts for the property market in general, the Company
has maintained a measured approach to deployment of capital despite
a favourable cash position and no assets were purchased over the 12
months.
Cash Resources
The Group had £9.9 million of cash available and an undrawn
facility of £13 million at 30 June
2019 and acquisition opportunities are constantly under
review. There is no undue pressure to invest with the near-term
focus being to concentrate available capital on worthwhile, cost
effective asset management initiatives within the standing
portfolio. Opportunistic sales may also be considered where
appropriate.
Borrowings
The Group currently has in place a secured £90 million
non-amortising term loan facility with Canada Life Investments,
repayable in November 2026. The
Company also has an additional £20 million 5-year revolving credit
facility agreement with Barclays Bank plc, £7 million of which was
drawn down at the year-end, down from £13 million one year earlier.
This facility is available until November
2020.
The Group’s gearing level, net of cash, represented 26.7 per
cent of investment properties at 30 June
2019. The weighted average interest rate (including
amortisation of refinancing costs) on the Group’s total current
borrowings was 3.2 per cent. The Company continues to maintain a
prudent attitude to gearing.
Dividends and Dividend Cover
Three interim dividends of 1.25
pence per share were paid during the year with a fourth
interim dividend of 1.25 pence per
share to be paid on 30 September
2019. This gives a total dividend for the year ended
30 June 2019 of 5.0 pence per share, a yield of 6.3 per cent on
the year-end share price. In the absence of unforeseen
circumstances, it is the intention of the Group to continue to pay
quarterly interim dividends at the existing rate.
The level of dividend cover for the year was 89.4 per cent,
compared to 95.7 per cent for the previous year. This fall is
primarily as a result of a decrease in rental income, following the
property sales over the last 18 months and the loss of income
following the CVA at Homebase. There are also a number of asset
management initiatives ongoing, which has resulted in a short-term
reduction in the level of rents at those properties, and upon
successful completion, these should begin to deliver improvement in
the rental income in the future.
While the Board is conscious of the reduced dividend cover in
the year, the sustainability of the dividend and the generation of
total returns within the portfolio are of greater importance. The
Board will, therefore, continue to explore opportunities that
improve medium to longer term value within the portfolio, even if
this has an adverse near-term impact on dividend cover.
Responsible Property Investment
I am particularly pleased with the progress that has been made
with our Responsible Property Investment (RPI) strategy and the
positive engagement we have had with a number of our key
shareholders in this area.
The publication of the inaugural RPI Report for the Group for
2018 was a significant milestone in our pledge to drive greater
transparency into our performance on material Environmental, Social
& related Governance (ESG) factors and we have had some
excellent feedback on it from shareholders. We continue to place
considerable emphasis on our RPI commitments and are pleased to
provide a further summary of progress in the Annual Report,
complemented by our RPI Report 2019 which will be available on the
Company’s website and gives greater detail and insight on our
performance against relevant metrics.
Board Composition
Having served 15 years on the Board, Andrew Gulliford has indicated his intention to
retire by the 2020 AGM. The Board have therefore commenced the
search for a suitable non-executive director with the relevant
property expertise and experience to replace Mr Gulliford following
his retirement. As part of this process, consideration will also be
given to the requirement to seek, where appropriate, additional
diversity within the Board. A further announcement will be made in
due course.
Outlook
The outlook continues to be dominated by the stresses in the
retail sector and the Brexit process, with its political and
economic ramifications. A slowdown in global growth offers
additional challenges, with a period of muted rental growth now
likely to be the outcome and meaningful differences in the prospect
for the underlying property sectors. However, with fiscal policy
potentially easing and the market expecting interest rates to
remain at low levels by past standards, property market performance
may receive some support once there is greater clarity on political
sentiment.
Property continues to deliver an attractive income return. Prime
property in established locations and emerging hubs is expected to
out-perform. The Industrial and Distribution market should continue
to be a major driver of performance, benefiting from the continued
growth of online sales but perhaps to a lesser degree as supply
increases. The retail sector is facing structural issues which will
take time to resolve and this will continue to impact sentiment for
much of the sector. Repurposing and repricing of property is
underway, and the market is predicted to re-balance in due course
albeit with significant casualties at the secondary end of the
market and at lower rents for a majority. Alternatives are expected
to continue to grow in importance as investors seek long-term
contracted income. A period of positive single-digit total returns
is in prospect, underpinned by the income return.
There remains considerable uncertainty surrounding the UK
property market. The effect of this uncertainty is mitigated to a
degree by the Company’s balanced and well let portfolio. At the
current time, the more appropriate and attractive use of company
resources lies in asset management opportunities which exist within
the portfolio.
Vikram Lall
Chairman
Source: BMO REP Property Management Limited, MSCI Inc
Manager’s Review
Portfolio Highlights
• Company portfolio delivered an ungeared total
return of 2.9 per cent over the year.
- Out-performance against the MSCI Quarterly Property Universe
(“MSCI or ‘the index”) over three and five years to June 2019, driven by a relatively high income
return and weighting to Industrials. The Company portfolio has
outperformed against the Index since inception 15 years ago.
• Income return of 5.3 per cent over the year.
• An encouraging year of leasing activity has led
to the portfolio being practically fully let with a vacancy rate of
just 0.1 per cent at year-end, well below the MSCI average of 7.2
per cent.
- Capital projects and asset management initiatives have helped
deliver 4.4 per cent gross income growth (like for like rent
receivable) over the year versus 2.2 per cent for the Index.
- The 40 per cent weighting to high performing South East
Industrials delivered c.13 per cent gross income growth for the
year.
- The portfolio continues to offer cross sector, institutional
quality holdings with a bias towards the Industrial subsector and
the south east, while maintaining some exposure to central
London.
- Above market yield and income growth, and below market void
without sacrificing contractual lease duration, which currently
sits at 5.8 years by average weighted unexpired term.
- Lower purchase volumes in a relatively late cycle environment
have limited non-recoverable expenditure.
- Disposals from the retail portfolio continue the rebalancing
away from an unfavoured subsector and increased average lot
sizes.
Property Market
The UK commercial property market delivered a total return of
3.3 per cent in the year to June 2019
as measured by MSCI. Performance was driven by an annual income
return of 4.4 per cent, with capital values falling by 1.1 per
cent.
The market recorded consistently positive total returns at the
all-property level throughout the year, but performance has
decelerated compared with a year earlier, with the second half of
the period weaker than the first. The 4.4 per cent income return
has slipped slightly from the 4.5 per cent reported a year earlier.
Capital growth turned negative during the year, largely due to
weakness in the retail market.
The UK economy has delivered muted but positive GDP growth for
the year, although the unwinding of Brexit-related stockpiling
affected performance during the final quarter. Consumer price
inflation decelerated to finish the year at the Bank of England’s
target level of 2 per cent. The labour market has continued to
improve and annual wage growth is positive in real terms. The Bank
of England raised its official
rate in August 2018 but has kept it
unchanged since then, as inflation moderated, and GDP growth
remained subdued. Gilt yields have been on a generally downward
trend since autumn 2018, finishing the period below 1 per cent and
have fallen further since the end of the reporting period. The
Brexit negotiations and the consequent economic and political
turmoil remained a major concern for investors throughout the
period and the ramifications remain unclear. This has affected
sentiment towards UK property, intensifying in the second half of
the reporting period. Slower economic growth overseas and the rise
of protectionism globally are also areas of concern though it may
not have fed through into pricing yet.
Investment activity weakened over the period. The year to
June 2019 saw £53 billion invested in
property versus £66 billion in the previous year. This trend
intensified markedly in the latter half of the year. Initially
there was a sharp fall in retail investment volumes but by the end
of the reporting year, transaction levels were lower than the
long-term average across the market. Concerns about Brexit as the
initial deadline approached and changes to taxation affecting
overseas investors may in part explain the decline. Overseas net
investment however remained positive throughout the year. There
were fewer large London office
deals, but this was counterbalanced by interest in the regions and
alternative sectors. Net investment by institutions turned negative
in the second part of the year and private property companies were
consistent net sellers. Local authorities remained in the market
but at lower volumes and with a move to smaller lot sizes towards
the end of the period alongside a reported focus on their local
area. Open-ended UK direct property funds have seen net outflows
consistently since October 2018, with
concerns about liquidity returning. The banks are still net lenders
to commercial property but there has been stress in the shopping
centre market.
Investors have generally been cautious, favouring long-term
secure income. There have been reports of more opportunistic
investors waiting in the wings to capitalise on any forced sales or
portfolio rebalancing, but pricing may need to adjust further
before this occurs on any scale. Similarly, business plans linked
to the repurposing of retail assets as alternative uses may provide
some relief to structural tensions, but this often requires
repricing or at least substantial capital injection to bring them
forward. Initial yields edged out to 4.6 per cent at the end
of the reporting period, compared with 4.5 per cent a year earlier.
The softening was most apparent for shopping centres and retail
warehousing, with yields hardening for industrials and offices
outside London.
Total return performance by segment has broadly maintained the
pattern seen since the referendum. Industrial and distribution
property continued to out-perform but to a lesser degree in the
second half of the year. The annual total return was 10.5 per cent
with the south east out-performing the rest of the UK. Annual
capital growth of c.6 per cent reflected both open market rental
growth and the impact of the change in equivalent yield. Offices
recorded a 5.2 per cent total return. Rest of UK Offices led the
sub-markets and delivered a 6.2 per cent total return with West End
offices lagging at 4.0 per cent but all segments out-performed the
all-property average. The well-publicised problems of the retail
sector have continued and intensified, characterised by company
voluntary arrangements (‘CVAs’) administrations and store
rationalisation. Annual retail total returns were minus 3.8 per
cent. Shopping centres and department stores have been particularly
badly affected but the problems are widespread with most parts of
the market recording negative total returns. These changes are
structural and are likely to lead to re-based rent levels and
market pricing of investments. Alternatives, including healthcare,
hotels and hospitality and student accommodation, out-performed the
all-property average to deliver a 6.1 per cent total return.
Alternatives are growing in popularity, helped by their generally
longer lease profile and now account for 14 per cent of the MSCI
Quarterly Property Universe, overtaking retail warehousing over the
course of the year in terms of capital value in the Index.
Open market rental growth was marginally lower at the
all-property level, hit by weakness in the retail market, where
rents fell by 3.8 per cent. Retail rents have been affected by
retail failures, but lease negotiations are difficult more
generally, with stronger retailers seeking rent cuts to renew.
Office rental growth was 1.2 per cent, led by City offices, despite
earlier Brexit-related concern. Rental growth was 3.6 per cent for
industrials, with the southeast out-performing. This represents a
deceleration from the pace reported in the previous year.
Alternatives saw 1.2 per cent annual rental growth, with little
change from a year earlier. Gross income growth for the year to
June 2019 was 2.2 per cent, led by
offices and industrials.
The property market is slowing as it moves into a late-cycle
phase. There is polarisation by sector and considerable uncertainty
exists, with both investors and occupiers remaining cautious.
Property looks fairly priced when measured against the post-GFC
yield gap against gilts. An all-property annual income return of
4.4 per cent on relatively long-term contracted income still looks
appealing when compared against other asset classes.
Portfolio
The Company’s property portfolio produced an ungeared total
return of 2.9 per cent over the year to June
2019 versus an MSCI Index return of 3.3 per cent. The
portfolio continues to outperform over three and five years and
over the 15 years since inception. Performance was driven by an
above market income return of 5.3 per cent but held back by a
capital value fall of 2.2 per cent. The portfolio has delivered an
annualised ungeared total return of 7.0 per cent per annum over
three years and 8.9 per cent over five years.
The above market income yield, liquid asset base, weighted
average unexpired lease term of approximately 6 years, and absence
of vacancy remain the defining characteristics of the
portfolio. The portfolio benefits from a yield premium to the
MSCI Index but the quality of the underlying assets and the
successful delivery of property level initiatives has ensured gross
income growth of 4.4 per cent for the year verses 2.2 per cent for
the Index. The strategy to maintain a comparatively high exposure
to the industrial and logistics market and allocate Company
resources to asset management initiatives within the regional
office portfolio have been key factors in the delivery of
medium-term outperformance. We believe that the high weighting to
the south east geography continues to offer solid prospects for
future performance as well as liquidity in the asset base, as does
the average lot size within the portfolio which is currently £8.6m.
As in the previous reporting period, portfolio turnover and the
burden of associated transaction costs were relatively low, as were
the non-recoverable costs linked to below benchmark property voids.
In a lower returning environment, the control of these
non-recoverable items is of increasing importance.
Despite a softening of values at the All Property level over the
last 12 months, much of this has to date been concentrated within
the retail sub sectors or for more secondary property. The market
in general remains competitive for quality assets, particularly
those with robust income characteristics. Against this backdrop and
with selected worthy asset management initiatives under way on the
existing portfolio, the Manager continues to be selective in
deployment. In the event that there was a repricing of suitable
assets later in the year, potentially linked to either political
developments or selling activity within the open-ended fund space,
the Manager remains vigilant and ready to engage on appropriate
opportunities.
The recent priority has been to continue the success of the
disposal programme, designed in particular to exit some of the
smaller legacy retail assets. A further two assets, at Regent
Street, Swindon and Sands Road, Gateshead were sold over the reporting period.
This continues the strategy of selling less desirable assets into a
competitive, relatively late cycle market with eight having been
successfully disposed of over the past three years. This capital
has then been recycled into projects within the standing portfolio,
the most recent of those being the Office refurbishment at Standard
Hill, Nottingham which has
resulted in the securing of a new 15-year lease to The College of
Law at a new benchmark rental tone for the city.
Retail
Despite consumer spending holding up relatively well over the
period, retail as a sector has experienced significant structural
headwinds. The Company’s Retail portfolio was no outlier in this
regard and recorded comfortably the poorest nominal performance
over the period at -6.3 per cent, anchored by capital return of
-11.4 per cent. This return was below the MSCI Index, primarily on
account of the performance of the portfolio’s Rest of UK and South
East standard retail sub sectors which while fully let and
delivering yield premium against the market, experienced higher
capital value falls. This demonstrates, in our view, realistic
adjustment of the market value for the Company’s assets from the
portfolio valuers. The portfolio’s Retail Warehousing
outperformed the Index over the year but still delivered a negative
total return of -3.6 per cent, driven by capital falls of 9 per
cent. Standout returns were delivered by the asset located at
Beverly Way, New Malden which offers right sized, accessible
accommodation in an area of very tight supply, with the additional
benefit of indexed linked rents. The Company’s exposure is
generally at the lower rented end of the market, with an absence of
fashion tenants and benefitting from higher income yield than the
index peers. This will by no means entirely insulate the asset base
against the threats clearly evident within the sector, though we
feel it should offer some relative defence. The sale of the retail
warehousing asset at Sands Road, Gateshead to an institutional buyer in line
with its latest valuation demonstrated both liquidity and pricing.
A second disposal, the high street retail asset at Regent Street,
Swindon, sold to an owner
occupier, was also conducted at market valuation. Retail accounts
for c.34 per cent of the portfolio’s assets, broadly in line with
the MSCI Index in terms of weighting, with 19 per cent of assets
accounted for by Retail Warehousing. Structurally the portfolio
benefitted from the absence of any Shopping Centres or Department
Stores.
Given downgrades to the sector linked to changing shopping
patterns and the rise of online and consumer spending, we continue
to see rents challenged in most locations. The increased use of
CVA’s has undermined the perceived security of a lease contract
with the feeling of injustice spreading to those occupiers
operating successful strategies and paying historic market rents.
There is clearly significant risk of the ongoing relevance of many
retailing locations at the secondary end of the market while prime
assets will not be beyond the reach of falling rents and rising
yields. Vacancy rates are not as yet unduly high, however, there
has been a recent jump up above the 10% threshold. There are
retailers taking space and trading well but lease lengths are
falling and turnover rents gaining in popularity with around a
third of vacant space having been empty for more than two years.
Some of this is now being repurposed for leisure, hotels,
residential or simply demolished, although generally there is
pricing impact or requirement for significant capital injection to
realise these outcomes. It will take time but we anticipate that
the thriving town centres of the future will encompass retail as
part of a wider range of facilities and community uses. On a more
positive note there is also an increasing recognition that stores
and online shopping can be complementary in driving sales,
something we are seeing within the Company assets with particular
relevance to the retail warehousing portfolio, where accessibility,
storage, stock capacity and lower global rents can play a role in a
multi-channel offer.
As addressed in the previous period, the portfolio suffered some
impact from the 2018 CVA of Homebase following the sale of the
business to restructuring specialists Hilco. None of the Company’s
assets let to Homebase were vacated, with rents unaffected at the
store at Bromsgrove (where an
insurance lease to an occupier with a Dunn & Bradstreet rating
of 5A1 was put in place to cover for any future failure). There was
a partial reduction at another store in Luton on a short lease expiring 2020, a
property where planning consent has now been granted and a pre-let
agreed for a food store redevelopment to create a fully let, long
dated inflation linked asset. One unit was impacted on a meaningful
basis and this was the retail warehouse unit at Northfields Retail
Park, Rotherham where the CVA
bound the Company to accepting a discounted rent. We continue to
realise the business plan for the site having recently agreed terms
to let the property at an improved rent.
A number of sales have been conducted from the retail segment of
the portfolio over recent years, both as part of a reweighting
exercise and with a view to crystallising performance. There is no
intention to embark upon a wholesale exit from the sector. Many of
the portfolio’s assets continue to offer valuable contribution
towards the Company objective and while demand from investors is
undoubtedly thin at present, the Manager remains active in seeking
exit strategies where appropriate, subject to achieving acceptable
pricing.
Offices
The Company’s Office assets comprise 26 per cent of the
portfolio and outperformed the MSCI Index by 80 bps over the year
returning 6.0 per cent, driven by a higher income return. West End
Offices and Rest of UK Offices led the way following successful
asset management, refurbishment and leasing. Of particular note was
the letting, post extensive refurbishment, of the office at
Standard Hill, Nottingham to the
College of Law on the basis of a new 15-year lease at a rent of
£576,000 p.a. There has also been refurbishment work at the
property at 14 Berkeley Street, London, to reposition the suites to satisfy
demand for more flexible space. Following completion, the
1st and 5th floors were let during the second
half of the period, above valuation assumptions. The office
portfolio is fully let.
While there could be some Brexit-related nervousness in the
short-term, the prime end of the Office market looks generally
sound, benefiting from healthy demand, low new supply levels, which
could be prolonged due to high building costs, and relatively
attractive yields. Despite the uncertainty surrounding Brexit,
take-up in Central London has held
up reasonably well. The tech sector remains buoyant and demand is
increasing from professional services. New supply is low and
availability is falling, leading to a reduction in the vacancy rate
both in the City and West End. Around 50 per cent of space under
construction is pre-let. These supply constraints may be felt more
keenly once the Brexit terms are finalised if delayed tenant moves
are actioned. Rental growth is positive, rising by 1.6 per cent in
the City and 1.1 per cent in the West End on an annual basis. Over
the longer-term, we expect London’s performance to remain robust,
helped by its role as a global city and low levels of new
supply.
Occupier requirements are changing with leases becoming more
flexible and tenants seeking well specified and connected
buildings. Access to talent remains key. With building quality and
flexibility becoming increasingly important to occupiers, there may
be implications for capital depreciation. We expect city centres to
out-perform given their generally greater amenity level and
connectivity and for prime property to out-perform secondary
assets.
Industrial and Logistics
The Company’s Industrial and logistics properties were again the
standout performers over the year. Standard industrials
out-performed distribution warehouses and both were well ahead of
the all-property average. Industrials and Logistics properties
comprised c.40 per cent of the portfolio by value as at the year
end. This structural overweight to the best performing sub-market
is a key reason for the portfolio’s outperformance over the medium
and long term. The Company’s assets are located exclusively in the
supply constrained south east where we continue to see strong
demand from a range of occupiers. While there has been a supply
pickup regionally, the low level of existing supply in the south
east is compounded by intense competition for land from both
commercial and residential uses as well as a generally restrictive
planning policy. Against this background the Company’s Industrial
properties have delivered 13 per cent income growth over the year.
We remain wary of the compressing of yields across the sector as a
whole and while income growth has continued to justify the sector,
there is clearly a risk that Industrials become over bought. Stock
selection and property fundamentals will be of increasing
importance moving forward. The Manager continues to focus on
mid-box clusters as the basis for the portfolio exposure, located
in the key distribution locations and infrastructure hubs with both
fit for purpose site and accommodation.
Most of the top performing assets within the portfolio over the
year were South East Industrial properties and over three years,
the Company’s top five performing assets all hail from this
subsector. The whole subsector has shown attractive relative
capital and income returns but the latter part of the period has
shown some disaggregation based upon asset fundamentals and this
will be of greater importance moving forward. A key contribution in
the Company portfolio came from the holding at Southampton
International Business Park, Eastleigh where rental growth in the open
market was again combined with asset management to extend the lease
terms and deliver income growth. A further positive contribution
came from Lakeside Industrial Estate, Colnbrook where success in renewing existing
leases and progress on re-gearing upcoming lease expiries combined
with the continued strength of investor appetite for multi-let
estates located in the Capital drove performance.
Despite the market being well bid for best in class stock,
investment activity weakened in the latter half of the year to
touch its lowest level since the referendum, with portfolio
activity in particular being more muted. The occupational market is
perhaps a little patchier than headline numbers and media
commentary might suggest. Standard industrial rental growth
out-paced that of distribution on an annual basis with some signs
that rental growth is moderating in both sub-markets. Nonetheless
it remains above the long-run average and remains one area of the
market delivering growth. There is greater activity in the prime
market, with demand in the secondary sector more static. Supply is
edging higher and there is more than 7 million sq. ft. of space
under construction according to Savills, with some meaningful
geographic variance in availability. More than half the space
currently available is Grade A space.
The industrials market is expected to continue to out-perform,
but there are signs that the degree of out-performance could
moderate. Demand is likely to be supported by the continued growth
of online but increased supply and low margin contracts could cap
rental growth prospects, while Brexit could simultaneously lead to
both a shift to warehousing in mainland Europe and some nearshoring or stockpiling
within the UK itself. Quality, flexibility and location to major
markets and skill hubs is critical.
Alternatives
The Company does not currently own any ‘Alternatives’ in the
strictest sense but does have exposure to long let automotive
investments, classified by some as alternatives on account of their
bespoke accommodation and leasing characteristics. By capital value
this is c.5 per cent of total assets, currently allocated to the
retail subsector for weighting purposes.
MSCI data shows Alternatives (other commercial) delivering an
annual total return of 6.1 per cent for the year versus 3.3 per
cent for all-property.
The alternatives market was a primary driver for investment
activity early in the reporting period but weakened by the final
quarter, with few large deals completed. Post-period end there has
been one transaction over £1 billion and four more deals above
£250m. Overseas interest remains significant and the specialist
REITs are still buying, although we have also witnessed selected
and opportunistic selling.
The sector is evolving and growing in importance. Certainly,
access remains a medium-term strategic target for the Company given
both the demographic and structural drivers and the policy support
for many of the constituent segments of the market. However, there
is a clear risk that some buyers are being pushed up the risk curve
in order to obtain representation. This specific tenant and
subsector risk needs to be correctly priced. There could be some
challenges from regulatory changes, rising costs linked to Brexit
and supply issues in some parts of the market. Despite this, the
sector is expected to remain in favour with investors, but with
some increased variation in performance between its component
parts. At the asset level, issues regarding covenant and
operational risk remain.
Outlook
Brexit, and its economic and political repercussions, is
expected to remain a major influence on sentiment. Whilst the
uncertainty remains unwelcome, the possibility of some fiscal
easing and a prolonged period of low interest rates may not be
entirely negative for property. The industrial market is expected
to continue to out-perform, helped by the growth of online
retailing but may face more headwinds than in the recent past. For
offices, the demand for more flexibility in lease terms and
improved building specification are likely to remain major factors
for occupiers but a lack of supply could underpin improved rental
growth once there is post-Brexit clarity. We expect retail property
to undergo further correction but to stabilise at lower levels in
due course. This unwinding is undoubtedly the largest risk for the
market and the portfolio. We see Central
London and affluent towns with a tourist or educational
dimension being relatively resilient over the longer term, though
not immune. With muted economic growth and investor sentiment
restrained, we expect income to be the major driver of
performance.
The Company’s high weighting to the supply constrained south
east, held at yield premium to the market, alongside the c.40 per
cent exposure to the Industrial and Logistics market, an area of
the market forecast to outperform, place the portfolio on a solid
defensive footing.
The consistent demand for the Company’s properties demonstrated
both by the low vacancy rate and recent evidence of above market
income growth, offer much to be positive about. The successful
realisation of capital works projects at Standard Hill,
Nottingham along with asset
management at Berkeley Street, London and the Industrials at Eastleigh demonstrate a recent track record of
value-add initiatives. Similar results at the pre-let supermarket
development at Luton and the
office scheme at Chelmsford in
particular should add valuable income to the portfolio.
Peter Lowe
BMO Rep Property Management Limited
BMO Real Estate
Investments Limited
Consolidated
Statement of Comprehensive Income
|
Year ended 30 June 2019 |
Year ended
30 June
2018 |
|
£‘000 |
£‘000 |
|
|
|
Revenue |
|
|
Rental income |
18,606 |
19,134 |
Other income |
- |
4,375 |
Total revenue |
18,606 |
23,509 |
|
|
|
(Losses)/gains on investment
properties |
|
|
(Losses)/gains on sale of investment
properties realised |
(206) |
1,568 |
Unrealised (losses)/gains on
revaluation of investment properties |
(7,343) |
14,851 |
Total
Income |
11,057 |
39,928 |
|
|
|
Expenditure |
|
|
Investment management fee |
(2,286) |
(2,156) |
Other expenses |
(1,757) |
(1,619) |
Total expenditure |
(4,043) |
(3,775) |
Net operating profit before
finance costs and taxation |
7,014 |
36,153 |
|
|
|
Net finance costs |
|
|
Interest receivable |
13 |
2 |
Finance costs |
(3,526) |
(3,550) |
|
(3,513) |
(3,548) |
|
|
|
Net profit from
ordinary activities before taxation |
3,501 |
32,605 |
Taxation on profit on ordinary
activities |
(295) |
(295) |
Profit for the year |
3,206 |
32,310 |
|
|
|
|
|
|
Basic and diluted earnings per
share |
1.3p |
13.4p |
|
|
|
|
|
|
All items in the above statement derive from continuing
operations.
All of the profit for the year is attributable to the owners of
the Group.
BMO Real Estate Investments Limited
Consolidated
Balance Sheet
|
30 June 2019
£‘000 |
30 June 2018
£‘000 |
Non-current assets |
|
|
Investment properties |
339,353 |
349,268 |
Trade and other receivables |
4,162 |
3,692 |
|
343,515 |
352,960 |
Current assets |
|
|
Trade and other receivables |
2,569 |
1,282 |
Cash and cash equivalents |
9,858 |
15,037 |
|
12,427 |
16,319 |
|
|
|
Total assets |
355,942 |
369,279 |
|
|
|
|
|
|
Non-current liabilities |
|
|
Interest-bearing bank loans |
(96,505) |
(102,299) |
Trade and other payables |
(782) |
(291) |
|
(97,287) |
(102,590) |
|
|
|
Current liabilities |
|
|
Trade and other payables |
(6,074) |
(5,279) |
Tax payable |
(295) |
(294) |
|
(6,369) |
(5,573) |
|
|
|
Total liabilities |
(103,656) |
(108,163) |
|
|
|
Net assets |
252,286 |
261,116 |
|
|
|
|
|
|
Represented by: |
|
|
Share capital |
2,407 |
2,407 |
Special distributable reserve |
177,161 |
177,161 |
Capital reserve |
70,144 |
77,693 |
Revenue reserve |
2,574 |
3,855 |
|
|
|
Equity shareholders’
funds |
252,286 |
261,116 |
|
|
|
Net asset value per
share |
104.8p |
108.5p |
BMO Real Estate Investments Limited
Consolidated
Statement of Changes in Equity
For the year ended 30 June 2019
|
Share Capital
£’000 |
Special Distributable Reserve
£’000 |
Capital Reserve
£’000 |
Revenue
Reserve
£’000 |
Total
£’000 |
At 1 July 2018 |
2,407 |
177,161 |
77,693 |
3,855 |
261,116 |
|
|
|
|
|
|
Profit for the year |
- |
- |
- |
3,206 |
3,206 |
Total comprehensive income for the year |
- |
- |
- |
3,206 |
3,206 |
|
|
|
|
|
|
Dividends paid |
- |
- |
- |
(12,036) |
(12,036) |
|
|
|
|
|
|
Transfer in respect of losses on
investment properties |
- |
- |
(7,549) |
7,549 |
- |
|
|
|
|
|
|
At 30 June 2019 |
2,407 |
177,161 |
70,144 |
2,574 |
252,286 |
For the year ended 30 June
2018
|
Share Capital
£’000 |
Special Distributable Reserve
£’000 |
Capital Reserve
£’000 |
Revenue
Reserve
£’000 |
Total
£’000 |
At 1 July 2017 |
2,407 |
177,161 |
61,274 |
- |
240,842 |
|
|
|
|
|
|
Profit for the year |
- |
- |
- |
32,310 |
32,310 |
|
|
|
|
|
|
Total comprehensive income for the
year |
- |
- |
- |
32,310 |
32,310 |
|
|
|
|
|
|
Dividends paid |
- |
- |
- |
(12,036) |
(12,036) |
|
|
|
|
|
|
Transfer in respect of gains on
investment properties |
- |
- |
16,419 |
(16,419) |
- |
|
|
|
|
|
|
At 30 June 2018 |
2,407 |
177,161 |
77,693 |
3,855 |
261,116 |
BMO Real Estate Investments Limited
Consolidated
Statement of Cash Flows
|
Year ended
30 June 2019 |
Year ended
30 June 2018 |
|
£’000 |
£’000 |
|
|
|
Cash flows from operating
activities |
|
|
Net profit for the year before
taxation |
3,501 |
32,605 |
Adjustments for: |
|
|
Loss/(gains) on sale of investment properties realised |
206 |
(1,568) |
Unrealised
loss/ (gains) on revaluation of investment properties |
7,343 |
(14,851) |
(Increase)/decrease in operating trade and other receivables |
(1,758) |
211 |
Increase/(decrease) in operating trade and other payables |
1,286 |
(805) |
Interest
received |
(13) |
(2) |
Finance
costs |
3,526 |
3,550 |
|
14,091 |
19,140 |
|
|
|
Taxation paid |
(295) |
(306) |
Net cash inflow from operating
activities |
13,796 |
18,834 |
|
|
|
Cash flows from investing
activities |
|
|
Purchase of investment
properties |
- |
(10,190) |
Capital expenditure |
(878) |
(1,067) |
Sale of investment properties |
3,244 |
9,242 |
Interest received |
13 |
2 |
Net cash inflow/(outflow) from
investing activities |
2,379 |
(2,013) |
|
|
|
Cash flows from financing
activities |
|
|
Dividends paid |
(12,035) |
(12,036) |
Bank loan interest paid |
(3,319) |
(3,313) |
Bank loan repaid, net of costs –
Barclays Loan |
(6,000) |
(3,000) |
Net cash outflow from financing
activities |
(21,354) |
(18,349) |
|
|
|
Net decrease in cash and cash
equivalents |
(5,179) |
(1,528) |
Opening cash and cash
equivalents |
15,037 |
16,565 |
Closing cash and cash
equivalents |
9,858 |
15,037 |
BMO Real Estate Investments Limited
Principal Risks
and Future Prospects
Each year the Board carries out a comprehensive, robust
assessment of the principal risks and uncertainties that could
threaten the Group's success. The consequences for its business
model, liquidity, future prospects and viability form an integral
part of this assessment.
The Board applies the principles detailed in the internal
control guidance issued by the Financial Reporting Council and has
established an ongoing process designed to meet the particular
needs of the Group in managing the risks and uncertainties to which
it is exposed.
Principal risks and uncertainties faced by the Group are
described below and in note 2, which provides detailed explanations
of the risks associated with the Group’s financial instruments.
.
Other risks faced by the Group include the following:
- Market – the Group’s assets comprise of direct investments in
UK commercial property and it is therefore exposed to movements and
changes in that market. This includes political and economic
factors such as Brexit.
- Investment and strategic – poor investment processes and
incorrect strategy, including sector and geographic allocations and
use of gearing, could lead to poor returns for shareholders.
- Regulatory – breach of regulatory rules could lead to
suspension of the Group’s Stock Exchange listing, financial
penalties or a qualified audit report.
- Tax structuring and compliance – changes to the management and
control of the Group or changes in legislation could result in the
Group no longer being a tax efficient investment vehicle for
shareholders.
- Financial – inadequate controls by the Manager or third party
service providers could lead to misappropriation of assets.
Inappropriate accounting policies or failure to comply with
accounting standards could lead to a qualified audit report,
misreporting or breaches of regulations. Breaching Guernsey
solvency test requirements or loan covenants could lead to a loss
of shareholders’ confidence and financial loss for
shareholders.
- Reporting – valuations of the investment property portfolio
require significant judgement by valuers which could lead to a
material impact on the net asset value. Incomplete or
inaccurate income recognition could have an adverse effect on the
Group’s net asset value, earnings per share and dividend
cover.
- Credit – an issuer or counterparty could be unable or unwilling
to meet a commitment that it has entered into with the Group.
This may cause the Group’s access to cash to be delayed or
limited.
- Operational – failure of the Manager’s accounting systems or
disruption to its business, or that of other third-party service
providers through error, fraud, cyber-attack or business continuity
failure could lead to an inability to provide accurate reporting
and monitoring, leading to a loss of shareholders’ confidence.
- Environmental – inadequate attendance to environmental factors
by the Manager, including those of a regulatory and market nature
and particularly those relating to energy performance, health and
safety, flood risk and environmental liabilities, leading to the
reputational damage of the Group, reduced liquidity in the
portfolio, and/or negative asset value impacts.
The Board seeks to mitigate and manage these risks through
continual review, policy-setting and enforcement of contractual
obligations. It also regularly monitors the investment environment
and the management of the Group’s property portfolio.
The Manager seeks to mitigate these risks through active asset
management initiatives and carrying out due diligence work on
potential tenants before entering into any new lease agreements.
All properties in the portfolio are insured.
The principal areas of particular
focus encountered during the year, how they are mitigated and
actions taken to address these are set out in the table below.
Principal Risk |
Mitigation |
Actions taken in the year |
Valuers
have difficulty in valuing the property assets due to lack of
market evidence or market uncertainty. Error in the calculation/
application of the Group Net Asset Value ('NAV') leads to a
material misstatement.
Risk unchanged throughout the year under review. |
Professional external
valuers are appointed to value the portfolio on a quarterly basis.
There is regular liaison with the valuers regarding all elements of
the portfolio. There is attendance by one or more Directors at the
valuation meetings and the Auditor attends the year end valuation
meeting. |
Valuing properties
was challenging in the aftermath of the Brexit vote in June 2016.
There has been more transactional based market evidence this year
which the valuers have used to assist them in producing the
quarterly valuations. There was attendance by one or more Directors
at the valuation meetings throughout the year. |
Unfavourable markets, poor stock selection, inappropriate asset
allocation and under-performance against benchmark and/or peer
group.
This risk may be exacerbated by gearing levels.
Risk increased in the year under review. |
The underlying
investment strategy, performance, gearing and income forecasts are
reviewed with the Investment Manager at each Board Meeting. The
Group's portfolio is well diversified. Gearing is kept at modest
levels and is monitored by the Board. |
The Board review the
Manager's performance at quarterly Board Meetings against key
performance indicators and is satisfied that the Manager's
long-term performance is in line with expectations. |
The
retail market has witnessed a number of company voluntary
arrangements, profit warning announcements and administrations in
the last year. There is an increased risk of tenant defaults in
this sector which could put the level of dividend cover at
risk.
Risk increased in the year under review. |
The Manager provides
regular information on the expected level of rental income that
will be generated from the underlying properties. The Portfolio is
well diversified by geography and sector and the exposure to
individual tenants is monitored and managed. |
The
portfolio has been impacted, particularly with Homebase, who are a
tenant in three of the portfolio’s properties and placed their
business into a CVA. Business plans are in place to address
potential consequences on the assets affected and the Manager
remains confident in successfully negotiating a satisfactory
outcome. |
Viability Assessment and Statement
The Board conducted this review over a 5-year time horizon, a
period thought to be appropriate for a commercial property
Investment Company with a long-term investment outlook, borrowings
secured over an extended period and a portfolio with a weighted
average unexpired lease length of 5.8 years. The assessment has
been undertaken taking into account the principal risks and
uncertainties faced by the Group which could threaten its
objective, strategy, future performance, liquidity and
solvency.
The major risks identified as relevant to the viability
assessment were those relating to a downturn in the UK commercial
property market and its resultant effect on the valuation of the
investment portfolio, the level of rental income being received and
the effect that this would have on cash resources and financial
covenants. The Board took into account the illiquid nature of the
Group’s portfolio, the existence of the long-term borrowing
facilities, the effects of any significant future falls in
investment values and income receipts on the ability to repay and
re-negotiate borrowings, maintain dividend payments and retain
investors. These matters were assessed over an initial period to
September 2024, and the Directors
will continue to assess viability over 5 year rolling periods,
taking account of foreseeable severe but plausible scenarios.
In the ordinary course of business, the Board reviews a detailed
financial model on a quarterly basis, incorporating market
consensus forecast returns, projected out to the maturity of its
principal loan of £90 million which is due to mature in 2026.
This model uses prudent assumptions and factors in any
potential capital commitments. For the purpose of assessing the
viability of the Group, the model has been adjusted to look at the
next five years and is stress tested with projected returns
comparable to the commercial property market crash experienced
between 2007 and 2009. The model projects a worst case scenario of
an equivalent fall in capital and income values over the next two
years, followed by three years of zero growth. The model
demonstrated that even under these extreme circumstances the Group
remains viable.
Based on their assessment, and in the context of the Group’s
business model, strategy and operational arrangements set out
above, the Directors have a reasonable expectation that the Group
will be able to continue in operation and meet its liabilities as
they fall due over the 5-year period to September 2024.
The Group’s liquidity risk is managed on an ongoing basis by the
Manager and monitored on a quarterly basis by the Board. In
order to mitigate liquidity risk the Group aims to have sufficient
cash balances (including the expected proceeds of any property
sales) to meet its obligations for a period of at least twelve
months.
In certain circumstances, the terms of the Group’s bank loans
entitle the lender to require early repayment, for example if
covenants are breached, and in such circumstances the Group’s
ability to maintain dividend levels and the net asset value
attributable to the Ordinary Shares could be adversely
affected.
BMO Real Estate Investments Limited
Going Concern
In assessing the going concern basis of accounting the Directors
have had regard to the guidance issued by the Financial Reporting
Council. They have reviewed detailed cash flow, income and expense
projections in order to assess the Group’s ability to pay its
operational expenses, bank interest and dividends. The Directors
have examined significant areas of possible financial risk
including cash and cash requirements and the debt covenants, in
particular those relating to loan to value and interest cover. The
Directors have not identified any material uncertainties which cast
significant doubt on the Group’s ability to continue as a going
concern for a period of not less than 12 months from the date of
the approval of the consolidated financial statements. The Board
believes it is appropriate to adopt the going concern basis in
preparing the financial statements.
Directors’ Responsibilities in Respect of the Annual Report
& Consolidated Accounts
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with IFRS as
adopted by the European Union, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Group and the undertakings included in the consolidation taken as a
whole and comply with The Companies (Guernsey) Law, 2008; and
- the Strategic Report and the Directors’ Report includes a fair
review of the development and performance of the business and the
position of the Group and the undertakings included in the
consolidation taken as a whole together with a description of the
principal risks and uncertainties that it faces; and
- the financial statements and Directors’ Report includes details
of related party transactions; and
In the opinion of the Directors:
- the Annual Report and financial statements, taken as a whole,
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group’s position and
performance, business model and strategy.
On behalf of the Board
V Lall
Chairman
19 September 2019
BMO Real Estate
Investments Limited
Notes to the Consolidated
Financial Statements
for the year ended 30 June
2019
1. The audited
results of the Group which were approved by the Board on
19 September 2019 have been prepared
on the basis of International Financial Reporting Standards as
adopted by the EU, interpretations issued by the IFRS
Interpretations Committee, applicable legal and regulatory
requirements of the Companies (Guernsey) Law, 2008 and the Listing
Rules of the UK Listing Authority as well as the accounting
policies set out in the statutory accounts of the Group for the
year ended 30 June 2019.
2. Financial
Instruments and investment properties
The Group’s investment objective is to provide ordinary
shareholders with an attractive level of income together with the
potential for income and capital growth from investing in a
diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial
property investments. In addition, the Group’s financial
instruments comprise cash, receivables, interest-bearing loans and
payables that arise directly from its operations.
The Group is exposed to various types of risk that are
associated with financial instruments. Financial risks are risks
arising from financial instruments to which the Group is exposed
during or at the end of a reporting period. Financial risk
comprises market risk (including currency risk, price risk and
interest rate risk), credit risk and liquidity risk. There was no
foreign currency risk as at 30 June
2019 or 30 June 2018 as assets
and liabilities are maintained in Sterling.
Market price risk
Market risk is the risk the fair value of future cash flows of a
financial instrument will fluctuate because of changes in market
prices.
Sensitivities to market risks included below are based on change
in one factor while holding all other factors constant. In
practice, this is unlikely to occur, and changes in some of the
factors may be correlated – for example, changes in interest rate
and changes in foreign exchange rates.
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.
Price Risk
The Group has no significant exposure to price risk as it does
not hold any equity securities or commodities. The Group is exposed
to price risk other than in respect of financial instruments, such
as property price risk including property rentals risk. Investment
in property and property-related assets are inherently difficult to
value due to the individual nature of each property. As a result,
valuations are subject to substantial uncertainty. There is no
assurance that the estimates resulting from the valuation process
will reflect the actual sales price even where such sales occur
shortly after the valuation date. Such risk is minimised through
the appointment of external property valuers.
Any changes in market conditions will directly affect the
profit/loss reported through the Consolidated Statement of
Comprehensive Income. A 10 per cent increase in the value of the
investment properties held at 30 June
2019 would have increased net assets available to
shareholders and the increased the net income for the year by £33.9
million (2018: £34.9 million); an equal change in the opposite
direction would have decreased net assets and decreased net income
by an equivalent amount.
The calculations above are based on investment property
valuations at the respective balance sheet dates and are not
representative of the year as a whole, nor reflective of future
market conditions.
Interest rate risk
Some of the Group’s financial instruments are
interest-bearing. They are a mix of both fixed and variable
rate instruments with differing maturities. As a consequence,
the Group is exposed to interest rate risk due to fluctuations in
the prevailing market rate.
The Group’s exposure to interest rate risk relates primarily to
the Group’s borrowings. Interest rate risk on the £90 million
Canada Life term loan is managed by the loan bearing interest rate
on a fixed rate of 3.36 per cent per annum until maturity on 9
November 2026.
Credit risk
Credit risk is the risk that an issuer or counterparty will be
unable or unwilling to meet a commitment that it has entered into
with the Group.
In the event of default by an occupational tenant, the Group
will suffer a rental shortfall and incur additional costs,
including legal expenses, in maintaining, insuring and re-letting
the property. The Board receives regular reports on concentrations
of risk and any tenants in arrears. The Manager monitors such
reports in order to anticipate, and minimise the impact of,
defaults by occupational tenants.
The Group has a diversified tenant portfolio. The maximum credit
risk from the rent receivables of the Group at 30 June 2019 is £802,000 (2018: £664,000). The
maximum credit risk is stated after providing for expected credit
losses of £9,000 (2018: £40,000). Of this amount £nil was
subsequently written off and £4,000 has been recovered.
The expected loss rates are based on the payment profiles of
tenants over a period of 36 months before 31
December 2018 or 1 January
2018, respectively, and the corresponding historical credit
losses experienced within this period.
Apart form the rent receivable disclosed above there were no
financial assets which were either past due or considered impaired
at 30 June 2019 (2018: nil).
Deposits refundable to tenants may be withheld by the Group in
part or in whole if receivables due from the tenant are not settled
or in case of other breaches of contract.
All of the cash is placed with financial institutions with a
credit rating of A or above. Bankruptcy or insolvency of
these financial institutions may cause the Group’s ability to
access cash placed on deposit to be delayed or limited.
Should the credit quality or the financial position of the banks
currently employed significantly deteriorate, the Manager would
move the cash holdings to another financial institution.
The Group can also spread counterparty risk by placing cash
balances with more than one financial institution. The
Directors consider the residual credit risk to be minimal.
Liquidity risk
Liquidity risk is the risk that the Group will encounter in
realising assets or otherwise raising funds to meet financial
commitments. The Group’s investments comprise UK commercial
property.
Property in which the Group invests is not traded in an
organised public market and may be illiquid. As a result, the
Group may not be able to quickly liquidate its investments in these
properties at an amount close to their fair value in order to meet
its liquidity requirements.
The Group’s liquidity risk is managed on an ongoing basis by the
Manager and monitored on a quarterly basis by the Board. In
order to mitigate liquidity risk the Group aims to have sufficient
cash balances (including the expected proceeds of any property
sales) to meet its obligations for a period of at least twelve
months.
In certain circumstances, the terms of the Group’s bank loans
entitle the lender to require early repayment, for example, if
covenants are breached, and in such circumstances the Group’s
ability to maintain dividend levels and the net asset value
attributable to the Ordinary Shares could be adversely
affected.
3. The fourth
interim dividend of 1.25p will be paid on 30
September 2019 to shareholders on the register on
13 September 2019. The ex-dividend
date was 12 September 2019.
4. There were
240,705,539 Ordinary Shares in issue at 30
June 2019. The earnings per Ordinary Share are based on the
net profit for the year of £3,206,000 and on 240,705,539 Ordinary
Shares, being the weighted average number of shares in issue during
the year.
5. These are not
full statutory accounts. The full audited accounts for the year
ended 30 June 2019 will be sent to
shareholders in September 2019, and
will be available for inspection at Trafalgar Court, Les Banques,
St. Peter Port, Guernsey, the registered office of the
Company. The full annual report and consolidated accounts
will be available on the Company’s websites:
bmorealestateinvestments.com
6. The Annual
General Meeting will be held on 19 November
2019.
Alternative Performance Measures
The Company uses the following Alternative Performance Measures
(‘APMs’). APMs do not have a standard meaning prescribed by GAAP
and therefore may not be comparable to similar measures presented
by other entities.
Discount or Premium – The share price of an Investment Company
is derived from buyers and sellers trading their shares on the
stock market. If the share price is lower than the NAV per share,
the shares are trading at a discount. This usually indicates that
there are more sellers than buyers. Shares trading at a price above
the NAV per share, are said to be at a premium.
|
|
2019
pence |
2018
pence |
Net Asset Value per
share |
(a) |
104.8 |
108.5 |
Share price per share |
(b) |
80.0 |
99.8 |
(Discount) or Premium (c =
(b-a)/a) |
(c) |
-23.7% |
-8.0% |
|
|
|
|
|
Dividend Cover – The percentage by which Profits for the year
(less Gains/losses on investment properties and non-recurring other
income) cover the dividend paid.
A reconciliation of dividend cover is shown below:
|
|
|
30 June
2019 |
30 June
2018 |
|
|
|
£’000 |
£’000 |
|
|
|
|
|
Profit for the year |
|
|
3,206 |
32,310 |
Less: |
Realised losses/(gains) |
|
206 |
(1,568) |
|
Unrealised losses/(gains) |
|
7,343 |
(14,851) |
|
Other income |
|
- |
(4,375) |
Profit before investment
gains and losses |
(a) |
10,755 |
11,516 |
Dividends |
|
(b) |
12,036 |
12,036 |
Dividend Cover
percentage (c=a/b) |
(c) |
89.4% |
95.7% |
Dividend Yield – The annualised dividend divided by the share
price at the year-end.
Net Gearing – Borrowings less net current assets divided by
value of investment properties.
|
|
30 June
2019 |
30 June
2018 |
|
|
£’000 |
£’000 |
|
|
|
|
Loans |
|
96,505 |
102,299 |
Less net current assets |
|
(6,058) |
(10,746) |
Total |
(a) |
90,447 |
91,553 |
Value of investment
properties |
(b) |
339,353 |
349,268 |
Net Gearing (c = a/b) |
(c) |
26.7% |
26.2% |
Ongoing Charges – All operating costs incurred by the
Company, expressed as a proportion of its average Net Assets over
the reporting year. The costs of buying and selling
investments and derivatives are excluded, as are interest costs,
taxation, non-recurring property costs and the costs of buying back
or issuing Ordinary Shares.
|
|
30
June
2019 |
30 June
2018 |
|
|
|
£’000 |
£’000 |
|
|
|
|
|
|
Total expenditure |
|
4,043 |
3,775 |
|
Less non-recurring costs |
|
(852) |
(793) |
|
Total |
(a) |
3,191 |
2,982 |
|
Average net assets |
(b) |
256,408 |
251,751 |
|
Ongoing charges
(c=a/b) |
(c) |
1.2% |
1.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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.
Portfolio (Property) Total Return – Combining the
Portfolio Capital Return and Portfolio Income Return over the
period, calculated on a quarterly time-weighted basis.
Total Return – The return to shareholders calculated on a
per share basis by adding dividends paid in the period to the
increase or decrease in the Share Price or NAV. The dividends are
assumed to have been reinvested in the form of Ordinary Shares or
Net Assets, respectively, on the date on which they were quoted
ex-dividend.
|
|
|
|
|
|
Net asset value |
Share price |
NAV/Share price per share at 30
June 2018 (pence) |
|
108.5 |
99.8 |
NAV/Share price per share at 30
June 2019 (pence) |
|
104.8 |
80.0 |
Change in the year |
|
-3.4% |
-19.8% |
Impact of dividend
reinvestments |
|
4.7% |
4.6% |
Total return for the
year |
|
1.3% |
-15.2% |
|
|
|
All enquiries to:
Peter Lowe
Scott Macrae
BMO Investment Business Limited
Tel: 0207 628 8000
The Company Secretary
Northern Trust International Fund Administration Services
(Guernsey) Limited
PO BOX 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey GY1 3QL
Tel: 01481 745001