To:
RNS
Date:
16 April 2020
From:
BMO Commercial Property Trust Limited (the “Company”)
L.E.I.
213800A2B1H4ULF3K397
Results in Respect of the Year Ended
31 December 2019 (audited)
Financial Headlines
· Share price total return of -2.4 per
cent*
· Portfolio total return of -0.1 per
cent*
· Dividend cover increased to 81.8 per
cent from 80.2 per cent*
· Yield on year-end share price of 5.2
per cent*.
*see Alternative Performance Measures
Chairman’s Statement
Introduction
The UK direct commercial property market delivered an income
driven, positive total return in 2019. This was lower than 2018,
and influenced by muted economic growth, the approaching Brexit
deadline and widespread weakness in the retail property market. The
industrial and distribution sector continued to perform relatively
well, delivering both rental and capital growth, and the office
market, led by the regions, performed broadly in line with its
income return. Investment volumes held up well and, although lower
than 2018, were around the longer-term average.
Performance for the Year
The Company’s net asset value (‘NAV’) total return for the year
was -2.1 per cent and the share price total return was -2.4 per
cent. The total return from the portfolio was -0.1 per cent,
lagging the total return of 1.3 per cent from the MSCI UK Quarterly
Property Index (‘MSCI’).
Our share price at the year-end was 115.6p, representing a
discount of 11.7 per cent to the NAV per share of 130.9p (compared
to a 10.9 per cent discount as at 31
December 2018), reflecting continued uncertainties in the
market surrounding Brexit and concerns over the retail sector.
The following table provides an analysis of the movement in the
NAV per share for the year:
|
Pence |
NAV per share as at 31 December
2018 |
139.8 |
Unrealised decrease in valuation of
direct property portfolio |
(7.8) |
Other net revenue |
4.9 |
Dividends paid |
(6.0) |
NAV per share as at 31 December
2019 |
130.9 |
During 2019 the capital return for the portfolio was -4.3 per
cent, compared to MSCI which recorded a capital return of -3.1 per
cent.
Unsurprisingly, our retail portfolio was a primary reason for
the negative returns and underperformance against MSCI. There was a
fall in value of the St. Christopher’s Place Estate, almost
entirely as a result of a mark down in the valuation of its two
Oxford Street retail units. This was in response to the challenging
investment environment and a material rebasing of rental values to
bring them in line with recent market evidence.
Unfortunately, our prime retail parks at Newbury and Solihull didn’t escape the retail headwinds
either and were marked down in value too as yields continued to
move out. However, on the positive side, construction work has
started at Newbury Retail Park to create new stores for Lidl and
Deichmann Shoes. They will fill space previously leased to Homebase
and Mothercare and we are optimistic such significant lettings will
attract other new occupiers to the park. Hobbycraft opened to trade
in August 2019, having replaced
Poundworld, who went into administration in 2018.
We had further good news post year-end following the completion
of an unconditional letting to Marks & Spencer at Sears Retail
Park in Solihull. This
significantly expands their presence, combining the former Homebase
unit with their existing food hall and is a valuable addition to
the park, showing that M&S share our confidence in the
location. Notwithstanding the challenges facing the high street,
our recent experience at both Newbury and Solihill demonstrates the
confidence of some retailers to continue to invest but only for the
right space in the right locations.
Our industrial portfolio also underperformed in 2019 with the
undoubted quality of the underlying assets failing to offset the
impact of a handful of near-term lease expiries and break-clauses.
This effect was compounded by our distribution unit at Daventry, let to Mothercare, where the
valuation was reduced due to future occupational uncertainty,
notwithstanding a rental guarantee from a Mothercare company not in
administration.
The strongest return contribution came from the office sector
where, in absolute terms, the best performance was from
Cassini House, St James’s Street,
London, following the successful
refurbishment and letting of the vacant 4th and 5th floors to Shore
Capital. Amongst other increases, there was also a pleasing uplift
in the valuation of Watchmoor Park, Camberley, where rental income
had been secured on part of Building C until 2030, and the sale of
land for residential development at Cowdray Avenue, Colchester eventually went unconditional
during the year, ahead of the 2018 valuation.
Borrowings and Loan Refinancing
The Group’s available borrowings comprise a £260 million term
loan with Legal & General Pensions Limited, maturing on
31 December 2024, together with a £50
million term loan facility and an undrawn £50 million revolving
credit facility, both with Barclays and available until
June 2021. All loan covenants were
comfortably met. The Group’s total loan to value, net of cash, was
21.3 per cent at the end of the year and the weighted average
interest rate on total current borrowings is 3.3 per cent.
Dividends and Dividend Cover
Twelve monthly interim dividends, each of 0.5p per share, were
paid during the year. This maintains the annual dividend of 6.0p
per share paid since 2006 and provides a dividend yield of 5.2 per
cent based on the year-end share price.
The Company’s level of dividend cover for the year (excluding
capital gains on properties) was 81.8 per cent. This was marginally
higher than the 80.2 per cent cover achieved last year. There was a
small decrease in the level of rental income collected, primarily
due to the sale of the office building at Thames Valley Park 2 in
Reading and the loss of income caused by the vacancies at
Solihull and Newbury. This was more than compensated by a
fall in the level of taxation payable and a reduction in
expenses.
REIT Conversion
Shareholders voted in favour of the REIT proposals at an
extraordinary general meeting held on 30 May
2019 and the Group entered the UK REIT regime on
3 June 2019. The adoption of REIT
status by the Group alters the shareholders’ tax positions in
respect of the receipt of distributions under the REIT regime, as
the majority of the distributions from the Company will be property
income distributions (“PID’s”). The first distribution that the
Company made under the REIT regime related to profits earned from
3 June 2019 and the first monthly PID
was paid on 31 October 2019.
Board Composition
Having served nine years on the Board, Chris Russell stepped down as Chairman of the
Company and retired from the Board at the annual general meeting on
30 May 2019. I became Chairman from
that date and Paul Marcuse took on the role of Senior Independent
Director. Chris joined the Board in 2009 and became Chairman in
2011. He excelled in this role and my Board colleagues and I would
like to thank him for his significant contribution and leadership
over many years.
As part of the REIT conversion, Peter
Cornell and David Preston,
both Guernsey directors, also stood down from the Board at the AGM.
I’d like to thank them too, at the same time welcoming Linda Wilding who is UK based and joined the
Board on 3 June 2019. Following these
changes, our Board now consists of five Directors, three males and
two females, four of whom are based in the UK and one in
Guernsey.
By the AGM this year, I will have served nine years on the
Board. There has been a significant amount of change in the
composition of the Board following REIT conversion and in order to
ensure a smooth transition, I will stand for re-election at the
next AGM in June 2020. Further to
this, it is my intention to retire from the Board at the AGM in
2021.
Environmental, Social and Governance
(ESG)
I am delighted with the progress the Company continues to make
in advancing its ESG strategy and with the improvement demonstrated
in a number of key industry indicators. A significant increase in
the Company’s annual Global Real Estate Sustainability Benchmark
(GRESB) score is a notable achievement this year and provides a
pleasing independent assessment of the successful results our
Property Manager has delivered across a broad array of
sustainability related initiatives. I was also particularly pleased
to see the Company receive a gold award from EPRA, the European
Public Real Estate Association, for the implementation of its
sustainability best practice recommendations and to have been
recognised as the most improved performer in 2019.
Our portfolio level successes are driven by many and varied
interventions at local property level where we strive for
efficiency and impact. When combined, this has created a solid
platform from which to drive further success. As a Board, we
continue to give considerable attention to our ESG commitments and
support our Property Manager in responding proactively to this
ever-changing landscape.
Annual General Meeting
The Annual General Meeting will be held at 2.00pm on Tuesday 30 June
2020 at the offices of BMO Global Asset Management, Exchange
House, Primrose Street, London,
EC2A 2NY.
We are closely monitoring the impact of COVID-19 and it is
currently the intention of the Company to hold the meeting as
planned. However, the Board notes the guidance issued by the
Government, restricting social gatherings in view of the COVID-19
pandemic, and the fact that if such guidance remains in place on
the date of the AGM, shareholders will be prohibited from attending
the AGM. Given the current guidance and the general uncertainty on
what additional and/or alternative measures may be put in place,
the Board requests that shareholders do not attend the AGM in
person but instead appoint a proxy and provide voting instructions
in advance of the AGM, in accordance with the instructions
explained in the Notice of AGM.
Outlook
The emergency measures put in place to limit the spread of
COVID-19 have led to a collapse in the financial markets and
significant downgrades to the economic outlook. There have been
major shifts in both monetary and fiscal policies in the UK and
globally to try to mitigate the economic impact, but their likely
effectiveness is unclear at present and sentiment has deteriorated
sharply. Property has not been immune, with valuers unable to
determine “true value” in these conditions and share prices across
the real estate sector have fallen sharply. Performance in 2020 is
likely to be severely affected across the board.
It will take time for the markets to re-balance following such a
major shock. Changes to lifestyles and working patterns may persist
beyond the crisis period, which for property may present
opportunity as well as challenges. However, the economic outlook
will still be affected by Brexit and this represents another area
of uncertainty. Given this backdrop, we expect capital values to
remain under pressure and rental growth, especially in retail, to
be by exception. Optimising and protecting income will be paramount
in the difficult period ahead.
As at the current date more information has been gathered on the
effects of COVID-19 on the Company. A trading update has been
released to the market in parallel with this announcement, which
gives information regarding a temporary suspension to monthly
dividends and the NAV as at 31 March
2020. This announcement is available on the Company's
website at bmocommercialproperty.com.
These are challenging times for property markets, and for the
retail sector in particular, and your Company hasn’t been immune to
this. Although longer-term performance has been solid, we have had
a number of events in recent years which has led to relative
underperformance from our portfolio. That said, we share the
Manager’s conviction in the quality of the current portfolio and
are encouraged by the many accretive opportunities it presents.
Martin Moore
Chairman
Managers’ Review
Property headlines over the year
• Void rate reduced from 8.5 per cent to 4.8 per
cent at year end.
• The Company produced a total return of -0.1* per
cent versus the MSCI UK Quarterly Property Index (‘MSCI’) return of
1.3 per cent.
• Completed the sale of Thames Valley Park 1&2
and Watchmoor Park Building A.
• Land at Colchester sold to residential developer.
• Completed new lease agreement to Lidl, Deichmann
Shoes and Hobbycraft at Newbury Retail Park. M&S signed to take
new general merchandise store at Solihull Retail Park.
*see Alternative Performance Measures
Property Market Review
The benchmark total return for the year, as measured by the MSCI
UK Quarterly Property Index (‘MSCI’) was 1.3 per cent. Total
returns were substantially lower than in 2018, affected by
continued Brexit uncertainty, concerns over the general election, a
sluggish economy, and structural problems in the retail sector.
Key Benchmark Metrics –
All Property |
|
2019
% |
2018
% |
Total Returns |
1.3 |
6.2 |
Income Return |
4.5 |
4.4 |
Capital Return |
(3.1) |
1.7 |
Open Market Rental Value Growth |
(0.7) |
0.5 |
Initial Yield |
4.7 |
4.5 |
Equivalent Yield |
5.5 |
5.5 |
Source: MSCI Inc
Investment activity in 2019 was lower than in the previous year
with most sectors of the commercial real estate market affected.
However, strong investor demand for residential assets saw a marked
increase, accounting for approximately 22 per cent of all
investment in 2019. Investment from overseas buyers remained
positive but institutions were net sellers of property and the
open-ended property funds witnessed persistent outflows. There were
signs of an upturn in the second half of the year, with improved
sentiment and activity by year-end.
The distress in retail dominated the UK market as cyclical
factors combined with structural changes took their toll. As a
consequence, the retail market continued to drag down performance
at the all-property level. Shopping centres and department stores
were particularly weak but as the Company Voluntary Arrangements
(‘CVAs’), administrations and store rationalisation programmes
continued, stronger performing retailers demanded rent cuts,
flexibility in the form of turnover rents and shorter leases. The
year saw the problems in retail accelerate and spread to affect
prime property both in and out of town and the hitherto resilient
Central London market. Business
rates remained largely unreformed and this occupier cost burden
restricted the ability of landlords to increase or maintain rental
income. As a result, rental growth has been negative while concerns
about the prospects for the sector have hit investment activity,
especially in the shopping centre sector. Yields have moved out;
transaction activity has fallen away in both the occupational and
investment markets, and capital values have registered double-digit
falls.
On a more positive note, the industrials and logistics market
continued to outperform, with occupational and investor demand
remaining healthy but discriminating in their asset choices. The
office market delivered a solid performance helped by restricted
new supply. Central London offices
seemingly shrugged off earlier Brexit concerns and regional offices
benefited from a lack of new buildings and Grade A supply, an
improved rental tone and comparatively attractive yields. The
alternatives market continued to attract investment with some large
deals taking place, often involving overseas purchasers.
The year was characterised by both economic and political
uncertainty. Economic growth was positive, if anaemic, but the
market was supported by continued low interest rates. This led to
some investors increasing their exposure to property with a focus
on yield and secure income streams, especially where it involved
some form of inflation protection. In a global context, UK prime
yields can appear relatively attractive against other core property
markets.
Our established ESG approach, which we continue to advance all
the time, has ensured that the Company is well positioned to
anticipate and respond to shareholder priorities in this regard.
This has been reflected in the very positive feedback we have
received on the continued progress the Company has been making.
Valuation and Portfolio
Total Portfolio
Performance |
|
2019 |
2018 |
No of properties |
36 |
38 |
Valuation (£’000) |
1,342,610 |
1,430,190 |
Average Lot Size (£’m) |
37.3 |
37.6 |
|
Portfolio
(%) |
Benchmark
(%) |
Portfolio Capital Return |
(4.3) |
(3.1) |
Portfolio Income Return |
4.4 |
4.5 |
Portfolio Total Return |
(0.1) |
1.3 |
Source: BMO REP Asset Management plc
The 2019 total return from the portfolio was -0.1 per cent
compared with the MSCI return of 1.3 per cent. The Company’s
underperformance was primarily attributable to the valuation falls
on retail properties, a common theme for the UK real estate market.
Capitalisation rates moved out at Solihull and Newbury retail parks, with the valuations
falling by 13.7 per cent and 16.8 per cent respectively.
Unfortunately, Oxford Street in Central
London experienced a tough trading environment with a number
of stores closing, especially large units incurring high rents and
high business rates. This has led to vacancies increasing and a
rebasing of rents, and this pressure on rental levels impacted the
valuation of St. Christopher’s Place Estate.
Disappointingly, our industrial portfolio also underperformed as
a result of shorter lease durations secured on our logistics
properties. Specifically, we had an exposure to Mothercare at
Daventry where the value was hit
due to the uncertainty over the tenancy even though the rent is
guaranteed by a Group company which is not in administration.
Sector
Analysis (% of total property portfolio) |
|
2019
(%) |
2018
(%) |
Offices |
40.9 |
39.9 |
Retail |
21.8 |
22.4 |
Retail Warehouses |
10.0 |
10.9 |
Industrial |
17.5 |
17.8 |
Alternative |
9.8 |
9.0 |
Source: BMO REP Asset Management
plc
Geographical Analysis (% of total property portfolio) |
|
2019
(%) |
2018
(%) |
South East |
21.6 |
23.4 |
London – West End |
36.5 |
35.3 |
Eastern |
1.9 |
2.1 |
Midlands |
11.1 |
11.8 |
Scotland |
13.0 |
12.3 |
North West |
11.9 |
11.4 |
Rest of London |
1.5 |
1.4 |
South West |
2.5 |
2.3 |
Source: BMO REP Asset Management
plc
Income analysis
The void rate at the commencement of
the year was 8.5 per cent, excluding property being developed or
refurbished. As a result of both the strategic sales of non-core
assets and the leasing of space, this had reduced to 4.8 per cent
by year-end.
Lease
Expiry Profile |
At 31
December 2019 the weighted average lease length for the portfolio,
assuming all break options are exercised, was 6.6 years (2018: 7.1
years) |
% of leases expiring
(weighted by rental value) |
2019
(%) |
2018
(%) |
0 – 5 years |
45.1 |
44.4 |
5 – 10 years |
34.9 |
30.2 |
10 – 15 years |
12.6 |
17.1 |
15 – 25 years |
7.4 |
8.3 |
Source: BMO REP Asset Management
plc
Covenant
Strength (% of income by risk bands) |
|
2019
(%) |
2018
(%) |
Negligible and
Government |
57.5 |
54.1 |
Low |
17.9 |
19.9 |
Low to Medium |
3.3 |
4.5 |
Medium to High |
2.5 |
3.2 |
High |
2.2 |
2.1 |
Maximum |
9.4 |
10.3 |
Unscored and
ineligible |
7.2 |
5.9 |
Source: IRIS Report, MSCI Inc
The largest occupiers, based as a percentage of contracted rent,
as at 31 December 2019, are
summarised as follows:
Income
Concentration |
Company
name |
% of Total
Income |
Artemis Investment
Management LLP |
4.3 |
Apache North Sea
Limited |
4.0 |
GB Gas Holdings
Limited |
4.0 |
CNOOC Petroleum Europe
Limited |
3.9 |
Virgin Atlantic
Limited |
3.7 |
Kimberly-Clark
Limited |
3.7 |
JP Morgan Chase
Bank |
3.0 |
University of
Winchester |
2.8 |
Transocean Drilling UK
Limited |
2.8 |
Mothercare UK
Limited* |
2.6 |
Total |
34.8 |
Source: BMO REP Asset Management
plc
*has a rental guarantee from a
Mothercare company not in administration.
Retail
We have emphasised the challenges faced
by UK retailers and the impact of CVAs and retailer default. We
have been extremely focused on managing properties affected to
secure new tenants to occupy vacant units as well as to protect and
sustain rental income through lease event negotiations. Several of
our initiatives have involved complex and wide-ranging negotiations
with local authorities to secure planning consents to facilitate
change of use and physical works and have involved lengthy and
protracted lease negotiations with retailers. We are able to report
the following successes:
Newbury
We completed a letting to Lidl on the
majority of the former Homebase unit. Following a CVA, Homebase
were occupying their store at a concessionary rent of £430,950 per
annum. Their lease was surrendered at our instigation to reduce
immediate covenant risk and to introduce new retailers with more
appeal to shoppers to the park.
The permitted use of the premises was
widened to allow the sale of food and the sub-division of units,
which resulted in Lidl taking on a new 25-year lease (tenant break
at year 20) with CPI-linked reviews, at a rent of £430,000 per
annum, receivable from November
2020.
Works to create the sub-divided unit
are on site and progressing to schedule and will result in much
improved retail frontages. The remaining 9,500 sq. ft. unit is
being marketed to let.
We are also on site with construction
works to split a 12,000 sq. ft. unit formally occupied by
Mothercare who had a CVA in place. They had been paying a
concessionary rent of £118,000 per annum before closing and
vacating the unit. Half of this unit has now been let to Deichmann
Shoes on a new 10-year lease (tenant break at year 6) at a rent of
£168,000 per annum, receivable from March
2021. The other half-unit is being marketed to let.
This significant leasing activity
followed on from the letting to Hobbycraft at a rent of £215,578
per annum, having replaced Poundworld, who went into administration
in 2018. Hobbycraft opened to trade in August 2019, and their rent-free period expires
in September 2020.
The successful rental negotiations
evidenced by these lettings has also enabled us to start to agree
lease renewals on the park. A renewal with Sports Direct has
completed on a new 10-year lease (tenant break at year 5) at a rent
of £198,025 per annum with no rent-free period. This is a 5.7 per
cent reduction from the previous rent of £210,000 per annum and is
a good result in the current environment.
These lettings demonstrate the
resilience of the park, its dominance in the local catchment area
and its attractiveness to retailers and shoppers alike.
Solihull
A 36,500 sq. ft. store on the retail
park was vacated by Homebase in January
2019 following their CVA. We have spent the last eighteen
months negotiating a sequence of planning consents on the use of
the store to permit a far wider range of goods to be sold, as well
as for the demolition of existing premises and the construction of
a new store.
Post year-end we completed an
unconditional letting to Marks & Spencer for a redeveloped
35,000 sq. ft. store on a 20-year lease (breaks at year 10 and
15).
As part of the redevelopment, the new
store will be combined with the adjacent M&S Food Hall. The
combined store will create an 82,000 sq.ft. store incorporating
general merchandise, a larger Food Hall as well as an M&S Café.
The retail park is a well situated, popular trading venue and this
expansion from M&S reinforces our confidence in the park.
St. Christopher’s
Place Estate
The estate is the principal food and
beverage destination for the area around the Bond Street/Oxford
Street interchange and is a core investment with a history of
strong performance. The estate ownership includes two retail stores
located on Oxford Street and their revaluation accounted for
approximately 90 per cent of an overall reduction in the estate’s
value of 5.6 per cent during 2019.
As mentioned previously, Oxford Street
has recently experienced many challenges, with some significant
large store vacancies, redevelopments and an increase in smaller
store availability, especially at either end of the street. This is
evidenced by prime Zone A rental values falling from a peak of £990
per sq. ft. to £850 per sq. ft., and capitalisation rates moving
out by around 50 basis points. The ongoing delay in the opening of
the Elizabeth Line has not helped the situation. On the positive
side, key stakeholders have been investing in the immediate
vicinity including Westminster City Council with the Oxford Street
District Realm Project, and Selfridges’ ongoing investment in both
its department store and an important redevelopment of the corner
of Duke Street and Oxford Street.
Our asset management strategy for the
estate has been a combination of refurbishment, repurposing and
selective re-lettings. We have completed lettings to Leica Camera, Flat Iron and HighBrook Investors
during the year.
Offices
We completed the major refurbishment of
Ness & Nevis House, Edinburgh Park in April 2019, and the letting to Diageo completed
in December 2019. This is now
Diageo’s Scottish headquarters and they occupy the building on a
new 16-year lease (break at year 10) at a rent of £21 per sq.
ft.
We also let two floors at the
refurbished Cassini House,
London SW1. Shore Capital took the
fourth and fifth floors at headline rents of £105 sq. ft. for a
10-year term (tenant break at year 5). This letting was in line
with the valuers estimated rental value (ERV) and had an accretive
impact on valuation.
Post the reporting period, we have let
the sixth floor to Mitsui Fudosan on a new 10-year lease (break at
year 5) at a rent of £106 per sq. ft. This letting completes the
major refurbishment project, which commenced in early 2018 at a
total cost in excess of £9 million, and which has resulted in
significant valuation uplifts. Cassini
House is a prime freehold office building of exceptional
quality in a core St. James’ location with an attractive lease
profile.
Having sold two buildings at Watchmoor
Park, Camberley, Building C is the Company’s remaining ownership.
There was successful leasing activity ahead of the Novartis lease
expiry in 2020, with lettings to Alcon (approximately 19,000 sq.
ft.) and Sandoz (approximately 8,000 sq. ft.), both at a rent of
£22.50 per sq. ft, which represents a significant uplift on the
current passing rent of £14.00 per sq. ft. There remains 20,000 sq.
ft. to be let and this is currently being marketed.
Due to lease breaks and expiries at 17a
Curzon Street, a full refurbishment of the first, second and fourth
floors were undertaken. The works completed in November 2019 at a cost of £1.25 million. These
floors are being marketed at £85 per sq. ft. with the fourth floor
under offer.
Office Sales
During the twelve months, we progressed
our strategic sales programme disposing of non-income producing
assets with challenging re-letting prospects. The largest of these,
Thames Valley Park One and Thames Valley Park Two, exchanged in
December 2018 and completed in
January 2019 at a combined sale price
of £24.5 million. This sale removed 103,900 sq. ft. of vacant
office space from the portfolio, which would have required around
£8 million of reinvestment to undertake an extensive refurbishment.
In April 2019, Building A, Watchmoor
Park, Camberley, sold for a net price of £3.94 million. We believe
these sales were well timed, as investor sentiment and pricing for
“risk on” assets diminished during the second half of the year.
Industrial and logistics
The performance of the industrial and
logistics assets was hindered by the stagnation of business
activity arising from political and Brexit uncertainty.
Frustratingly this coincided with a
lack of any significant lease event dates occurring naturally
within the calendar year. These traditionally offer an opportunity
to outperform, be it through a strong rent review settlement, or a
value enhancing lease renewal. Despite our continued direct
engagement and in some cases lengthy negotiations, the vast
majority of logistics tenants continued to resist concluding any
short or medium-term initiatives. In most instances these
opportunities are deferred as opposed to lost for good. In line
with this general deferral strategy, we elected to deploy it
ourselves in pushing out two potential break dates with tenants in
Southampton and Hams Hall,
Birmingham, which was sensible
given the risk and potential timescale for vacancies.
The letting of Hurricane 47, Estuary
Business Park, Liverpool, has been
slower than envisaged, having been impacted by concerns regarding
the UK’s motor vehicle production industry. Leasing agents have
been reporting interest from prospective tenants from a wider
manufacturing and services base. Construction works for a second
warehouse on the adjacent site have not started and the programme
has been deferred.
Industrial sale
The sale of Phase 1 of the former
Ozalid Works site in Colchester
completed to Persimmon Homes at a price of £6.0 million. The sale
of Phase 2 will complete in July
2020. The sale followed extensive and lengthy negotiations
to secure a revised residential planning consent and was an
excellent result for the Company, allowing us to dispose of a
non-income producing site and obsolete light industrial units at
above market valuation.
The Alternative Property Sector
Alternatives comprise 9.8 per cent of
the portfolio and 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.
Outlook
The improved sentiment seen at the
close of 2019 and in early 2020 dissipated and went into sharp
reverse as fears about the impact of COVID-19 gathered force. The
crisis has led to major changes to fiscal and monetary policy both
in the UK and abroad and a significant downgrading of economic
forecasts. The financial markets are in disarray and in property,
open-ended funds have been gated as valuers cannot determine “true
value” in such a climate. The severity and duration of the COVID-19
outbreak is unknown but inevitably such a shock will affect
performance. With businesses struggling, prospects for rental
growth are limited and capital values are expected to remain under
pressure.
As we continue to monitor ongoing
developments regarding the outbreak of COVID-19, the Manager is
taking every precaution to safeguard the health and wellbeing of
staff, occupiers and customers. The Manager has robust business
continuity plans to ensure they can maintain operations in these
challenging times. Policies have been thoroughly reviewed again
since the outbreak, and the Board are in close contact with senior
management and business continuity teams across the BMO Financial
Group to assess the situation and react accordingly. A work from
home policy has been introduced by the Manager across all
geographies with all employees to follow government advice
regarding personal travel.
The economy and the property market
still has to contend with Brexit and although the triggering of the
transition period in January 2020
provided some clarity, it is by no means assured that a deal will
be reached and the exit terms and their impact on the economy are
still to be determined. We also believe that the structural
adjustments in the retail sector are not yet complete.
Whilst the current situation is
extremely difficult and the short-term outlook is filled with
uncertainty and risk, in due course the retail market will reach an
equilibrium, Brexit will be determined and COVID-19 will pass or be
a measurable risk. In the longer-term, the changes to lifestyles
and working practices may persist and present opportunities for
`the property industry. The period ahead is likely to be volatile
and characterised by a focus on optimising and protecting the
income stream.
Richard
Kirby
Fund Manager
BMO REP Asset Management plc
BMO Commercial Property Trust Limited
Consolidated Statement of Comprehensive Income (audited)
|
|
Year
ended
31 December
2019 |
Year
ended
31 December
2018 |
|
|
£’000 |
£’000 |
Revenue |
|
|
|
Rental income |
|
64,380 |
64,903 |
Other income |
|
- |
1,483 |
|
|
--------- |
--------- |
Total revenue |
|
64,380 |
66,386 |
|
|
|
|
(Losses)/gains on investment
properties |
|
|
|
Unrealised losses on revaluation of
investment properties |
|
(63,045) |
(6,171) |
Gains on sale of investment
properties realised |
|
1,321 |
2,613 |
|
|
---------- |
---------- |
Total
income |
|
2,656 |
62,828 |
|
|
---------- |
---------- |
Expenditure |
|
|
|
Investment management
fee |
|
(7,446) |
(7,823) |
Other expenses |
|
(5,877) |
(6,191) |
|
|
---------- |
---------- |
Total expenditure |
|
(13,323) |
(14,014) |
|
|
----------- |
----------- |
Operating (loss)/profit before
finance costs and taxation |
|
(10,667) |
48,814 |
|
|
----------- |
----------- |
Net finance costs |
|
|
|
Interest receivable |
|
42 |
6 |
Finance costs |
|
(10,916) |
(10,912) |
|
|
----------- |
----------- |
|
|
(10,874) |
(10,906) |
|
|
----------- |
----------- |
(Loss)/profit before
taxation |
|
(21,541) |
37,908 |
|
|
|
|
Taxation |
|
(934) |
(1,510) |
|
|
---------- |
---------- |
(Loss)/profit for
the year |
|
(22,475) |
36,398 |
|
|
---------- |
---------- |
Other comprehensive
income |
|
|
|
Items that are or may be
reclassified subsequently to profit or loss |
|
|
|
Movement in fair value of effective
interest rate swaps |
|
(319) |
362 |
|
|
---------- |
---------- |
Total comprehensive income for
the year, net of tax |
|
(22,794) |
36,760 |
|
|
---------- |
---------- |
|
|
|
|
Basic and diluted earnings per
share |
|
(2.8)p |
4.6p |
All of the profit and total comprehensive income 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
31 December
2019
£’000 |
As at
31 December
2018
£’000 |
Non-current assets |
|
|
Investment properties |
1,314,973 |
1,384,856 |
Trade and other receivables |
20,816 |
19,344 |
Interest rate swap |
- |
102 |
|
------------ |
------------ |
|
1,335,789 |
1,404,302 |
|
------------ |
------------ |
Current assets |
|
|
Investment properties held for
sale |
5,235 |
23,562 |
Trade and other receivables |
7,561 |
6,630 |
Taxation receivable |
112 |
- |
Cash and cash equivalents |
25,894 |
10,127 |
|
------------ |
------------ |
|
38,802 |
40,319 |
|
------------ |
------------ |
Total assets |
1,374,591 |
1,444,621 |
|
------------ |
------------ |
|
|
|
Current liabilities |
|
|
Trade and other
payables
Taxation payable |
(17,197)
- |
(16,282)
(1,029) |
|
------------ |
------------ |
|
(17,197) |
(17,311) |
Non-current liabilities |
|
|
Trade and other payables |
(2,119) |
(1,847) |
Interest-bearing loans |
(308,366) |
(308,015) |
Interest rate swaps |
(217) |
- |
|
------------ |
------------ |
|
(310,702) |
(309,862) |
|
------------ |
------------ |
Total liabilities |
(327,899) |
(327,173) |
|
------------ |
------------ |
Net assets |
1,046,692 |
1,117,448 |
|
------------ |
------------ |
|
|
|
Represented by: |
|
|
Share capital |
7,994 |
7,994 |
Special reserve |
589,593 |
589,593 |
Capital reserve – investments
sold |
(20,725) |
1,708 |
Capital reserve – investments
held |
370,946 |
410,237 |
Hedging reserve |
(217) |
102 |
Revenue reserve |
99,101 |
107,814 |
|
------------ |
------------ |
Equity shareholders’
funds |
1,046,692 |
1,117,448 |
|
------------ |
------------ |
Net asset value per
share |
130.9p |
139.8p |
BMO Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2019
(audited)
|
Share Capital
£’000 |
Special
Reserve
£’000 |
Capital
Reserve -
Investments Sold
£’000 |
Capital Reserve
– Investments Held
£’000 |
Hedging Reserve
£’000 |
Revenue
Reserve
£’000 |
Total
£’000 |
At 1 January 2019 |
7,994 |
589,593 |
1,708 |
410,237 |
102 |
107,814 |
1,117,448 |
Total comprehensive
income for the year |
|
|
|
|
|
|
|
Loss for the year |
- |
- |
- |
- |
- |
(22,475) |
(22,475) |
Movement in fair value
of interest rate swaps |
- |
- |
- |
- |
(319) |
- |
(319) |
Transfer in respect of unrealised
losses on investment properties |
- |
- |
- |
(63,045) |
- |
63,045 |
- |
Gains on sale of investment
properties realised |
- |
- |
1,321 |
- |
- |
(1,321) |
- |
Transfer of prior years’
revaluations to realised reserve |
- |
- |
(23,754) |
23,754 |
- |
- |
- |
Total comprehensive income for
the year |
- |
- |
(22,433) |
(39,291) |
(319) |
39,249 |
(22,794) |
|
|
|
|
|
|
|
|
Transactions with owners of the
Company recognised directly in equity |
|
|
|
|
|
|
|
Dividends paid |
- |
- |
- |
- |
- |
(47,962) |
(47,962) |
At 31 December 2019 |
7,994 |
589,593 |
(20,725) |
370,946 |
(217) |
99,101 |
1,046,692 |
Consolidated Statement of Changes in
Equity
for the year ended 31 December 2018
(audited)
|
Share Capital
£’000 |
Special
Reserve
£’000 |
Capital
Reserve -
Investments Sold
£’000 |
Capital Reserve
– Investments Held
£’000 |
Hedging Reserve
£’000 |
Revenue
Reserve
£’000 |
Total
£’000 |
At 1 January 2018 |
7,994 |
589,593 |
7,063 |
408,440 |
(260) |
115,820 |
1,128,650 |
Total comprehensive
income for the year |
|
|
|
|
|
|
|
Profit for the
year |
- |
- |
- |
- |
- |
36,398 |
36,398 |
Movement in fair value
of interest rate swaps |
- |
- |
- |
- |
362 |
- |
362 |
Transfer in respect of unrealised
losses on investment properties |
- |
- |
- |
(6,171) |
- |
6,171 |
- |
Gains on sale of investment
properties realised |
- |
- |
2,613 |
- |
- |
(2,613) |
- |
Transfer of prior years’
revaluations to realised reserve |
- |
- |
(7,968) |
7,968 |
- |
- |
- |
Total comprehensive income for
the year |
- |
- |
(5,355) |
1,797 |
362 |
39,956 |
36,760 |
|
|
|
|
|
|
|
|
Transactions with owners of the
Company recognised directly in equity |
|
|
|
|
|
|
|
Dividends paid |
- |
- |
- |
- |
- |
(47,962) |
(47,962) |
At 31 December 2018 |
7,994 |
589,593 |
1,708 |
410,237 |
102 |
107,814 |
1,117,448 |
BMO Commercial Property Trust Limited
Consolidated Statement of Cash Flows (audited)
|
Year ended 31
December 2019 |
Year ended 31
December 2018 |
|
£’000 |
£’000 |
Cash flows from operating
activities |
|
|
(Loss)/profit for the year before
taxation |
(21,541) |
37,908 |
Adjustments for: |
|
|
Finance
costs |
10,916 |
10,912 |
Interest
receivable |
(42) |
(6) |
Unrealised
losses on revaluation of investment properties |
63,045 |
6,171 |
Gains on
sale of investment properties realised |
(1,321) |
(2,613) |
Increase in
operating trade and other receivables |
(2,617) |
(2,054) |
Increase /
(decrease) in operating trade and other payables |
1,307 |
(2,317) |
|
----------- |
----------- |
Cash generated from
operations |
49,747 |
48,001 |
|
----------- |
----------- |
Interest
received |
42 |
6 |
Interest
and bank fees paid |
(10,549) |
(10,551) |
Tax
paid |
(2,076) |
(1,220) |
|
----------- |
----------- |
|
(12,583) |
(11,765) |
|
----------- |
----------- |
Net cash inflow from operating
activities |
37,164 |
36,236 |
|
----------- |
----------- |
Cash flows from investing
activities |
|
|
Purchase of investment
properties |
- |
(5,754) |
Sale of investment properties |
34,428 |
5,100 |
Capital expenditure |
(7,863) |
(12,649) |
|
----------- |
----------- |
Net cash inflow / (outflow) from
investing activities |
26,565 |
(13,303) |
|
----------- |
----------- |
Cash flows from financing
activities |
|
|
Dividends paid |
(47,962) |
(47,962) |
|
----------- |
----------- |
Net cash outflow from financing
activities |
(47,962) |
(47,962) |
|
----------- |
----------- |
Net increase / (decrease) in cash
and cash equivalents |
15,767 |
(25,029) |
Opening cash and cash
equivalents |
10,127 |
35,156 |
|
----------- |
----------- |
Closing cash and cash
equivalents |
25,894 |
10,127 |
|
----------- |
----------- |
BMO Commercial Property Trust
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 Company'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 Company in managing the risks and uncertainties to
which it is exposed.
Principal risks and uncertainties faced by the Company are
described below and in note 1, which provides detailed explanations
of the risks associated with the Company’s financial
instruments.
• Market – the
Company’s assets comprise direct investments in UK commercial
property and it is therefore exposed to movements and changes in
that market.
• Investment and
strategic – poor investment decisions and incorrect strategy,
including sector and geographic allocations, use of gearing,
inadequate asset management activity and tenant defaults could lead
to poor returns for shareholders.
• Regulatory – breach
of regulatory rules could lead to suspension of the Company’s
London Stock Exchange listing, financial penalties or a qualified
audit report.
• Environmental –
inadequate attendance to environmental factors by the Managers,
including those of a regulatory and market nature and particularly
those relating to energy performance, health and safety, climate
risk and environmental liabilities, leading to the reputational
damage of the Company, reduced liquidity in the portfolio, and/or
negative asset value impacts.
• Tax structuring and
compliance – the Company should ensure compliance with relevant tax
rules and thresholds at all time. Changes to tax legislation could
have an adverse financial impact.
• Operational –
failure of the Managers’ accounting systems or disruption to its
business, or that of other third party service providers, could
lead to an inability to provide accurate reporting and monitoring,
leading to a loss of shareholders’ confidence.
• Financial –
inadequate controls by the Managers or other 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.
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 Company’s property portfolio. The
Managers seek 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 of the properties in the portfolio are insured.
As well as considering current risks quarterly, the Board and
the Investment Manager carry out a separate annual assessment of
emerging risks when reviewing strategy and evaluate how these could
be managed or mitigated. However, the Board considers that the line
between current and emerging risks is often blurred and many of the
emerging risks identified are already being managed to some degree
where their effects are beginning to impact.
The principal emerging risks identified are outlined below:
· The structural changes in the retail
market is a significant emerging risk, particularly as the
prominence of online shopping continues to increase. Over the last
two years the market has experienced a number of high-profile
retailers going out of business, downsizing, closing stores and
negotiating flexible leases at lower rents. With an increasing
number of vacant stores, the challenge is to find different uses
for commercial property, whether that’s for residential, leisure,
food and beverage, or other alternative uses.
· The ESG agenda is a very prominent one
and will continue to grow in its importance to Shareholders, future
investors and our customers. As discussed in our ESG report, we
have already made significant strides in this area and we will
continue to do so. The increasing market attention being paid to
climate risk and social impact have been notable features of the
evolving agenda over the last year, and those need to be considered
more explicitly in property investment and management activity than
has been the case previously.
· The political climate continues to be
uncertain and as well as the ongoing effects of Brexit, there are
strong calls for another Scottish referendum. During times of
heightened uncertainty, a key benefit to the Company is its
closed-ended structure, in that it is not forced to sell property
during stressed times.
· Legislative changes are always a risk,
particularly where they are politically driven and may cause
changes in our property allocation. Such issues might involve some
style of rent control or an escalation of regulatory oversight on
ESG factors, particularly in responding to the climate
emergency.
· The impact of technology increasingly
means that things change very quickly which is an opportunity as
well as a risk, and it is important that we continue to keep
abreast of what is happening in this space.
· Post period end, the developing threat
from COVID-19 is the dominant risk for the global economy, and by
extension the UK property market. The severity of the threat is
becoming clearer by the day with the likelihood of significant
disruption to all sectors worldwide. This threat has an ongoing
effect on many of our principal risks and the Board will be meeting
regularly with the Manager to assess these risks and how they can
be managed. More detail is included in the Chairman’s Statement and
the Manager’s Report. Of particular concern is the Company’s cash
flow, given the number of expected tenant defaults in the
short-term. The Board and the manager review on a daily basis the
cash collected and have taken the decision to temporarily suspend
the monthly dividend and to defer capital expenditure to maximise
the cash reserves available. In addition, the Group is in regular
contact with its lenders in case the decline in rent collected
causes certain covenants to be breached or become close to being
breached.
To help manage emerging risks and discuss other wider topics
affecting property, the Board invites to its annual strategy
meeting various experts to give their views and promote discussion.
The Board considers having a clear strategy is the key to managing
and mitigating emerging risk.
The highest residual risks encountered during the year, how they
are mitigated and actions taken to address these are set out in the
table below.
Highest Residual Risks |
Mitigation |
Actions taken in the year |
Unfavourable markets, poor stock selection, inappropriate asset
allocation and underperformance against benchmark and/or peer
group. This risk may be exacerbated by gearing levels.
A challenging retail market where rental growth is generally
negative and capital values are falling as capitalisation rates
rebase.
This market has witnessed many company voluntary arrangements and
administrations in the last two years. There is an increased risk
of tenant defaults in this sector which could put the level of
dividend cover at risk. |
The underlying investment strategy, performance, gearing and
income forecasts are reviewed with the Investment Manager at each
Board Meeting. The Company’s portfolio is well diversified and of a
high quality. Gearing is kept at modest levels and is monitored by
the Board.
The Manager provides regular information on the expected level of
rental income that will be generated from underlying properties.
The portfolio is well diversified by geography and sector and the
exposure to individual tenants is monitored and managed to ensure
there is no over exposure. |
The Board reviews the Manager’s performance at quarterly
Board meetings against key performance indicators and the ongoing
strategy is reviewed and agreed.
The portfolio has been impacted by several CVA’s and
administrations at its retail parks over the last 2 years. This has
had an impact on the rental income and the valuation of these
assets. A number of the stores affected have now re-let as a result
of business plans actioned to manage these events. The detail of
these is included in the Manager’s Report. |
Risk increased in the year under review |
The share price has
been trading at a discount to NAV which has been as wide as 22.2
per cent and significantly wider post year-end following the
COVID-19 outbreak. Such an imbalance can diminish the
attractiveness of the Company to existing investors. |
The
discount is reported to and reviewed by the Board at least
quarterly. Share buybacks as a means of narrowing the discount or
as an attractive investment for the Company are considered and
weighed up against the risks. The position is monitored by the
Manager on a daily basis and any material changes are investigated
and communicated to the Board more regularly. |
Investors
have access to the Manager and the underlying team who will respond
to any queries they have on the discount. The number of meetings to
discuss the discount increased during the year. At the Board’s
request there has been increased reporting from the broker on the
market and the shareholder feedback they are receiving. |
Risk increased in the year under review |
Improved
shareholder communication is key in the current environment with
valuations falling and the shares trading at a significant
discount.
It is important that all shareholders have access to information on
how the Company is being run in order to make informed investment
decisions, which will help to mitigate widespread selling of the
Company’s shares. |
The Investment Manager and broker regularly meet significant
shareholders. The Chairman and Senior Independent Director meet the
largest shareholder annually and are available to meet other
shareholders.
The website is kept up to date and contains relevant information;
complying with any regulatory requirements.
A comprehensive Annual Report is produced, which is independently
audited. |
The quality of communication continues to evolve. Actions
during the year include:
• Refreshment of the Company’s website which has an enhanced look
and feel, providing greater detail on the Company’s portfolio.
• Additional commentary in the quarterly NAV announcements.
• An increased number of meetings with investors through meetings
arranged by the Manager’s investor relations team. |
Risk increased in the year under review |
Viability Assessment and Statement
The Board conducted this review over a five-year time horizon, a
period thought to be appropriate for a Company investing in
commercial property with a long-term investment outlook, with
primary borrowings secured for a further four years, a continuation
vote in 2024 and a property portfolio with an average unexpired
lease length of 6.6 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 property 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 Company’s property portfolio, the existence of the
long-term borrowing facility, the effects of any significant future
falls in investment property values and property income receipts on
the ability to repay and re-negotiate borrowings, maintain dividend
payments and retain investors. These matters were assessed over a
period to April 2025, and the
Directors will continue to assess viability over five 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 for five years. 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 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 diminution of rental values over
the next two years, followed by three years of zero growth. The
model demonstrated that even under these extreme circumstances the
Company remains viable.
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 2025. For this reason, the Board also
considers it appropriate to continue adopting the going concern
basis in preparing the Annual Report and Consolidated Accounts.
The Company continues to monitor the potential impact of the
COVID-19 virus on cash flows. Particular attention is paid to the
circumstances of all the tenants in the portfolio and detailed
modelling is performed on a day to day basis as events unfold. At
this stage it is not possible to predict what the full impact will
be.
Detailed modelling has been performed, which has looked at the
impact of the current crisis under increasingly negative scenarios
and the effect of a suspension in paying out dividends to preserve
cash. The modelling demonstrates that the Company remains
viable.
We have also reviewed the Company’s position regarding its loan
covenants.
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 42 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 69 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 June 2021. The LTV test should
remain comfortable with a fall of 64 per cent of the market value
of the properties secured under this loan being required before
breaching. The assets secured under this loan relate to the St
Christopher’s Place Estate and the level of rental income
receivable from these assets will be significantly impacted. The
interest cover test is therefore expected to become more
challenging. This particular covenant test has been discussed with
Barclays, who are sympathetic given current events, and they have
confirmed that they are prepared to support the business through
this uncertain period.
BMO Commercial Property Trust
Limited
Going Concern
In assessing the going concern basis of accounting the Directors
have had regard to the guidance issued by the Financial Reporting
Council. They have reviewed detailed cash flow, income and expense
projections in order to assess the Company’s ability to pay its
operational expenses, 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.
Having taken the decision to suspend the dividend and held
discussions with lenders, they have not identified any material
uncertainties which cast significant doubt on the ability to
continue as a going concern for the foreseeable future, which is
considered for a period of not less than 12 months from the date of
the approval of the financial statements. The Board believes it is
appropriate 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 2019, 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 include 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
Martin Moore
Director
BMO Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year ended 31 December
2019
1. Financial
Instruments and investment properties
The Company’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. 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 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 Managers monitor such
reports in order to anticipate, and minimise the impact of,
defaults by occupational tenants.
All of the Group’s cash is placed with financial institutions
with a long-term 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.
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 2.522 per cent per annum
until the maturity date of 21 June
2021. 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
2019. The revolving credit facility pays an undrawn
commitment fee of 0.60 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 0.75 per cent as at
31 December 2019 (2018: 0.75 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 799,366,108 Ordinary Shares in issue at 31 December 2019 (2018: 799,366,108).
At 31 December 2019, the Company
did not hold any Ordinary Shares in treasury (2018: nil).
3. Earnings
per share
The basic and diluted earnings per Ordinary Share are based on
the loss for the year of £22,475,000 (2018: profit £36,398,000) and
on 799,366,108 (2018: 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. Capital
Commitments
The Group had capital commitments totalling £2,100,000 as at
31 December 2019 (2018: £3,600,000).
These commitments related mainly to contracted development work at
the Group’s property at 56 James Street, St. Christopher’s Place
Estate, London.
6. Post
Balance Sheet Events and COVID-19 impact
The outbreak of the Novel Coronavirus (COVID-19), declared by
the World Health Organisation as a “Global Pandemic” on the
11 March 2020, has had a significant
effect on the global economy and by extension the UK property
market and stock markets. Of particular concern is the Company’s
cash flow, given the number of expected tenant defaults in the
short-term and the Board has therefore taken the decision to
temporarily suspend future dividends with immediate effect. The
Chairman’s Statement and the Manager’s Report consider the possible
impact upon the Company.
The Group has billed c.£9m of its quarter 2 rent due on 25 March
and has collected 74 per cent of this amount to date (compared to
96 per cent for the same period last year). The total quarterly
rent amounts to c.£16 million and a high proportion of the balance
relates to rent at St. Christopher’s Place, not scheduled to be
billed until 21 April. Based on dialogue with tenants at St.
Christopher’s Place we would expect the overall percentage
collected across the portfolio for quarter 2 to drop. We also
suspect the quarter 3 rent collection commencing in June will be
equally challenging. Given this background, the Board has taken the
decision to temporarily suspend future dividends with immediate
effect. The Board currently intends to re-introduce monthly
distributions when deemed appropriate, based on their assessment of
the likely duration of continued market disruption as a result of
COVID-19 and the level of retained cash reserves within the
Group.
7. These are not
full statutory accounts. The full audited accounts for the year to
31 December 2019 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 – The percentage
by which Profits for the year (less Gains/losses on investment
properties) cover the dividend paid.
A reconciliation of dividend cover is
shown below:
|
|
|
2019 |
2018 |
|
|
|
£’000 |
£’000 |
|
|
|
|
|
(Loss)/Profit for the
year |
|
|
(22,475) |
36,398 |
Add back: |
Unrealised losses on revaluation of
investment properties |
|
63,045 |
6,171 |
|
Gains on sales of investment
properties realised |
|
(1,321) |
(2,613) |
|
Other income |
|
- |
(1,483) |
Profit before investment
gains and losses |
(a) |
39,249 |
38,473 |
Dividends |
|
(b) |
47,962 |
47,962 |
Dividend Cover
percentage (c= a/b) |
(c) |
81.8 |
80.2 |
|
|
|
|
|
Dividend Yield – The annualised
dividend 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