TIDMBREI
To: RNS
Date: 28 September 2020
From: BMO Real Estate Investments Limited
LEI: 231801XRCB89W6XTR23
· Portfolio ungeared total return* of -0.6 per cent for the year
· NAV total return* of -3.7 per cent for the year
· Dividend of 4.375 pence per share for the year, giving a yield* of 7.8 per
cent on the year-end share price
· Dividend cover decreased to 84.3 per cent for the year from 89.4 per cent
* See Alternative Performance Measures
Chairman's Statement
We are reporting in the midst of the Covid-19 pandemic and the resultant
economic disruption. The end of the Brexit transition period is also upon us,
with no clarity on a deal. These factors have led to the U.K. commercial
property sector having a very difficult 2020.
Against this background, the Group's net asset value ('NAV') total return for
the year ended 30 June 2020 was -3.7 per cent with a NAV per share as at 30
June 2020 of 96.6 pence, down from 104.8 pence per share at the prior year-end.
The share price total return for the year was -24.9 per cent with the shares
trading at 56.0 pence per share at 30 June, a discount of 42.0 per cent to the
NAV. Large discounts have been experienced across the real estate sector in a
period of falling NAV's with many companies either cutting or suspending
dividends in a market where rental collection has become challenging.
Property Market
The UK commercial property market delivered a total return of -2.7 per cent as
measured by the MSCI UK Quarterly Property Index ('MSCI') for all assets in the
year to 30 June 2020. Total return performance was marginally positive in the
first half of the year, but negative returns were experienced in the second six
months following the impact of Covid-19. The annual all-property income return
was 4.5 per cent and capital values fell by 6.8 per cent in the year.
The UK property market went into sharp reverse in March as lockdown was imposed
but monthly total returns, although negative, have been on a consistently
improving trend since then. A material uncertainty clause was applied by
valuers in March, which reflects the fact that there is less certainty in the
valuations, given the unknown future impact that Covid-19 might have on the
real estate market. Valuers are therefore exercising a higher degree of caution
and giving less weight to previous market evidence for comparison purposes.
This 'material uncertainty' clause no longer applies to industrial, logistics
and distribution assets.
The downturn has been notable for weakness in the occupational market and
reduced rates of rent collection, as well as a decrease in property valuations
across most sectors. The impact on performance has been particularly severe for
retail, leisure and hospitality where reduced rates of rent collection have
been experienced. Industrials, offices, supermarkets and residential have been
relatively resilient. Investment activity in the final quarter dropped sharply
as sentiment was hit by the scale of economic dislocation. There has been no
flight of capital or mass distressed selling, but some transactions have been
aborted, others put on long-term hold and very little new stock released. Some
deals have gone ahead, especially for long lease indexed supermarket stock and
industrial and distribution assets.
Performance
The Group's property portfolio produced an ungeared total return of -0.6 per
cent over the year to June 2020 compared with MSCI which recorded -2.7 per cent
over the same period. The portfolio has also outperformed MSCI over three years
and as a result, the Manager is eligible for the maximum performance fee. The
Board are conscious of the sensitivity of paying performance fees in a market
of negative returns and following discussions between the Board and the
Manager, a reduction in the performance fee for the year of 50 per cent has
been negotiated. It has also been agreed that from 1 July 2020 performance fees
will be removed from the investment management fee.
The relative outperformance has primarily been driven by the allocation to
industrial, logistics and distribution assets which accounted for 43.4 per cent
of the portfolio at the year end. The portfolio continues to experience a low
vacancy rate which currently stands at 3.3 per cent, compared to an average of
7.5 per cent for the index as measured by MSCI. Rent collection has also
benefited over recent quarters by the absence of shopping centre, department
store, hotel, leisure and student accommodation exposure, and the very small
exposure to the food and beverage sector.
The Manager has been engaging with tenants given the challenges faced by many
to meet quarterly rental commitments at this time. The trading restrictions put
in place by the Government resulted in the closure of many of our retail units,
although the vast majority have now commenced trading, albeit with social
distancing measures in place. Collection rates for the last two quarters are
ahead of expectations and currently stand at 94.1 per cent for the March to
June quarter and 90.0 per cent for the June to September quarter.
Both the office assets and the industrial, logistics and distribution assets
delivered positive returns over the year of 6.1 per cent and 4.0 per cent
respectively, with capital returns of 1.1 per cent for offices and -0.6 per
cent for industrials, logistics and distribution. These two sectors now make up
73.2 per cent of the portfolio by value.
The retail market continues to suffer with the pace of valuation falls
accelerating further, led by the anticipated rebasing of rents across much of
the high street and shopping centre submarkets. Against this background, the
Company's retail portfolio as a whole delivered -12.4 per cent compared to
-12.6 per cent for MSCI. A large portion of the Company's retail exposure is
low rented, functional, retail warehouses. The majority of the Company's
tenants in this space were able to remain open throughout lockdown. This was
demonstrated by the 94 per cent collection from this part of the portfolio for
the March to June quarter, with monthly payment plans having been put in place
to assist some tenants with cashflow where justified.
Cash and Borrowings
The Group has approximately GBP13.7 million of available cash and an undrawn
revolving credit facility of GBP20 million. The Group's GBP90 million long-term
debt with Canada Life and the undrawn loan facility with Barclays do not need
to be refinanced until November 2026 and March 2025 respectively. As at 30 June
2020, the Group's net gearing was 25.6 per cent and there was significant
headroom under debt covenants. The weighted average interest rate (including
amortisation of refinancing costs) on the Group's total current borrowings was
3.1 per cent. The Company continues to maintain a prudent attitude to gearing.
Dividend
Two interim dividends of 1.25 pence per share were paid during the year with a
third interim dividend of 0.625 pence per share paid on 30 June 2020. This was
a 50 per cent reduction on previous quarterly dividends, reflecting the fact
that rent collection was likely to be challenging in the coming months and that
the Group had been paying a dividend which had not been fully covered over the
course of the financial year. The Board therefore considered it prudent to
reduce the level of its future quarterly dividend payments in order to protect
cash reserves and the long-term value of the Group.
A fourth interim dividend of 0.625 pence per share will be paid on 30 September
2020 and the Board will continue to monitor closely the impact of Covid-19 on
rental receipts and earnings and keep the future level of dividends under
review.
Environmental, Social and Governance ('ESG')
The Company continues to make good progress in advancing its ESG strategy with
the improvement demonstrated in a number of key industry indicators. An
increase in the Company's annual Global Real Estate Sustainability Benchmark
(GRESB) score is a notable achievement this year and provides a positive
independent assessment of the successful results our Property Manager has
delivered across a broad array of sustainability related measures.
Our portfolio level successes are driven by many and varied interventions at
local property level where we strive for efficiency and impact. When combined,
this has created a solid platform from which to drive further progress. As a
Board, we continue to give considerable attention to our ESG commitments and
support our Property Manager in responding proactively to this important
requirement. A more detailed summary of progress is included in the Annual
Report, and a full review will be shared in the separate 2020 ESG Report,
available on the Company's website.
Board Composition
Having served 16 years on the Board, Andrew Gulliford had indicated his
intention to retire by this year's AGM. The Board commenced its search for a
suitable replacement, but this process was suspended as a result of the
Covid-19 pandemic. We consider the stability of the Board to be very important
at this time and Andrew's in-depth knowledge of the Company and its portfolio
has been invaluable. The recruitment of a non-executive Director with the
appropriate property experience will recommence in due course but meantime,
Andrew has agreed to stand for re-election at this year's AGM and serve on the
Board until a new appointment is made. As part of this process, consideration
will also be given to the requirement to seek, where appropriate, additional
diversity within the Board.
Annual General Meeting
The AGM is currently scheduled to be held on 17 November 2020 at the offices of
BMO Global Asset Management, Quartermile 4, 7a Nightingale Way, Edinburgh, EH3
9EG at 12.00pm. Despite the easing of some lockdown measures which were put in
place due to Covid-19, some restrictions remain, including guidance on social
distancing and given public health concerns, the meeting will not be held in
the usual format.
It will be restricted to the formal business of the meeting as set out in the
Notice of the Annual General Meeting on pages 77 to 78 of the Annual Report and
will follow the minimum legal requirements for an AGM. On this occasion the
Fund Manager will not attend the meeting, but a presentation will be made
available on the Company's website together with some frequently asked
questions after the AGM.
Shareholders are strongly discouraged from attending the meeting and entry may
be restricted and/or refused in accordance with the Articles, the law and/or
Government guidance.
Your Board strongly encourage all shareholders to make use of the proxy form or
form of direction provided in order that you can lodge your votes. Voting on
all resolutions will be held on a poll, the results of which will be announced
and posted on the Company's website following the meeting.
In view of the revised format this year, should shareholders have any questions
or comments in advance of the AGM these can be raised with the Company
Secretary (BREICoSec@bmogam.com).
Outlook
Although the next few months may see positive economic data as some
restrictions ease, and growth resumes from a low base, we expect the recovery
to be slow. There is likely to be increased unemployment as the furlough scheme
ends, which could delay recovery, and further waves of infection and lockdowns
cannot be ruled out. It looks probable that there will be a permanent shift in
the property market, particularly in retail where online shopping has
accelerated and in the office sector where there are and will be increasing
numbers working from home.
Although the lockdown measures began to be eased towards the end of our
financial year, the economic outlook remains highly uncertain and the trading
position of many occupiers is extremely challenged. It will take time for
output to return to pre Covid-19 levels and for many businesses the new
economic reality will look very different to that prior to the outbreak.
In the short term, securing income due under existing lease contracts remains
the Manager's primary focus. The Company's diverse occupier base offers some
defence in this regard as does the weighting towards industrial, logistics and
distribution and offices.
We expect that the Company will continue to be impacted by current uncertain
markets for the rest of 2020 and into 2021 and at the time of writing further
restrictions have been put in place by the government. However, the portfolio
is well balanced in terms of quality, sector and geography. This, combined
with sufficient cash resources and comparatively strong rental collection,
provides resilience during this difficult period.
We wish our shareholders well during the coming difficult months.
Vikram Lall
Chairman
Manager's Review
Portfolio headlines over the year
· The Company portfolio delivered an ungeared total return of -0.6 per cent
over the year.
· Outperformance against the MSCI Quarterly Property Universe ("MSCI or 'the
index") over the year, as well as over the three and five years to June 2020.
The portfolio has outperformed the index over the 16 years since inception.
· Outperformance driven by a relatively high income return and weighting to
Industrials.
· Income return of 5.2 per cent over the year to June 2020.
· Further sales from the retail portfolio demonstrate the liquidity of the
Company asset base.
· Successful completion of asset management initiatives over the year and
continued demand for the Company's properties have held the vacancy rate at 3.3
per cent, well below the MSCI average of 7.6 per cent.
· The structural overweight to Industrials (43 per cent by capital value)
and the South East (65 per cent) has been preserved.
· Rental collection for the March-June Quarter of 94.1 per cent with further
sums expected. Collection rates to date are in line for the June-September
period.
Property Market
The UK commercial property market delivered a total return of -2.7 per cent in
the year to June 2020 as measured by the MSCI UK Quarterly Property Universe
("MSCI"). Performance was driven by an annual income return of 4.5 per cent,
with capital values falling by 6.8 per cent.
The market was characterised by muted but positive total returns for the
majority of the year, with the all-property average dragged lower by weakness
in the retail sector. Performance in the final third of the year was hit by the
impact of economic lockdown imposed in March 2020, due to the coronavirus
pandemic. This produced a deterioration in performance across all sectors of
the market and affected both occupier and investment demand. As a result, total
returns at the all-property level fell into negative territory by the end of
the reporting period.
The global nature of the pandemic has plunged the world economy into recession.
The UK economy was delivering muted growth before lockdown was imposed,
affected by Brexit concerns. Since then, UK GDP has fallen sharply, and
although there was some modest monthly improvement towards the end of the
period, as some restrictions were eased, the economy has still recorded a
massive loss in output. The downturn is significantly worse than the recession
seen during the global financial crisis. Fiscal and monetary policies have been
eased dramatically to try to moderate the impact of lockdown on businesses,
workers and consumers. The implementation of the job furlough scheme has
limited the impact on employment to date. Consumer price inflation decelerated
over the course of the year to 0.6 per cent by year-end and interest rates were
reduced. The ten-year gilt rate fell to 0.2 per cent by end-June 2020.
There were tentative signs of an improvement in investor sentiment at the start
of 2020, following the decisive election result and some emerging clarity on
Brexit, and the year has seen major deals complete for industrials, offices,
hotels, healthcare and student accommodation. The year to June 2020 saw GBP51
billion invested in property versus GBP56 billion in the previous year. This
masks a sharp drop in the final quarter of the reporting period. In March 2020,
valuers invoked the material uncertainty clause for all property, although
there has been some easing subsequently. Open-ended funds have been closed to
subscriptions and redemptions and property company dividend payments were in
many cases cut or suspended. Some transactions, notably for industrials and
long-lease indexed supermarkets have progressed. There has been little sign of
distressed selling or a flight of capital from property but many transactions
have been put on hold, aborted or subjected to price reductions. Overseas
buyers remain net investors in property, while local authorities have been
reducing their rate of net investment following public scrutiny of some recent
acquisitions. Most sectors recorded lower investment activity compared with the
previous year, with alternatives a notable exception. The banks have remained
net lenders to commercial property, but there are signs of stress particularly
in the retail sector.
Total return performance by segment has generally been lower than in the
preceding year but continuing the trend established over recent past reporting
periods, remains highly polarised. Industrial and distribution property
continued to drive performance delivering a 4.0 per cent benchmark total return
and with south-east industrials out-performing at 4.8 per cent. Offices also
delivered a positive performance, at 1.4 per cent, led by City offices. All the
office segments delivered a positive annual total return. The retail market
weakened further over the year to deliver a -12.6 per cent total return.
Shopping centres fared worst with a -22.0 per cent total return but retail
warehouses also struggled at -14.9 per cent. Standard retail, both in the south
east and other regions, saw negative total returns, but to a lesser degree. The
Alternatives sector saw a marginally negative total return of -0.1 per cent. In
the final three-month period, south east industrials delivered positive total
returns, but this was the only standard segment to do so. Even greater pressure
has been placed on the retail sector, while Alternative sector performance has
been hit by weakness in the leisure and hospitality markets.
The current crisis has been marked by stress in the occupational market and
rent collection rates dropped in the latter half of the period, most noticeably
for retail and leisure. Rent collection has been impeded by Government
emergency legislation. Annual net operating income growth was -1.1 per cent at
the all-property level, reflecting a 7.1 per cent fall in the June quarter.
Towards the very end of the period, there have been signs of an easing in
lockdown, more businesses opening, valuation constraints easing and some
improvement in investment deal flow but considerable uncertainty remains.
Portfolio
Against this backdrop the Company portfolio delivered an ungeared return of
-0.6 per cent over the 12 months to June versus the Index of -2.7 per cent with
returns weakening as the period wore on. A positive income return of 5.2 per
cent was offset by capital value falls of 5.6 per cent. The portfolio has
delivered in excess of the Index over 1, 3, 5, 7 and 16 years since inception.
The relative outperformance has been primarily driven by the high conviction to
Industrial, logistics and distribution assets (43 per cent of portfolio
weighting by capital value) and the sustained yield premium, assisted by the
consistently low vacancy rate which currently stands at 3.3 per cent (versus
over 7.6 per cent for the Index). The average lot size of the portfolio, at
under GBP9 million, has aided liquidity and enabled some flexibility in trading
throughout a relatively challenging time in the investment market. Over recent
quarters the absence of any allocation to shopping centres, department stores,
hotel, leisure and student accommodation, and the very small exposure to the
food and beverage sector, has been of benefit to relative performance.
The completion of asset management initiatives and successful negotiation of
lease events on the Company's Office portfolio led to Offices being the
portfolios best performing subsector over the year, delivering 6.1 per cent.
This was followed by Industrial & logistics assets at 4 per cent and Retail,
inclusive of Retail Warehousing, delivering -12 per cent. Industrial and Office
assets make up approximately 75 per cent of the portfolio by value.
Retail
Structural change for the retail sector has been accelerated by lockdown as the
move towards e-commerce has intensified, initially by necessity and now
progressively, by habit. CVAs, business failures, store rationalisations and
re-financings continued with high street, shopping centre and leisure tenants
in particular demanding a re-basing of rents. Landlords are constrained in
their rent collection options when faced with rent arrears on account of the
moratorium on affirmative action, and there is now some momentum behind lease
reform and a move towards turnover rents in the sector. The problems have
affected all parts of the market but mass-market operators, highly leveraged
companies, fashion, restaurants and some luxury retailers are worst affected.
Delays to the reform and revaluation of business rates will further impact upon
the sector. Although post period we have seen some outlets re-opening, footfall
and trading has not fully recovered, and further stress is anticipated.
Supermarkets may be relatively resilient where the covenant is strong, and the
income stream is both long and indexed. We continue to see merit in
appropriately let retail warehousing, particularly in business sectors where
occupiers continue to embrace an evolving multi-channel offer and utilise
stores for a mixture of sales, delivery and returns. Re-purposing and the
proposed changes to permitted development rights (PDRs) may act to support the
sector, but the structural adjustment has further to go.
The Company's Retail assets remain fully let and marginally outperformed the
wider market, delivering -12.4 per cent over the year. Although only 11 per
cent of the portfolio by weighting, capital write downs for the High Street
portfolio have been severe and the market remains under significant pressure
with the pace of value falls accelerating as the period drew to a close. A more
relative bright spot has been the Company's retail warehousing assets which
also outperformed their peers in the wider market, although still delivering a
-9 per cent total return over the 12 months. Fully let and with a high
prevalence of 'essential retailers' as occupiers, we have seen robust rent
collection over the period of lockdown from this segment of the portfolio. The
lack of exposure to Shopping Centres, department stores and fashion parks has
been to the benefit of relative performance for some time now, as has been the
absence of leisure, hotels and student accommodation over recent quarters.
A number of sales have been conducted from the retail portfolio over recent
years, predominantly as part of a reweighting exercise and this policy was
progressed further over the 12 months to June (see below). While further
opportunistic disposals remain under consideration there are no plans for a
wholesale exit from the sector. Notwithstanding the obvious structural
challenge to the sector we continue to see significant polarisation in returns
within sectors and it remains important to look beyond blunt classification to
the underlying fundamentals of any asset. Many of the portfolio's assets from
this sector continue to offer a valuable contribution towards the Company
objective, particularly so with regards to the delivery of income from the
Retail Warehousing portfolio. Where opportunity for management has arisen, for
example in the case of the property assets at Enterprise Way, Luton and Brook
Retail Park, Bromsgrove we have generally been able to generate successful
outcomes.
Offices
There has been much debate around the 'future of the Office' following the
adoption of agile working practices as a consequence of the recent lockdown,
and the encouragement from both employers and government, initially at least,
to work from home. Investor sentiment towards offices fell sharply in the final
quarter of the period, however, it was still positive in balance for Central
London and Rest of UK offices. The latest RICS survey shows 93 per cent of
respondents expecting occupiers to cut their floor space requirements with the
majority favouring 5-10 per cent as the likely medium-term readjustment.
The Q2 2020 Central London occupational market data was particularly weak due
to lockdown. The outlook is uncertain but 50 per cent of space under
construction to 2024 is let or under offer, providing some downside protection.
The City appears more exposed in this regard than the West End. Moving in to
Q3, workspace occupancy rates are still low, 30-50 per cent at best, and
travelling on public transport remains unpopular with workers, particularly
those who feel they can function with a high degree of efficiency remotely.
Outside of Central London the core regional markets have less than two years
supply and vacancy rates actually indicate under-supply. More than half of the
space under construction has been pre-let. Lockdown has affected the market but
the fundamentals, outside of the evolving threat from behavioural change appear
relatively sound at this time.
Occupiers have been delaying decisions and there has been an emphasis on
cutting costs. This is in part down to behavioural changes, not least the
concerns around public transportation relevant in many of our large cities, but
it is also linked to the correlation between Office performance and GDP growth,
expectations for which remain exceptionally weak. Take-up has also been
affected by problems in the flexible office sector, most notably at WeWork.
There has been little increase in new supply in the majority of core markets
over recent years and vacancy rates remain low by historic standards. Supply is
likely to be hit further by lockdown and this, coupled with a loss of tertiary
space due to the extension of PDRs could act as support. Nonetheless we expect
to see a period of subdued rental growth linked to a softening of aggregate
demand. Space requirements, office layout and facilities will change as a
result of the pandemic, certainly in the short term, but likely with at least
some lasting consequence. The polarisation between prime and secondary stock is
likely to persist, with those landlords able to offer service and amenity,
build relationships with occupiers and prioritise wellbeing and ESG
considerations set to remain most relevant.
The Company's Office portfolio is geographically diverse with holdings in the
West End of London, the wider South East and core regional markets such as
Edinburgh. The sector delivered the strongest returns over the year on account
of leasing activity and the realisation of value-add initiatives at 6.1 per
cent versus 1.4 per cent for the Index peers.
Industrial and Logistics
There was a marked slowdown in returns from the sector as the year wore on but
nonetheless the Industrial and Logistics sector continued its recent trend of
outperformance, with the South East, which includes London, continuing to
out-perform the Rest of the UK. Standard industrials outperformed logistics
warehousing over the year, driven in no small part by sentiment towards London
multi let estates. The Company's Industrial assets delivered in line with their
peers at 4.0 per cent versus 3.98 per cent for the Index over the year.
Despite the challenges being faced by the UK economy, sentiment for industrial
property is being supported by the belief that a permanent shift to more online
retailing will offer sustained benefit to the sector. A move to onshoring, and
a reappraisal of supply chains, either due to Brexit or as a response to
lockdown is also being viewed as a positive. Supply as a whole remains at
favourable levels. The sector is unlikely to escape the effects of UK and
global recession but is expected to be among the least impacted.
A feature of the market has been the increase in average deal size over the
year led by demand from e-commerce occupiers. Activity has been boosted by
Amazon as well as Covid-related demand from supermarkets and the NHS. Despite
the expectation of continued buoyant demand, the risk of tenant default also
needs to be borne in mind, particularly so the more the market leans on demand
from retail and e-commerce in a recessionary environment. Similarly, certain
geographies, exposed through supply chains to specific sectors of the economy
may prove more vulnerable in the event of a prolonged downturn, while others
appear a little more at the mercy of Brexit trade deals. There had been a
noticeable supply pickup early in the period regionally and the low level of
existing supply in the south east has been compounded by intense competition
for land from a wide range of users. By the end of the year the volume of new
supply has started to tail off somewhat, reduced in part by lockdown, with
developers said to be increasingly cautious. Availability on the whole has
remained broadly unchanged, but with a shift towards better quality assets and
an overhang of some secondary stock.
The positive performance of the Company's Industrial, Logistics and
Distribution assets was delivered on account of their core, South-East, and
predominantly urban locations where we continue to see strong levels of demand,
successful outcomes at lease event and the opportunity to actively manage the
tenant base. By weighted contribution the assets at Hemel Hempstead, and the
multi-let estate at Colnbrook, Heathrow were amongst the top performers over
the period, as was the 'big box' logistics asset at Echo Park, Banbury. The
portfolio's exposure to the industrial, logistics and distribution segment of
the market is now over 43 per cent of assets by value and continues to deliver
significant structural benefit. Whilst we remain wary of the compressing of
yields across the sector as a whole, occupancy and income growth has continued
to justify the sector to date, particularly so on a relative basis given the
trials evident in many of the other traditional sectors.
The industrials market is expected to continue to out-perform, but there are
signs that the degree of out-performance is moderating. Demand is likely to be
supported by the continued growth of online but economic stress and in places,
increased supply, could cap rental growth prospects, while Brexit could
simultaneously lead to both a shift to warehousing in mainland Europe and some
nearshoring / stockpiling within the UK itself. Quality, location, and access
to major markets and skill hubs remains critical.
Alternatives
The portfolio does not currently own alternatives, which delivered a marginal
negative total return over the year following a significant deterioration in
the final quarter. The pandemic has affected hotel and student accommodation
occupancy rates and this could take some time to recover. Analyst forecasts for
the five years to 2024 have generally been downgraded with severe mark-downs
seen for restaurants, leisure and secondary healthcare. Further rental and
capital value corrections are in prospect.
Rent collection
Collection for the March to June quarter for the Company is currently 94.1 per
cent with the June to September quarter to date currently standing at 90.0 per
cent. Monthly payment agreements are set to improve upon this further in the
coming weeks. c.50 per cent of the Q2 shortfall is to be recovered in due
course via repayment plans and via documented lease extensions, the balance
being either rent free concession or sums pending agreement. Agreements to
allow occupiers to pay monthly act as a drag on collection statistics, however
we are keen to help our tenants manage their cashflow wherever possible at this
difficult time. Practical full recovery from Offices and Industrials for
March-June and over 91 per cent from retail warehouses for the same period
demonstrates the quality of the Company tenant base alongside the hard work of
the asset management team. We recognise the challenges being faced by many of
our occupiers at present and continue to work with them to seek mutually
beneficial outcomes. Negotiations are undertaken on a case by case basis prior
to granting any concession to contractually obliged rents. Although June's
recovery is encouraging to date, we expect further challenges ahead as the
economy starts to open up.
Asset Management
In an environment where passive rental value growth will be difficult to come
by active management will be the key to driving income growth. Whilst the
near-term focus has been on the protection of the Company's balance sheet,
there are a number of portfolio initiatives that remain ongoing that are
forecast to add meaningful income to the portfolio upon practical completion.
Sales earlier in the period have enabled the Company to continue with these
initiatives without compromising on financial prudence. The two major capital
projects are at the office property at County House, Chelmsford and the retail
warehouse at Enterprise Way, Luton. The redevelopment at Luton is entirely
pre-let to a discount food store, DIY retailer and drive through pod, with the
majority of the new income secured on the basis of long leases with upward only
inflation linkages in the rent review mechanisms. Contractors are on site with
practical completion of the building works and commencement of the new leases
expected mid-2021. In the meantime, the Company continues to receive income
from the current occupier. The refurbishment of the office at County House,
Chelmsford is ongoing with the first stage of the works to be completed later
this year. The Crown Prosecution Service are the existing tenant who are
continuing to occupy and pay rent through the delivery phase, having
contractually committed to a new 10-year lease on half of the property upon
completion of the works. The remainder of the refurbished space will be
available to let in the open market. At the time of writing we are in
negotiations with an occupier to take one of the floors.
The year has been characterised by positive leasing outcomes on the Industrial
assets at Colnbrook Industrial Estate, Heathrow and Airways, Eastleigh. In
addition, there was the letting of office suits at 14 Berkeley Street, London
and Glory Park, High Wycombe, alongside the new letting over 40,000 sq ft of
space to Virgin Media at Bellshill, Glasgow. Encouraging rent review
settlements were delivered at the office building let to HSBC in Edinburgh
Park.
Transactions
As in the previous reporting period, portfolio turnover and the burden of
associated transaction costs were relatively low, the Company having declined
to purchase assets late in the cycle following the Covid-19 outbreak.
Turning to sales, the Company continued to reduce its exposure to the retail
sector. There was the sale of the parade of shops at Kings Heath, Birmingham
for GBP2.0 million at the start of the year, followed by the successful disposal
of two retail assets for a combined
GBP13.7 million in the final quarter of 2019, the first a multi-let high street
block in Leamington Spa and the second a retail warehouse in Rotherham. In
aggregate these sales were secured within 1 per cent of the independent market
valuation at the time. There have now been 9 disposals from the retail
portfolio over the last 4 years. We are wary of continuing to hold exposure to
a structurally challenged part of the market but are also alive to the dangers
of seeking a wholesale exit at this time with investment demand relatively
weak. There remains benefit in some diversification which was brought into
sharp focus by the recent downgrades to parts of the leisure and food &
beverage market, albeit that diversification must be aligned to structural
trends. For example, at current pricing we continue to see merit in ownership
of the Company's functional, generally low rented, retail warehousing assets,
well placed for both convenience and multi-channel retailing, where we are
seeing live opportunities to unlock value via leasing activity or repurposing.
Cash management
The cash built up through sales originally earmarked to pursue suitable
acquisition opportunities or to enhance the existing portfolio via asset
management initiatives has served the purpose of bolstering the balance sheet
over the past few months, while LTV's have come under scrutiny and rent
collection for the sector has been sluggish. The cash position presents a solid
footing with which to approach the challenges inherent in the UK commercial
property market at this time, and subject to continued robustness in rent
collection, the pursuit, at the right time, of acquisition opportunities. Given
competition for quality property and the cautious optimism in forecasts for the
market in general throughout much of the period until lockdown, the Company has
maintained a measured approach to deployment of capital. This is something
which now appears prudent given recent value falls at the All Property level.
The Manager considers that while there is no pressure to invest the remaining
cash reserves immediately, opportunities may reveal themselves from stressed or
forced sellers in due course. Opportunistic sales from the retail portfolio
remain under consideration, although very much subject to pricing.
Outlook
Although the next few months may see positive economic data as restrictions
ease, and growth resumes from a low base, there are a number of headwinds.
There is likely to be a spike in unemployment as the furlough scheme ends in
October, which could delay recovery. Further waves of infection and lockdowns
cannot be ruled out. The Brexit negotiations have been slow and the UK remains
on course to leave the EU at the end of the year. Although fiscal austerity has
been ruled out, at some point, the public accounts will need to move towards
stabilisation. The property market will also need to adjust to a probable
permanent shift towards more online retailing and increased working from home,
affecting prospects across the main sectors. Hospitality and Student
accommodation face unique challenges in the short term. Lease structures may
also change, as firms demand greater flexibility, and income growth will be
patchy. The outlook is uncertain, but on consensus economic forecasts and with
no further major lockdowns, we expect a difficult 2020 to be followed by a
partial recovery in 2021 and modest positive total returns thereafter, led by
the industrials, logistics & distribution sector.
The Company portfolio will not be immune to these market forces, which look
likely to weigh on performance in the near term, although it remains relatively
well placed to be resilient on the basis of its diversification and quality,
sector and geographic bias. In particular, prospects remain encouraging for
Industrial, logistics and distribution properties located within the south
east, as well as a fit for purpose Office exposure. The company has made a
meaningful move to down weight its exposure to the retail market and does not
carry a legacy allocation to the Shopping Centre, Leisure and Hospitality sub
sectors. Comparably strong rent collection statistics and the minimal impact
from CVA or administrations to date has added further comfort.
Peter Lowe
BMO Rep Property Management Limited
BMO Real Estate Investments Limited
Consolidated Statement of Comprehensive Income
Year ended Year ended
30 June 2020 30 June 2019
GBP'000 GBP'000
Revenue
Rental income 17,011 18,606
Total revenue 17,011 18,606
Losses on investment properties
Losses on sale of investment properties realised (991) (206)
Unrealised losses on revaluation of investment (17,031) (7,343)
properties
Total Income (1,011) 11,057
Expenditure
Investment management fee (2,261) (2,286)
Other expenses (2,146) (1,757)
Total expenditure (4,407) (4,043)
Net operating (loss)/profit before finance costs and (5,418) 7,014
taxation
Net finance costs
Interest receivable 34 13
Finance costs (3,507) (3,526)
(3,473) (3,513)
Net (loss)/profit from ordinary activities before (8,891) 3,501
taxation
Taxation on profit on ordinary activities (258) (295)
(Loss)/profit for the year/total comprehensive income (9,149) 3,206
Basic and diluted earnings per share (3.8p) 1.3p
All items in the above statement derive from continuing operations.
All of the profit and total comprehensive income for the year is attributable
to the owners of the Group.
BMO Real Estate Investments Limited
Consolidated Balance Sheet
30 June 2020 30 June 2019
GBP'000 GBP'000
Non-current assets
Investment properties 308,734 339,353
Trade and other receivables 3,788 4,162
312,522 343,515
Current assets
Trade and other receivables 3,437 2,569
Cash and cash equivalents 13,726 9,858
17,163 12,427
Total assets 329,685 355,942
Non-current liabilities
Interest-bearing bank loans (89,542) (96,505)
Trade and other payables (960) (782)
(90,502) (97,287)
Current liabilities
Trade and other payables (6,319) (6,074)
Tax payable (258) (295)
(6,577) (6,369)
Total liabilities (97,079) (103,656)
Net assets 232,606 252,286
Represented by:
Share capital 2,407 2,407
Special distributable reserve 177,161 177,161
Capital reserve 52,122 70,144
Revenue reserve 916 2,574
Equity shareholders' funds 232,606 252,286
Net asset value per share 96.6p 104.8p
BMO Real Estate Investments Limited
Consolidated Statement of Changes in Equity
For the year ended 30 June 2020
Special
Share Distributable Capital Revenue
Capital Reserve Reserve Reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
At 1 July 2019 2,407 177,161 70,144 2,574 252,286
Loss for the year - - - (9,149) (9,149)
Total comprehensive
income for the year - - - (9,149) (9,149)
Dividends paid - - - (10,531) (10,531)
Transfer in respect of - - (18,022) 18,022 -
losses on investment
properties
At 30 June 2020 2,407 177,161 52,122 916 232,606
For the year ended 30 June 2019
Special
Share Distributable Capital Revenue
Capital Reserve Reserve Reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'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 - - - 3,206 3,206
income for the year
Dividends paid - - - (12,036) (12,036)
Transfer in respect of - - (7,549) 7,549 -
losses on investment
properties
At 30 June 2019 2,407 177,161 70,144 2,574 252,286
BMO Real Estate Investments Limited
Consolidated Statement of Cash Flows
Year ended Year ended
30 June 2020 30 June 2019
GBP'000 GBP'000
Cash flows from operating activities
Net (loss)/profit for the year before taxation (8,891) 3,501
Adjustments for:
Losses on sale of investment properties realised 991 206
Unrealised losses on revaluation of investment 17,031 7,343
properties
Realised capital contribution (12) -
Increase in operating trade and other receivables (494) (1,758)
Increase in operating trade and other payables 423 1,286
Interest received (34) (13)
Finance costs 3,507 3,526
12,521 14,091
Taxation paid (295) (295)
Net cash inflow from operating activities 12,226 13,796
Cash flows from investing activities
Purchase of investment properties (723) -
Capital expenditure (2,070) (878)
Sale of investment properties 15,402 3,244
Interest received 34 13
Net cash inflow from investing activities 12,643 2,379
Cash flows from financing activities
Dividends paid (10,531) (12,035)
Bank loan interest paid (3,470) (3,319)
Bank loan repaid, net of costs - Barclays Loan (7,000) (6,000)
Net cash outflow from financing activities (21,001) (21,354)
Net increase/(decrease) in cash and cash equivalents 3,868 (5,179)
Opening cash and cash equivalents 9,858 15,037
Closing cash and cash equivalents 13,726 9,858
BMO Real Estate Investments Limited
Principal Risks and Future Prospects
Each year the Board carries out a comprehensive, robust assessment of the
principal risks and uncertainties that could threaten the Group's success. The
consequences for its business model, liquidity, future prospects and viability
form an integral part of this assessment.
The Board applies the principles detailed in the internal control guidance
issued by the Financial Reporting Council and has established an ongoing
process designed to meet the particular needs of the Group in managing the
risks and uncertainties to which it is exposed.
Consideration has been given to the impact from Covid-19 which has had a
significant effect on the commercial real estate market. This has resulted in a
number of the residual risks increasing as highlighted in the table below.
Principal risks and uncertainties faced by the Group are described below and in
note 2, which provides detailed explanations of the risks associated with the
Group's financial instruments.
· Market - the Group's assets comprise of direct investments in UK
commercial property and it is therefore exposed to movements and changes in
that market. This includes political and economic factors such as Brexit and
the impact of Covid-19.
· Investment and strategic - poor investment processes and incorrect
strategy, including sector and geographic allocations and use of gearing, could
lead to poor returns for shareholders.
· Regulatory - breach of regulatory rules could lead to suspension of the
Company's Stock Exchange listing, financial penalties or a qualified audit
report.
· Tax structuring and compliance - the Group should ensure compliance with
the relevant tax rules and thresholds at all times. Changes in legislation
could result in the Group no longer being a tax efficient investment vehicle
for shareholders.
· Financial - inadequate controls by the Manager or third-party service
providers could lead to misappropriation of assets. Inappropriate accounting
policies or failure to comply with accounting standards could lead to a
qualified audit report, misreporting or breaches of regulations. Breaching
Guernsey solvency test requirements or loan covenants could lead to a loss of
shareholders' confidence and financial loss for shareholders.
· Reporting - valuations of the investment property portfolio require
significant judgement by valuers which could lead to a material impact on the
net asset value. Incomplete or inaccurate income recognition could have an
adverse effect on the Group's net asset value, earnings per share and dividend
cover.
· Credit - an issuer or counterparty could be unable or unwilling to meet a
commitment that it has entered into with the Group. This may cause the Group's
access to cash to be delayed or limited.
· Operational - failure of the Manager's accounting systems or disruption to
its business, or that of other third-party service providers through error,
fraud, cyber-attack or business continuity failure could lead to an inability
to provide accurate reporting and monitoring, leading to a loss of
shareholders' confidence.
· Environmental - inadequate attendance to environmental factors by the
Manager, including those of a regulatory and market nature and particularly
those relating to energy performance, health and safety, flood risk and
environmental liabilities, leading to the reputational damage of the Group,
reduced liquidity in the portfolio, and/or negative asset value impacts.
The Board seeks to mitigate and manage these risks through continual review,
policy-setting and enforcement of contractual obligations. It also regularly
monitors the investment environment and the management of the Group's property
portfolio.
The Manager seeks to mitigate these risks through active asset management
initiatives and carrying out due diligence work on potential tenants before
entering into any new lease agreements. All properties in the portfolio are
insured.
As well as considering current risks quarterly, the Board and the Investment
Manager carry out a separate annual assessment of emerging risks when reviewing
strategy and evaluate how these could be managed or mitigated. However, the
Board considers that the line between current and emerging risks is often
blurred and many of the emerging risks identified are already being managed to
some degree where their effects are beginning to impact.
The principal emerging risks identified are outlined below:
· The structural and behavioural changes in the market is a significant
emerging risk, particularly as the prominence of online shopping continues to
increase. Over the last two years the market has experienced a number of
high-profile retailers going out of business, downsizing, closing stores and
negotiating flexible leases at lower rents. With an increasing number of vacant
stores, the challenge is to find different uses for commercial property,
whether that's for residential, leisure, food and beverage, or other
alternative uses.
· The ESG agenda is a very prominent one and will continue to grow in its
importance to shareholders, future investors and our customers. As discussed in
our ESG report, we have already made significant strides in this area and we
will continue to do so. The increasing market attention being paid to climate
risk and social impact have been notable features of the evolving agenda over
the last year, and those need to be considered more explicitly in property
investment and management activity than has been the case previously.
· The political climate continues to be uncertain and as well as the ongoing
effects of Brexit, there are strong calls for another Scottish referendum.
During times of heightened uncertainty, a key benefit to the Company is its
closed-ended structure, in that it is not forced to sell property during
stressed times.
· Legislative changes are always a risk, particularly where they are
politically driven and may cause changes in our property allocation. Such
issues might involve some style of rent control or an escalation of regulatory
oversight on ESG factors, particularly in responding to the climate emergency.
· The impact of technology increasingly means that things change very
quickly which is an opportunity as well as a risk, and it is important that we
continue to keep abreast of what is happening in this space.
· The developing threat from Covid-19 is the dominant risk for the global
economy, and by extension the UK property market. The severity of the threat is
becoming clearer by the day with significant disruption to all sectors
worldwide. This threat has an ongoing effect on many of our principal risks and
the Board meet regularly with the Manager to assess these risks and how they
can be managed. More detail is included in the Chairman's Statement and the
Manager's Report. Of particular concern is the Company's cash flow, given the
number of expected tenant defaults in the short-term. The Board and the manager
review on a daily basis the cash collected and have taken the decision to half
the rate of the quarterly dividend to maximise the cash reserves available. In
addition, the Group is in regular contact with its lenders in case the decline
in rent collected causes certain covenants to be breached or become close to
being breached.
To help manage emerging risks and discuss other wider topics affecting
property, the Board has an annual strategy meeting. The Board considers having
a clear strategy is the key to managing and mitigating emerging risk.
The highest residual risks encountered during the year, how they are mitigated
and actions taken to address these are set out in the table below.
Highest Residual Risks Mitigation Actions taken in the year
Unfavourable markets, poor The underlying investment The Board reviews the
stock selection, strategy, performance, Manager's performance at
inappropriate asset gearing and income quarterly Board meetings
allocation and forecasts are reviewed with against key performance
underperformance against the Investment Manager at indicators and the ongoing
benchmark and/or peer each Board Meeting. The strategy is reviewed and
group. This risk may be Company's portfolio is well agreed.
exacerbated by gearing diversified and of a high The Board has met on a
levels. quality. Gearing is kept at significantly more frequent
A challenging retail market modest levels and is basis since the outbreak of
where rental growth is monitored by the Board. Covid-19 where it has
generally negative and The Manager provides received trading updates
capital values are falling regular information on the from the Manager and
as capitalisation rates expected level of rental carefully reviewed cash
rebase. income that will be forecasts.
This market has witnessed generated from underlying Rental collection in the
many company voluntary properties. The portfolio retail and retail warehouse
arrangements and is well diversified by sectors has been negatively
administrations in the last geography and sector and impacted by Covid-19. The
two years. There is an the exposure to individual Manager is in regular
increased risk of tenant tenants is monitored and contact with tenants and
defaults in this sector, managed to ensure there is rental collection is a
particularly since the no over exposure. primary focus. Collection
Covid-19 outbreak, which rates since the Covid-19
could put the level of outbreak have been ahead of
dividend cover at risk. expectations.
Risk increased in the year
under review
The share price has been The discount is reported to Investors have access to the
trading at a discount and and reviewed by the Board Manager and the underlying
this has widened at least quarterly. Share team who will respond to any
significantly since the buybacks as a means of queries they have on the
Covid-19 outbreak. This narrowing the discount or discount. The level of
imbalance, combined with as an attractive investment discount is kept under
the recent share price for the Company are constant review and the
volatility can diminish the considered and weighed up number of meetings to
attractiveness of the against the risks. The discuss the discount
Company to investors. position is monitored by increased during the year.
the Manager on a daily At the Board's request there
basis and any material has been increased reporting
changes are investigated from the broker on the
and communicated to the market and the shareholder
Board more regularly. feedback they are receiving.
Risk increased in the year
under review
Insufficient cash resources The Manager reports The Board have held
to meet capital commitments quarterly on ongoing additional ad-hoc Board
or to fund the quarterly revenue and cash Meetings since the Covid-19
dividend leading to forecasting. The Company outbreak which includes
emergency sale of assets performs a solvency test in revenue and cash
and/or cutting of dividend advance of each dividend forecasting. The GBP20m
level. payment. A detailed cash revolving credit facility
flow model and schedule on was extended from November
immediate cash commitments 2020 to March 2025. A
is regularly reviewed by decision was made to cut the
the Board. A GBP20m revolving dividend by 50 per cent in
credit facility with order to protect cash
Barclays (available until resources. The rate and
Risk increased in the year March 2025) provides sustainability of the
under review additional flexibility. dividend remains under
continual review.
Error in the calculation/ External valuers are The valuations are being
application of the appointed to value closely monitored and
investment company NAV the portfolio on a compared to other
leads to a material quarterly basis. There is market-based information.
misstatement. regular liaison with the There has been more
valuers regarding all transactional evidence
Valuers have difficulty in elements of the portfolio. coming to the market post
valuing the property assets There is regular attendance period end and the material
due to lack of by Directors at the uncertainty clause will be
transactional evidence or valuation meetings and the removed by the valuers for
market uncertainty. Auditors attend the year the September 2020
end valuation meeting. valuations.
The Valuers introduced a
material uncertainty clause
in their valuations
following the Covid-19
outbreak.
Risk increased in the year
under review
Viability Assessment and Statement
The Board conducted this review over a 5-year time horizon, a period thought to
be appropriate for a commercial property investment company with a long-term
investment outlook, borrowings secured over an extended period and a portfolio
with a weighted average unexpired lease length of 5.7 years. The assessment has
been undertaken, taking into account the principal risks and uncertainties
faced by the Group which could threaten its objective, strategy, future
performance, liquidity and solvency.
The major risks identified as relevant to the viability assessment were those
relating to a downturn in the UK commercial property market and its resultant
effect on the valuation of the investment portfolio, the level of rental income
being received and the effect that this would have on cash resources and
financial covenants. The Board took into account the illiquid nature of the
Group's portfolio, the existence of the long-term borrowing facilities, the
effects of any significant future falls in investment values and income
receipts on the ability to repay and re-negotiate borrowings, maintain dividend
payments and retain investors. These matters were assessed over an initial
period to September 2025, and the Directors will continue to assess viability
over 5 year rolling periods, taking account of foreseeable severe but plausible
scenarios.
In the ordinary course of business, the Board reviews a detailed financial
model on a quarterly basis, incorporating market consensus forecast returns,
projected out to the maturity of its principal loan of GBP90 million which is due
to mature in 2026. This model uses prudent assumptions and factors in any
potential capital commitments. For the purpose of assessing the viability of
the Group, the model has been adjusted to look at the next five years and is
stress tested with projected returns comparable to the most extreme commercial
property market downturn experienced historically. The model projects a
worst-case scenario of an equivalent fall in capital and income values over the
next two years, followed by three years of zero growth. The model demonstrated
that even under these extreme circumstances the Group remains viable.
Based on their assessment, and in the context of the Group's business model,
strategy and operational arrangements set out above, the Directors have a
reasonable expectation that the Group will be able to continue in operation and
meet its liabilities as they fall due over the 5-year period to September 2025.
For this reason, the Board also considers it appropriate to continue adopting
the going concern basis in preparing the Annual Report and Consolidated
Financial Statements.
The Company continues to monitor the potential impact of the Covid-19 virus on
cash flows. Particular attention is paid to the circumstances of all the
tenants in the portfolio and detailed modelling is performed on a day to day
basis as events unfold. Rental collection since the outbreak has been in excess
of the levels originally anticipated, with the levels of rent collected for the
March to June 2020 quarter at 94.1 per cent and collection for the June to
September 2020 quarter at 90.0 per cent. The Board made the decision to cut
the level of the quarterly dividend by 50 per cent from June 2020 in order to
preserve cash resources.
Detailed modelling has been performed, which has looked at the impact of the
current crisis under increasingly negative scenarios and the effect of a
suspension in paying out dividends to preserve cash. The modelling demonstrates
that the Company remains viable.
BMO Real Estate Investments Limited
Going Concern
In assessing the going concern basis of accounting the Directors have had
regard to the guidance issued by the Financial Reporting Council. They have
reviewed detailed cash flow, income and expense projections in order to assess
the Group's ability to pay its operational expenses, bank interest and
dividends. The Directors have examined significant areas of possible financial
risk including cash and cash requirements and the debt covenants, in particular
those relating to loan to value and interest cover. The Directors have not
identified any material uncertainties which cast significant doubt on the
Group's ability to continue as a going concern for a period of not less than 12
months from the date of the approval of the consolidated financial statements.
The Board believes it is appropriate to adopt the going concern basis in
preparing the financial statements.
Directors' Responsibilities in Respect of the Annual Report & Consolidated
Accounts
We confirm that to the best of our knowledge:
· the financial statements, prepared in accordance with IFRS as adopted by
the European Union, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Group and the undertakings
included in the consolidation taken as a whole and comply with The Companies
(Guernsey) Law, 2008;
· the Strategic Report (comprising the Chairman's Statement, Business Model
and Strategy, Promoting Success, Key Performance Indicators, Principal Risks
and Future Prospects, Manager's Review, Environmental, Social and Governance
and Property Portfolio) and the Report of the Directors' includes a fair review
of the development and performance of the business and the position of the
Group and the undertakings included in the consolidation taken as a whole
together with a description of the principal risks and uncertainties that it
faces;
· the financial statements and Directors' Report includes details of related
party transactions; and
· the Annual Report and financial statements, taken as a whole, are fair,
balanced and understandable and provide the information necessary for
shareholders to assess the Group's position and performance, business model and
strategy.
On behalf of the Board
V Lall
Chairman
25 September 2020
BMO Real Estate Investments Limited
Notes to the Consolidated Financial Statements
for the year ended 30 June 2020
1. The audited results of the Group which were approved by the Board
on 22 September 2020 have been prepared on the basis of International Financial
Reporting Standards as adopted by the EU, interpretations issued by the IFRS
Committee, applicable legal and regulatory requirements of the Companies
(Guernsey) Law, 2008 and the Listing Rules of the UK Listing Authority as well
as the accounting policies set out in the statutory accounts of the Group for
the year ended 30 June 2020.
2. Financial Instruments and investment properties
The Group's investment objective is to provide ordinary shareholders with an
attractive level of income together with the potential for income and capital
growth from investing in a diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial property
investments. In addition, the Group's financial instruments comprise cash,
receivables, interest-bearing loans and payables that arise directly from its
operations.
The Group is exposed to various types of risk that are associated with
financial instruments. Financial risks are risks arising from financial
instruments to which the Group is exposed during or at the end of a reporting
period. Financial risk comprises market risk (including currency risk, price
risk and interest rate risk), credit risk and liquidity risk. There was no
foreign currency risk as at 30 June 2020 or 30 June 2019 as assets and
liabilities are maintained in Sterling.
The Board reviews and agrees policies for managing the Group's risk exposure.
These policies are summarised below and have remained unchanged for the year
under review. These disclosures include, where appropriate, consideration of
the Group's investment properties which, whilst not constituting
financial instruments as defined by IFRS, are considered by the Board to be
integral to the Group's overall risk exposure.
The primary objectives of the financial risk management policies are to
establish risk limits, and then ensure that exposure to risks stays within
these limits.
Market risk
Market risk is the risk the fair value of future cash flows of a financial
instrument will fluctuate because of changes in market prices.
Sensitivities to market risks included below are based on change in one factor
while holding all other factors constant. In practice, this is unlikely to
occur, and changes in some of the factors may be correlated - for example,
changes in interest rate and changes in foreign currency rates.
The Group's strategy for the management of market risk is driven by the
investment policy. The management of market risk is part of the investment
management process and is typical of commercial property investment. The
portfolio is managed with an awareness of the effects of adverse valuation
movements through detailed and continuing analysis, with an objective of
maximising overall returns to shareholders.
Price Risk
The Group has no significant exposure to price risk as it does not hold any
equity securities or commodities. The Group is exposed to price risk other than
in respect of financial instruments, such as property price risk including
property rentals risk. Investment in property and property-related assets are
inherently difficult to value due to the individual nature of each property. As
a result, valuations are subject to substantial uncertainty. There is no
assurance that the estimates resulting from the valuation process will reflect
the actual sales price even where such sales occur shortly after the valuation
date. Such risk is minimised through the appointment of external property
valuers.
Any changes in market conditions will directly affect the profit/loss reported
through the Consolidated Statement of Comprehensive Income. A 10 per cent
increase in the value of the investment properties held at 30 June 2020 would
have increased net assets available to shareholders and the increased the net
income for the year by GBP30.9 million (2019: GBP33.9 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 GBP90 million Canada Life term loan is
managed by the loan bearing interest at a fixed rate of 3.36 per cent per annum
until maturity on 9 November 2026.
Credit risk
Credit risk is the risk that an issuer or counterparty will be unable or
unwilling to meet a commitment that it has entered into with the Group.
In the event of default by an occupational tenant, the Group will suffer a
rental shortfall and incur additional costs, including legal expenses, in
maintaining, insuring and re-letting the property. The Board receives regular
reports on concentrations of risk and any tenants in arrears. The Manager
monitors such reports in order to anticipate, and minimise the impact of,
defaults by occupational tenants.
The Group has a diversified tenant portfolio. The maximum credit risk from the
rent receivables of the Group at 30 June 2020 is GBP2,264,000 (2019: GBP802,000).
The maximum credit risk is stated after deducting an impairment provision of GBP
421,000 (2019: GBP9,000). Of this amount GBPnil was subsequently written off and GBP
111,000 has been recovered.
Apart from the rent receivable disclosed above there were no financial assets
which were either past due or considered impaired at 30 June 2020 (2019: nil).
Deposits refundable to tenants may be withheld by the Group in part or in whole
if receivables due from the tenant are not settled or in case of other breaches
of contract.
All of the cash is placed with financial institutions with a credit rating of A
or above. Bankruptcy or insolvency of these financial institutions may cause
the Group's ability to access cash placed on deposit to be delayed or limited.
Should the credit quality or the financial position of the banks currently
employed significantly deteriorate, the Manager would move the cash holdings to
another financial institution.
The Group can also spread counterparty risk by placing cash balances with more
than one financial institution. The Directors consider the residual credit
risk to be minimal.
Liquidity risk
Liquidity risk is the risk that the Group will encounter in realising assets or
otherwise raising funds to meet financial commitments. The Group's investments
comprise UK commercial property.
Property in which the Group invests is not traded in an organised public market
and may be illiquid. As a result, the Group may not be able to quickly
liquidate its investments in these properties at an amount close to their fair
value in order to meet its liquidity requirements.
The Group's liquidity risk is managed on an ongoing basis by the Manager and
monitored on a quarterly basis by the Board. In order to mitigate liquidity
risk the Group aims to have sufficient cash balances (including the expected
proceeds of any property sales) to meet its obligations for a period of at
least twelve months.
In certain circumstances, the terms of the Group's bank loans entitle the
lender to require early repayment, for example, if covenants are breached, and
in such circumstances the Group's ability to maintain dividend levels and the
net asset value attributable to the Ordinary Shares could be adversely
affected.
3. The fourth interim dividend of 0.625p will be paid on 30 September
2020 to shareholders on the register on 11 September 2020. The ex-dividend date
was 10 September 2020.
4. There were 240,705,539 Ordinary Shares in issue at 30 June 2020. The
earnings per Ordinary Share are based on the net loss for the year of GBP
9,149,000 and on 240,705,539 Ordinary Shares, being the weighted average number
of shares in issue during the year.
5. These are not full statutory accounts. The full audited accounts for
the year ended 30 June 2020 will be sent to shareholders in September 2020, and
will be available for inspection at Trafalgar Court, Les Banques, St. Peter
Port, Guernsey, the registered office of the Company. The full annual report
and consolidated accounts will be available on the Company's website:
www.bmorealestateinvestments.com
6. The Annual General Meeting will be held on 17 November 2020.
Alternative Performance Measures
The Company uses the following Alternative Performance Measures ('APMs'). APMs
do not have a standard meaning prescribed by GAAP and therefore may not be
comparable to similar measures presented by other entities.
Discount or Premium - The share price of an Investment Company is derived from
buyers and sellers trading their shares on the stock market. If the share price
is lower than the NAV per share, the shares are trading at a discount. This
usually indicates that there are more sellers than buyers. Shares trading at a
price above the NAV per share, are said to be at a premium.
2020 2019
pence pence
Net Asset Value per share (a) 96.6 104.8
Share price per share (b) 56.0 80.0
Discount (c = (b-a)/a) (c) -42.0% -23.7%
Dividend Cover - The percentage by which Profits for the year (less Gains/
losses on investment properties and non-recurring other income) cover the
dividend paid.
A reconciliation of dividend cover is shown below:
30 June 30 June
2020 2019
GBP'000 GBP'000
(Loss)/profit for (9,149) 3,206
the year
Add: Realised losses 991 206
Unrealised losses 17,031 7,343
Profit before investment gains and losses (a) 8,873 10,755
Dividends (b) 10,531 12,036
Dividend Cover (c=a/b) (c) 84.3% 89.4%
Dividend Yield - The annualised dividend divided by the share price at the
year-end.
Net Gearing - Borrowings less net current assets divided by value of investment
properties.
30 June 30 June
2020 2019
GBP'000 GBP'000
Loans 89,542 96,505
Less net current assets (10,586) (6,058)
Total (a) 78,956 90,447
Value of investment properties (b) 308,734 339,353
Net Gearing (c = a/b) (c) 25.6% 26.7%
Ongoing Charges - All operating costs incurred by the Company, expressed as a
proportion of its average Net Assets over the reporting year. The costs of
buying and selling investments and derivatives are excluded, as are interest
costs, taxation, non-recurring costs and the costs of buying back or issuing
Ordinary Shares. An additional Ongoing Charge figure is calculated which
excludes direct operating property expenses as these are variable in nature and
tend to be specific to lease events occurring during the year.
30 June 30 June
2020 2019
GBP'000 GBP'000
Investment management fee 2,261 2,286
Other expenses 2,146 1,757
Less non-recurring bad (413) 15
debts
Less direct property (852) (867)
expenses
Ongoing charges (excluding direct operating expenses) 3,142 3,191
Ongoing charges (excluding direct operating expenses) 1.3% 1.2%
as a % of average net assets
Ongoing charges (including direct operating expenses) 3,994 4,058
Ongoing charges (including direct operating expenses) 1.6% 1.6%
as a % of average net assets
Average net assets 244,424 256,408
Portfolio (Property) Capital Return - The change in property value during the
period after taking account of property purchases and sales and capital
expenditure, calculated on a quarterly time-weighted basis. This calculation
is carried out by MSCI Inc.
Portfolio (Property) Income Return - The income derived from a property during
the period as a percentage of the property value, taking account of direct
property expenditure, calculated on a quarterly time-weighted basis. This
calculation is carried out by MSCI Inc.
Portfolio (Property) Total Return - Combining the Portfolio Capital Return and
Portfolio Income Return over the period, calculated on a quarterly
time-weighted basis. This calculation is carried out by MSCI Inc.
Total Return - The return to shareholders calculated on a per share basis by
adding dividends paid in the period to the increase or decrease in the Share
Price or NAV. The dividends are assumed to have been reinvested in the form of
Ordinary Shares or Net Assets, respectively, on the date on which they were
quoted ex-dividend.
2020 2019
NAV per share at start of year - pence 104.8 108.5
NAV per share at end of year - pence 96.6 104.8
Change in the year -7.8% -3.4%
Impact of dividend reinvestments +4.1% +4.7%
NAV total return for the year -3.7% +1.3%
2020 2019
Share price per share at start of year - 80.0 99.8
pence
Share price per share at end of year - pence 56.0 80.0
Change in the year -30.0% -19.8%
Impact of dividend reinvestments +5.1% +4.6%
Share price total return for the year -24.9% -15.2%
All enquiries to:
Peter Lowe
Scott Macrae
BMO Investment Business Limited
Tel: 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
END
(END) Dow Jones Newswires
September 28, 2020 02:00 ET (06:00 GMT)
Ct Property (LSE:CTPT)
Gráfica de Acción Histórica
De Mar 2024 a Abr 2024
Ct Property (LSE:CTPT)
Gráfica de Acción Histórica
De Abr 2023 a Abr 2024