TIDMBCPT
To RNS
Date 12 April 2021
From BMO Commercial Property Trust Limited (the "Company")
L.E.I. 213800A2B1H4ULF3K397
Results in Respect of the Year Ended 31 December 2020 (audited)
Headlines
* Rental collection currently received to date since the first Covid lockdown
restrictions, from March 2020 to December 2020 is 88.2 per cent.
* The Company produced a portfolio total return of -4.8* per cent versus the
MSCI UK Quarterly Property Index ('MSCI') return of -2.0 per cent.
* Net asset value total return of -8.1 per cent
* Share price total return of -28.3* per cent
* Dividends for the year amounting to 2.85 pence per share
* Dividend cover of 162.8 per cent*
* Yield on year-end share price of 3.6 per cent*.
* Void rate reduced from 4.8 per cent to 2.9 per cent at year end.
* Completed the development at Newbury for new Lidl foodstore.
* Completed the development at Solihull for new M&S general merchandise
store.
* Several significant industrial lease renewals completed.
* ESG progress: Improved GRESB score and Gold award from EPRA sustainability
BPR.
*see Alternative Performance Measures
Chairman's Statement
The last year has been exceptionally challenging and, as you will have seen
from the headlines, the results we are reporting for the year are
disappointing. The Covid-19 pandemic ("the pandemic") is, of course, upper most
in our mind as we think about the past year and the widespread suffering and
sad loss of human life. The Company's 2020 results should be viewed against the
backdrop of the pandemic.
For our part, we have done all we can to ensure the safety of our Managers'
staff and our tenants and their visitors. We have developed and implemented new
protocols throughout the business, and across the portfolio, to ensure
compliance with Government guidelines. We have been sympathetic to the
difficulties faced by many of our tenants, carefully considering their
differing circumstances, aligning interests by offering rent concessions where
appropriate to support the short-term needs of their businesses as they re-map
post-Covid plans for recovery and growth.
Notwithstanding the 2020 headline results, much positive progress has been made
this year with the completion of many new lettings and lease renegotiations as
well as asset management and ESG initiatives. Welcoming many new tenants to our
portfolio during such a difficult year is testament to its underlying quality.
At the end of the year, our void level stands at an historically low 2.9 per
cent and we firmly believe that our portfolio, underpinned by our strong core
assets, is well positioned for recovery.
Property Market
In what was the most demanding year in recent memory, the UK direct commercial
property market delivered a -2.0 per cent all-property total return. The
disruption caused by the pandemic, coupled with persisting concerns on what a
post-Brexit trading environment would mean for the UK, were the two significant
factors weighing heavily on the property market.
At a sector level, industrial and distribution units proved resilient,
delivering positive total returns in the year, buoyed by the shift to online
sales. Other sectors fared less well, in particular the structural problems
affecting the retail sector were exacerbated by pandemic related restrictions
that ultimately led to suspensions in trading and store closures. Sadly, some
businesses have been critically damaged and will never return to our high
streets and retail parks. The office sector was also negatively impacted,
clouded by concerns about tenants reducing their future space requirements as a
consequence of a permanent shift, or more flexible approach, to remote working.
The market steadied as the year progressed, delivering a modest positive total
return in the second half, although capital values and open market rental
growth remained negative throughout. All property returns were supported by a
4.5 per cent annual income return. Investment volumes showed some signs of
recovery later in the year with activity focused on Central London offices and
the industrial sector, while the retail and leisure sectors remained firmly out
of favour with little to no transactions evident.
Performance for the Year
Our relatively higher weighting to the out of favour retail and office sectors,
particularly our exposure to London's West End through St Christopher's Place,
combined with a lower exposure to the strongly performing logistics sector, has
amplified our relative underperformance in these challenging markets.
Our share price at the end of the year was 80.0p, representing a discount of
31.9 per cent to the year-end Net Asset Value (NAV) per share of 117.5p
(compared to an 11.7 per cent discount as at 31 December 2019).
The persistency of the discount is a primary concern of the Board and is
reviewed at each Board Meeting. The option of share buybacks was regularly
considered but, in the face of such heightened uncertainty, the immediate
preference was to strengthen cash resources and invest in accretive asset
management initiatives.
While the NAV total return for the year was -8.1 per cent, the widening in the
discount during the year, resulted in a disappointing share price total return
of -28.3 per cent. The total return for the portfolio was -4.8 per cent,
lagging the total return of -2.0 per cent from the MSCI UK Property Index
(MSCI) and our capital return was -9.0 per cent, compared with -6.2 per cent
for the Index.
It has been a period of significant valuation movement as investment and
occupier markets re-set in response to changing structural trends. From today's
adjusted levels, the Board has confidence that the high quality, core assets
owned by the Company are positioned to benefit as business and consumer
sentiment improves and the UK returns to a more normal trading environment.
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 2019 130.9
Unrealised decrease in valuation of property portfolio (15.2)
Net revenue 4.6
Dividends paid (2.8)
NAV per share as at 31 December 2020 117.5
The largest detractor to performance were our retail assets, returning -14.0
per cent for the year with large capital falls at the St Christopher's Place
Estate and Broadway, Wimbledon.
The St Christopher's Place Estate, our largest investment, fell overall by -17
per cent in the year with its two Oxford Street retail units being particularly
hard hit (-33 per cent) as yields moved out and rental values were
significantly downgraded. We remain optimistic about the prospects for this
Estate and are looking forward to entering a more positive next chapter,
encouraged by the number of new retail and restaurant businesses that have
committed to new leases during 2020. This is a great vote of confidence in the
Estate. Elsewhere, working with local stakeholders, the exciting repositioning
of James Street continues and a number of other plans to deliver further value
across the Estate are mentioned in the Manager's Report.
In addition to St Christopher's Place, another large valuation fall was seen at
Broadway, Wimbledon, where a combination of yield movement, rental concessions
and rental value downgrades for the dominant restaurant, gym and cinema uses,
resulted in a reduction of 24 per cent. In the current environment, it's
unsurprising that no credit can be taken for the medium-term development
potential of this significant asset, but the Manager will continue to explore
these interesting future options in the months ahead.
Mirroring the positive leasing activity at St Christopher's Place, there was
also good progress on a number of fronts at the Company's two retail parks. Of
particular note were the major capital projects undertaken in the year. Newbury
saw the construction of a new 19,500 sq.ft. Lidl foodstore that opened to the
public in October 2020 and at Solihull, Marks and Spencer entered into a new 20
year lease for a redeveloped 35,000 sq.ft. store that we have combined with the
adjacent M&S Food Hall. Both will bring increased footfall to the Parks. This
activity combined with other initiatives already underway to introduce more new
tenants on to the Parks will provide good prospects for positive future
performance at a time when investor interest is beginning to return to this
sector of the property market.
Moving away from retail, our office portfolio experienced an overall return for
the year of -1.0 per cent with this headline number masking some large
increases and falls. The Leonardo Building, Crawley, fell by -22 per cent as a
result of a lease renegotiation with the tenant, Virgin Atlantic, as part of
their financial restructuring in response to the pandemic's huge impact on
airline businesses. 3 The Square, Stockley Park, fell by -19 per cent due to
the reducing unexpired lease term which led to a valuation re-rating in
response to the 'risk off' attitude of investors that was prevalent during
2020.
These downward movements were counterbalanced by increases elsewhere. Cassini
House, London SW1, now fully occupied following the letting to Mitsui Fudosan
in February 2020, enjoyed a valuation uplift of 4.5 per cent over the year.
Strong progress has also been made at Watchmoor Park in Camberley with an
increase of 10 per cent. Here, a new lease for 5 years with Muller was
completed on the refurbished second floor and, since the end of the year, terms
have been agreed to lease all the remaining vacant space.
Our well-located industrial portfolio returned 7.2 per cent over the year.
Performance was constrained by some significant lease events on the horizon in
2021 so it's pleasing to note that we were able to advance two of these towards
the end of the year. At G Park in Liverpool, a new 10-year renewal from March
2021 has been agreed with DHL and, more recently, terms have been settled with
Kimberley Clark to renew the lease of their distribution warehouse in Chorley.
Valuations are beginning to respond to the increasing WAULT across this part of
the portfolio with more still to come.
Borrowings and Loan Refinancing
The Group's borrowings comprise a £260 million term loan with Legal & General
Pensions Limited, maturing on 31 December 2024. The Company also has a Barclays
£50 million term loan and an undrawn £50 million revolving credit facility
which is available to the Company on the satisfaction of certain conditions
prior to drawdown. The Barclays facility expires on 31 July 2022, with the
option of two further one-year extensions. As at 31 December 2020, the
Company's net loan to value ('LTV') was 22.6 per cent.
Dividends
The Company paid seven interim dividends totalling 2.85 pence per share during
the year, compared to an annual dividend in 2019 of 6.0 pence per share. In
April 2020, due to the uncertainty that the impact of the pandemic would have
on future rental receipts, the Board took the difficult decision to temporarily
suspend monthly dividend payments in order to strengthen cash reserves and
protect the long-term value of the Company for the benefit of all shareholders.
Aided by a proactive approach from the Manager, many early agreements were
reached to restructure leases or temporarily defer rents, and this supported
the reintroduction of monthly dividends at 0.25 pence per share from August
2020. Collection rates continued at levels ahead of those anticipated in April,
giving the Board confidence to increase the dividend further to 0.35 pence per
share in December 2020.
Whilst there is now greater clarity on the timing of restrictions being lifted
as the roll out of the vaccine continues apace, the path of economic recovery
remains far from certain. That said, the Board's expectation is to continue to
pay monthly dividends at the current level for the foreseeable future. We are
mindful of the requirement to comply with the REIT test of distributing 90 per
cent of all net rental receipts and will continue to closely monitor the level
of future rental receipts and earnings.
Rent Collection
As highlighted in the Company's quarterly trading updates, collection of rent
in the retail and leisure sectors of the portfolio has been challenging. This
is unsurprising given the Government restrictions that have been in place, with
the non-essential retail and restaurants at St Christopher's Place and the
cinema and gym at Wimbledon having had limited trading opportunity since March
2020.
Rental collection for the year as a whole was 91.0 per cent, with collection
for the nine-month period following the first lockdown standing at 88.2 per
cent. The breakdown of our rental collection for the nine-month period by
sector is detailed below:
Rent Collected (%)
billed (£ (£m)
m)
Industrial 9.9 9.9 99.4
Offices 20.8 20.0 96.2
Retail Warehouse 5.9 5.1 86.2
Retail 9.2 5.9 64.2
Alternatives 3.3 2.5 74.7
Total 49.1 43.4 88.2
Rent collection rates for the first quarter of 2021, a period during which the
country has been on full lockdown, is at 84.7 per cent.
The Managers' continue to engage with tenants to deliver constructive outcomes
and provide support where it is deemed appropriate.
Environmental, Social and Governance (ESG)
Whilst the Company's focus on the social element of ESG was strong during the
year, this was not at the expense of environmental aspirations. With the global
spotlight on climate change focusing on Glasgow and its hosting of the 26th UN
Climate Conference, there is heightened awareness of the need to position the
portfolio, so it remains resilient as we transition to the green economy. The
Company has been actively progressing its approach to environmental risk and
opportunity throughout the year and has been working hard in preparation for
setting and publishing its net zero carbon ambition in 2021.
ESG remains a core aspect of the Company's forward strategy and at the heart of
the Manager's investment process and I am pleased to report that the Company
was the highest rated ESG Company in its peer group by GRESB in 2020. We will
continue our focus on our environmental and social impacts which remains
resolute and we are dedicated to building on this leading position. The Board
remains fully committed to this agenda and is pleased to provide a summary of
progress in the Annual Report, whilst a deeper review will be shared in the
2020 ESG Report, available on the Company's website.
Board Composition
I will retire at the AGM in June, having served on the Board for ten years, the
last two as Chairman. The strong results delivered to investors in earlier
years have sadly been overshadowed by a period of recent underperformance. It
has been a demanding yet rewarding experience throughout. I have been
privileged to work alongside a great cadre of directors, past and present, and
truly believe that the nature of the high-quality portfolio means the Company
is well positioned to drive forward strongly from today.
With effect from the date of my retirement, Paul Marcuse will take on the role
of Chairman. Paul, who has 40 years' experience in the real estate and finance
sectors has been on the Board since January 2017 and I feel confident that I
leave the Company and the Chairmanship in good hands.
I would also like to welcome Hugh Scott-Barrett who joined the Board on 4
January 2021. Hugh brings valuable experience having worked at Board level for
over twenty years across real estate, asset management, and banking. In
particular, he was Non-Executive Chairman at Capital & Regional plc until May
2020 and was Chief Executive of the Company prior to this from 2008 to 2017.
Hugh will take on the role of Senior Independent Director from the AGM date.
Annual General Meeting
Despite significant progress with the UK's vaccination programme, there remains
much uncertainty around the easing of the latest lockdown and the continuation
of social distancing in the months ahead. The Company's articles do not allow
the AGM to be held online and there will therefore be an online shareholder
meeting on 3 June 2021 at which there will be a presentation by the Manager,
which will be followed by a question and answer session with the Board and the
Manager.
Until new articles are adopted, the online shareholder meeting needs to be
separate from the formal AGM which will be held two weeks later on 17 June
2021. The AGM will be purely functional in format with access limited to two
members only, this being the minimum number sufficient to form a quorum. Voting
at the AGM will be conducted by way of a poll and we therefore urge
shareholders to lodge their votes to arrive by the deadline stated in the
notice of meeting, appointing the chairman of the meeting as proxy. A
resolution to adopt new articles of incorporation that will provide the Board
with the flexibility to hold physical, virtual only and/or hybrid meetings,
will be put to shareholders at the forthcoming AGM.
Future Positioning
Notwithstanding the exceptional headwinds of 2020, we have strong conviction in
the prospects for the portfolio. Our year-end void rates are low and our
Manager is focused on growing income and driving value as a result of numerous
asset management initiatives across the portfolio.
Following a thorough review of strategy during 2020 a higher level of
transacting can be anticipated in the coming year as we move to recycle capital
and adjust sector weightings. Particular priority will be given to using sales
proceeds to buy-back the Company's shares if the high level of discount
persists and if the Board believes that this course of action is in the best
interests of all shareholders. The Board and Managers' look forward to sharing
our progress and to actively engaging with shareholders in the coming year.
Martin Moore
Chairman
Managers' Review
Property Market Review
The benchmark total return for the year, as measured by the MSCI UK Quarterly
Property Index ('MSCI') was -2.0 per cent. Total returns were substantially
lower than in 2019, primarily impacted by the disruption and uncertainty caused
by the pandemic, but also the Brexit uncertainty that persisted for a large
part of the year and structural problems in the retail sector.
Key Benchmark Metrics - All Property
2020 2019
% %
Total Returns (2.0) 1.3
Income Return 4.5 4.5
Capital Return (6.2) (3.1)
Open Market Rental Value Growth (3.1) (0.7)
Initial Yield 4.7 4.7
Equivalent Yield 5.8 5.5
Source: MSCI Inc
Despite a recovery towards year-end, investment activity in 2020 was lower than
in the previous year, with most sectors of the commercial real estate market
affected. However, industrial assets, helped by a number of large portfolio
deals and strong demand from a wide range of investors, did record a marked
annual increase in investment volumes. Net investment from overseas buyers
remained positive, but institutions were net sellers of property, along with
both listed and private property companies. The year saw investors favouring
assets with long-term secure income and if possible, underpinned by alternative
use value.
Capital values fell by 6.2 per cent at the all-property level. The market was
supported by a 4.5 per cent annual income return.
The market was characterised by a polarisation in sector performance. Retail
remained the weakest of the three main sectors, with a -12.3 per cent total
return. Shopping centres were the worst affected segment, but the pandemic,
lockdowns and subsequent loss of footfall from tourists and workers led to a
marked deterioration in retail total returns in the big cities, and Central
London retail in particular. Company Voluntary Arrangements (CVAs),
administrations and store closures continued, with a focus on department stores
and fashion but also spreading to food and beverage. The pandemic hit leisure
and hospitality hard and contributed to a -2.0 per cent annual total return for
the alternatives sector, outweighing a positive contribution from residential
property and healthcare.
Offices delivered a mixed performance, helped by low levels of new supply but
there were concerns about the impact of working from home and social distancing
in workplaces, which affected sentiment. The sector delivered a -1.4 per cent
total return for the year, with modest positive total returns in the City and
Rest of UK office markets being outweighed by negative total returns in the
West End and Rest of South East. Both occupiers and investors were hesitant to
commit in uncertain times and there appears to be a flight to quality in the
sector.
Industrials and logistics pulled ahead of the field in 2020 to deliver a total
return of 9.4 per cent. The South East, including London, was once again ahead
of the regions. Distribution out-performed standard industrials, for the first
time since 2013. All segments of the industrial and logistics market
experienced stronger performance. The accelerated shift to online retailing and
the need for storage space during lockdown boosted take-up to record levels
during the year.
The pandemic inevitably depressed GDP, with the first estimate pointing to a
9.9 per cent drop in 2020. With many businesses closed and supplies disrupted,
companies have often struggled to raise revenue and pay rent. Rent collection
rates have been impacted across the market with offices and industrials
relatively resilient but retail and leisure seeing a sharp fall. The government
imposed a moratorium on landlord's actions to enforce payment of rent which has
been extended to at least June 2021. MSCI data shows a 4.2 per cent fall in net
operating income growth in 2020, with a positive performance from offices and
industrials being outweighed by falls in retail and alternatives.
Against a weak economic backdrop, open market value rental growth at the
all-property level was -3.1 per cent in 2020, the lowest since the global
financial crisis and this reflects long-term structural issues in retail as
well as the effects of the pandemic.
MSCI data for standing investments showed modest yield compression during the
year at the all-property level despite the economic headwinds. Inward yield
movement for industrials and residential contrasted with an outward shift for
retail and hotels and broad stability for offices.
Valuation and Portfolio
The total return from the portfolio in the year was -4.8 per cent compared with
the MSCI return of -2.0 per cent. The Company's performance has been affected
by valuation falls, primarily on the retail holdings most impacted by Covid and
the lockdowns. Broadway, Wimbledon with its exposure to leisure, non-essential
retail and hospitality saw its valuation fall by 24.2 per cent as
capitalisation rates moved out, rents rebased and the valuation reflected the
concessions provided to tenants. St Christopher's Place Estate, our largest
holding fell by 17.0 per cent. Valuers also adopted a blanket assumption on all
retail, restaurant and leisure properties of allowing for 3-6 month's rent as a
capital deduction. Elsewhere the valuers moved out capitalisation rates on all
properties with short unexpired lease terms and those impacted by Covid. For
instance, the valuation of The Leonardo Building, Crawley fell by 22.0 per cent
due to the tenant Virgin Atlantic negotiating a rent concession as detailed
below and 3 The Square, Stockley Park by 19.0 per cent due to a short unexpired
lease term.
Sector Analysis (% of total property portfolio)
2020 2019
(%) (%)
Offices 42.2 40.9
Retail 18.5 21.8
Retail Warehouses 10.0 10.0
Industrial 19.1 17.5
Alternative 10.2 9.8
Source: BMO REP Asset Management plc
Geographical Analysis (% of total property portfolio)
2020 2019
(%) (%)
South East 20.3 21.6
London - West End 35.4 36.5
Eastern 1.7 1.9
Midlands 12.4 11.1
Scotland 13.3 13.0
North West 12.7 11.9
Rest of London 1.6 1.5
South West 2.6 2.5
Source: BMO REP Asset Management plc
Lease Expiry Profile
At 31 December 2020 the weighted average lease length for the portfolio,
assuming all break options are exercised, was 6.0 years (2019: 6.6 years)
% of leases expiring (weighted by rental 2020 2019
value) (%) (%)
0 - 5 years 47.5 45.1
5 - 10 years 34.1 34.9
10 - 15 years 12.0 12.6
15 - 25 years 6.4 7.4
Source: BMO REP Asset Management plc
The largest occupiers, based as a percentage of contracted rent, as at 31
December 2020, 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 4.0
Kimberly-Clark Limited 3.8
Virgin Atlantic Limited 3.0
JP Morgan Chase Bank 3.0
University of Winchester 2.9
Transocean Drilling UK Limited 2.8
Mothercare UK Limited* 2.6
Total 34.4
Source: BMO REP Asset Management plc
*has a rental guarantee from a Mothercare company not in administration. The
lease was assigned to Ceva Logistics in March 2021.
Income analysis
We started the year with a vacancy rate of 4.8 per cent and due to the leasing
activity detailed in this report we were able to reduce this over the year to
2.9 per cent, excluding property being developed or refurbished. Whilst this
rate is extremely low, there is an expectation it will increase as the full
economic impact of Covid-19 takes effect.
As Managers, we have been focussed on rent collection with rental collection
statistics fast becoming the main metric of the Company's performance. BMO REP
has an in-house team which provides a full service across rent demand, credit
control, service charge administration and purchase ledger. The asset managers,
supported by this team, have been proactively engaged with many of the
Company's tenants, assessing and responding to requests for support on a case
by case basis. There is 'no one size fits all solution'. It is apparent that
these strong and historic relationships, combined with robust controls and
processes, have supported rent collection during such challenging times. The
Government has provided commercial tenants with well-publicised protection from
landlords seeking to take legal action to recover arrears of rent. It has
recently been announced that this protection has been extended until 30 June
2021. Unfortunately, there are a small number of tenants with strong businesses
who are using this protection not to pay rent or to engage.
At 31 December 2020 the weighted average lease length for the portfolio,
assuming all break options are exercised, was 6.0 years (2019: 6.6 years).
Retail
The enforced closure of all non-essential retail has increased the stress on
many retailers and has led to a torrid period of increased administrations,
CVA's and high-profile failures. At our retail parks the 'essential retailers'
such as Asda, Lidl, M&S Foodhall, Boots and B&Q have remained open and managed
to accommodate customers into their stores by adopting Covid safe practice.
Although restricted to selling essential goods with limited customer numbers in
store their annual figures, in the main, demonstrate reasonable trade
throughout the pandemic. Most non-essential retailers saw a welcome boost in
sales following the end of the first lock-down in June 2020. The car parks at
Solihull and Newbury were busy and consistently operating at approximately 80
per cent capacity, with figures even higher in December. Hoping that the second
lock down in November 2020 would be short-lived was perhaps wishful thinking.
Many soon found themselves in Tier 4 and any pre-Christmas recovery was short
lived before entering the latest lockdown.
Although revenues are down significantly, in some cases non-essential retailers
have managed to prop up sales through increased online orders and click and
collect facilities from "shuttered" stores. This was very evident at Newbury
Retail Park, by the likes of Mountain Warehouse, Hobbycraft and Currys PC
World. Despite these initiatives, in some cases stock supply and logistics
issues have hampered sales. However, where our tenants have both retail park
and town centre stores, they were anecdotally reporting stronger performance
from their retail parks as shoppers favoured an outdoor environment, convenient
car parking and larger store formats where it is easier to maintain social
distancing.
The welcome news that non-essential retail will be able to re-open on 12 April
could not come soon enough. The general consensus appears to be that there will
be a repeat of the trading experienced following the lifting of the first
lockdown in June 2020 and hopefully even greater propensity for frustrated
customers to spend, knowing that the vaccination programme is progressing well
and there is light at the end of the tunnel. Newbury and Solihull are quality
assets with strong catchment areas that have benefitted from a number of
substantial developments and new store openings which should help drive future
footfall.
We are able to report the following progress:
Newbury (retail warehouse)
The construction works at Newbury continued throughout lockdown 1.0. and all
units completed on programme and budget. The new 19,500 sq. ft. Lidl foodstore
was handed over in June and they opened to the public during October. As
previously reported Lidl entered into a 25-year lease (break at year 20) with
CPI linked reviews at a rent of £430,000 per annum and the rent-free period has
expired. Monitoring of the car park revealed a marked increase in vehicle
numbers entering the retail park, which can mainly be attributed to the opening
of the new Lidl store. The adjoining 9,500 sq. ft. unit has also completed and
is being marketed to let.
The store created for Deichmann Shoes (rent £168,000 per annum) is now open and
trading, unfortunately the letting of the adjacent unit fell through and it
will be remarketed after lockdown 3.0.
Following exhaustive negotiations, we elected not to renew the leases with Next
and New Look, the former offering uncompetitive terms and the latter subject to
a CVA which resulted in a rent which was linked solely to turnover. These two
units adjoin one another and comprise approximately 20,000 sq. ft. of retail
space. In February 2021 contracts were exchanged with TJ Morris, trading as
Home Bargains, to take both units on a new 20-year lease (no breaks) at a rent
of £17.50 per sq. ft. Construction has commenced to combine the units. This new
store will be an added attraction to the Park being a further move towards more
convenience-based retailing which is expected to be more sustainable in out of
town locations. There are other asset management initiatives that are in
advanced negotiations and it is hoped that these can be wrapped up as we exit
lockdown 3.0.
Solihull (retail warehouse)
The demolition and redevelopment of the former 36,500 sq. ft. Homebase unit
progressed throughout the year uninterrupted by Covid restrictions. Marks &
Spencer entered into a new 20-year lease (breaks at year 10 and 15) for a
redeveloped 35,000 sq. ft. store combined with the adjacent M&S Food Hall. The
combined unit creates 82,000 sq. ft. providing a new full provision general
merchandise store, a larger food hall and M&S café.
The construction of the new unit and refurbishment of the shopfront of the Food
Hall completed on programme and to budget. The new M&S store was handed over to
commence shop-fitting on 19 January 2021 and M&S is expected to be ready to
open their new flagship store in June 2021. The new lease is at a rent of £
1.373 million subject to a rent-free period which expires in May 2021.
M&S have announced they will be closing their town centre store in Solihull and
as such this reinforces the strength and draw of Sears Retail Park and we have
confidence that upon opening, footfall will increase and other retailers will
be attracted to the location.
Broadway, Wimbledon, London SW19 (retail/alternatives)
The capital value of Wimbledon has fallen 24.2 per cent over the year. Rent
collection for the asset has been significantly impacted, with a cinema and a
gym accounting for 48 per cent of the rental value and being unable to trade
for substantial periods of time. Rental concessions and deferred repayment
plans have been agreed with both Odeon and Nuffield Gym and further concessions
agreed with a number of the other tenants. As a consequence of the latest
lockdown it is anticipated further concessions will be required. As an
essential retailer, Morrisons continues to trade throughout the lockdowns and
this supermarket accounts for 30 per cent of contracted rents.
We continue to work closely with Merton Council in looking at the options for
the Company's ownership, as part of the Wimbledon Town Centre Masterplan. This
could provide the Company with a valuable redevelopment opportunity, enhancing
future prospects for this asset.
St. Christopher's Place Estate (retail/office/alternatives)
During the past 12 months footfall across Central London has been severely
supressed due to restrictions on movement and unnecessary travel, the decline
in both domestic and international tourists and government advice to office
workers to work from home. St Christopher's Place with its added reliance on
public transport has been significantly impacted and disrupted by the measures.
The non-essential shops and food and beverage (F&B) tenants are closed at
present due to the current Lockdown, with the exception of takeaway and
delivery services. The recently announced roadmap out of Lockdown advises that
non-essential shops are expected to open 'not before' 12th April, with indoor
hospitality earmarked for 17th May. There is an opportunity for F&B tenants to
offer outside dining from 12th April if conditions allow. Since the first
Lockdown non-essential shops will have lost approximately 8 months of trade and
restaurants 9 months (excluding the opportunity to trade externally). This
includes the busiest time of the year in the run up to Christmas.
When Lockdown 1.0. restrictions were lifted in Summer 2020, the majority of the
estate's tenants opened and footfall levels grew incrementally week on week,
reaching around 50 per cent of the previous year's levels with weekly footfall
growth outperforming the rest of the West End. The temporary road closure of
James Street to vehicles was a success, providing the estate's F&B tenants with
the opportunity to create additional external dining space and to accommodate
safe physical distancing practices, which encouraged people to visit the area.
The 'Eat Out to Help Out' scheme during August was particularly beneficial to
restaurant turnover.
By Autumn 2020, the estate was recovering reasonably well and becoming a
vibrant destination once again, particularly with our restaurant offer.
However, the second lockdown in November followed by the imposition of Tier 4
controls in London and the introduction of Lockdown 3.0. meant that all
non-essential retail and restaurants had to close once more and have remained
shut ever since.
Across the estate, rent support has been offered to tenants on a case by case
basis with many of the concessionary agreements expected to remain in place
until at least the end of this year. It is hoped this support will ensure our
tenants will be in a position to benefit from re-opening and the expected
bounce back and recovery during the second half of this year.
The capital value of St Christopher's Place has fallen 17.0 per cent over the
year. This is the result of pressure on both the retail and F&B sectors, with
both a decline in headline rental values and capitalisation rates moving out.
In particular, the holdings on Oxford Street have been hit with a significant
rebasing of rents.
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. Oxford Street is currently experiencing many
challenges with high profile retail failures resulting in increasing vacancy
levels, especially amongst larger shops and department stores. Rental values
along the street have rebased, falling from a peak of £990 per sf ft. to £750
per sq. ft.
Despite the challenges faced above and looking forward, there are positive
developments for the Estate. Westminster City Council are supportive of
extending the temporary road closure of James Street and separately, they have
reportedly committed £150m to kick start the Oxford Street District Improvement
programme, to encourage inward investment in advance of the Elizabeth Line
opening in 2022. This investment and focus to support the immediate area
surrounding St Christopher's Place is a positive response to promote the
recovery of Oxford Street and London's West End.
Unsurprisingly, there were some tenant casualties during the year. Of
particular note were Carluccios at 3-5 Barrett Street who undertook a CVA with
the Administrators securing a buyer for the business. Despite the new buyer,
our preference was to agree a new lease with a different operator as reported
below. Aldo at 372 Oxford Street is in Administration and the store remains
closed and the rent was paid through a bank guarantee until January 2021. Pizza
Express: 21-22 Barrett Street has undertaken a CVA but this restaurant is
unaffected and will remain open with no impact on rent.
Notwithstanding the challenges highlighted above, there has been a number of
important and successful leasing deals centred around the repositioning of
James Street which bode well for when the Estate is allowed to re-open.
Letting Activity
. New letting to Flat Iron at 42-44 James Street. Flat Iron is a steak
restaurant accessible to all with eight sites in Central London. This offering
will complement the existing choice of establishments along James Street.
. 36 James St: following the surrender of the T Burrows lease, a new letting
completed to 'Chrome' which is a coffee and sweet treats café concept.
. Completed on a new letting to a southern Asia grab & go food concept,
'Papa-dum' at 20 James St. in quarter 1 2021.
. The contractor completed building works at 54/56 James St and a new letting
to 'Sidechick' completed in March 2021. This restaurant is a new concept from
the owners of Patty and Bun, an existing tenant on the Estate, and underwrites
their support for the location.
. Secured a new letting of office space at 3-5 Barrett Street and completed a
number of lease renewals with office tenants.
. A surrender of the Carluccio's lease was completed at the end of September
simultaneously with a re-letting to San Carlo Holdings Ltd (part of the San
Carlo restaurant group) on a new 15-year lease at rent in excess of £400,000
pa. This will be a significant new operator for the estate, and it is
encouraging that such a high-profile restaurateur recognises the long-term
benefits and opportunity presented at the location.
We are encouraged by these new leases which give an indication that some
occupiers are looking beyond the short-term challenges presented by Covid for
the Estate to the opportunities that should exist longer term.
Offices
The past 12 months have been challenging for the Office sector. Understandably
Covid and the Government's advice to work from home has significantly affected
office take up and performance is therefore well down on the long-term average.
Availability has increased largely due to the amount of 'grey space' being
brought to the market by occupiers wanting to reduce their total floor space
exposure. Central London has seen availability increase twofold with a vacancy
rate in excess of 7 per cent but this is biased towards small floors and poor
specification space. More people will work in an agile fashion but the early
prognosis of the death of the office appears exaggerated and many large
corporates now confirm the expectation of a return to near normal office
occupation citing, productivity, collaboration, culture and wellbeing as key
reasons. It is expected that offices will be used slightly differently in the
future, majoring on collaboration space, wellness, flexibility and a flight to
quality.
An office building that has been under the spotlight is The Leonardo Building,
Crawley, let to Virgin Atlantic. Much of lockdown 1.0 was spent negotiating
with Virgin as part of their corporate financial restructuring. We contracted a
legal agreement granting them a 12-month rent free period, spread over 5 years
by rebasing the rent from £23.00 to £18.90 per sq. ft. At the end of this
5-year period Virgin have the option to take a 2.5-year reversionary lease on
the property or to repay 50 per cent of the monetary value of the concession
back to the Company.
Notwithstanding the current challenges, the Company has a high quality and
diversified office exposure with a mix of city centre and out of town locations
and although the occupational markets were subdued there was some encouraging
activity in the portfolio.
Cassini House, London SW1 is now fully occupied following the letting to Mitsui
Fudosan in February 2020. This is a refurbished freehold trophy asset in the
heart of St James's providing a high-quality secure income stream.
Substantial progress was made at Watchmoor Park, Camberley where the
refurbishment of two floors and the reception completed. These works were fully
funded by the settlement of a dilapidations claim with the former tenant. A
letting of 7,200 sq. ft. on the second floor completed to Muller (Milk and
More) at a rent of £23.00 per sq. ft. for a term of 5 years with a tenant
option to renew for a further 10 years. The agreed rent is substantially ahead
of the rent paid by the previous tenant of £14.00 per sq. ft. and an uplift on
the rents achieved on lettings in 2019. Terms have been agreed to let the
remaining 12,500 sq. ft. of vacant space in the property and this is now under
offer.
At 2-4 King Street, London SW1, a lease re-gear with one of the tenant's
resulted in a further 5-year term certain on two of the floors. At 17a Curzon
Street, London W1 the refurbished fourth floor let during the year. The first
and second floors which are also refurbished are still available to let but
with renewed interest since the New Year.
Industrial and Logistics
Negotiations with tenants on lease events were delayed during the first
lockdown, however, these gained momentum later in the year and we are able to
report a number of successful and value accretive outcomes where we have
negotiated lease renewals, let properties and removed credit risk from the
portfolio.
During the year Mothercare fully honoured their Plc guarantor obligations on
their logistics unit at Daventry by completing an assignment of the lease
following their UK trading entity's administration. In June, Clipper Logistics
took a short-term sub-lease of this 300,000 sq. ft. facility on behalf of the
NHS to provide storage and distribution of PPE. In March 2021 Mothercare
assigned their lease to Ceva Logistics, one of the largest third-party
logistics operators in Europe. This will enable Ceva Logistics to service a
major contract from the property which is highly accessible and adjacent to
junction 18 of the M1 motorway. There has been no loss of income to the Company
due to Mothercare's administration.
A reversionary lease completed with the existing tenant at G Park, Liverpool, a
360,000 sq. ft. distribution warehouse. The 10-year lease with DHL Supply Chain
Limited from March 2021 has the benefit of a tenant break at the end of the
fifth year and the rent contracted at £5.25 sq. ft. reflects an uplift in
excess of 10 per cent on the current rent. DHL were granted a 6 months
rent-free period by way of 12 months at half rent. This resulted in a valuation
uplift of £4.475m and the Company has de-risked the portfolio to its second
largest lease expiry in 2021.
In February 2021, a new letting of Hurricane 47, Estuary Business Park
contracted to an on-line rug retailer. This is good news as the leasing of this
47,000 sq. ft. unit had taken longer than expected. Kukoon Rugs have entered
into a 15-year lease (tenant break at 10 years) at a rent of £290,000 per annum
and were granted 6 months' rent free with a further 6 months by way of 12
months at half rent.
At the Cowdray Centre, Colchester we secured detailed planning consent for the
demolition of existing properties and the development of a new trade scheme
totalling approximately 30,000 sq. ft. It is expected we will commence the
first phase of this development during the course of this year.
Elsewhere we have agreed to defer tenant break clauses for Amazon in
Southampton and at Hams Hall, Birmingham where Jaguar Land Rover want the
future flexibility to allow them to control and lease property direct.
Good progress has also been made on a number of other leasing events. Terms
have been agreed for the lease renewal of Kimberly Clark at their distribution
warehouse located in Chorley and solicitors instructed to prepare the new lease
which is expected to complete shortly. This lease event is the largest lease
expiry due in 2021 and together with the DHL commitment at Liverpool removes a
significant amount of risk from the portfolio.
Industrial sale
The sale of Phase 2 of the former Ozalid Works site in Colchester completed to
Persimmon Homes at a price of £5.5 million on 30 July 2020. This was a disposal
of non-income producing land and obsolete industrial buildings with planning
consent for residential development.
The Alternative property sector
Alternatives comprise 10.2 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. The
University have paid their rent in full and on time. The occupation of the
short-term residential units at St Christopher's Place was unsurprisingly poor
during lockdown.
Outlook
The Company's largest holding has been severely impacted but we believe Central
London will recover and prime West End real estate with strong hospitality
linkages such as St Christopher's Place will benefit from both an initial
bounce back when restrictions are lifted and from a longer term recovery. A
substantial number of properties in the portfolio have significant asset
management opportunities which need to be worked through over the next couple
of years. We are confident these will be accretive to both income and value.
As the vaccination rollout becomes more widespread and restrictions are finally
eased or lifted, we will see greater certainty returning to the market, lifting
confidence and valuations alike. Brexit has been somewhat overshadowed by the
pandemic but, now triggered, it is causing some disruption which may be more
than frictional. As an asset class, real estate will continue to be supported
by a low interest rates environment, providing it with a yield advantage over
most other domestic and overseas asset classes.
While the adjustment in retail may have further to go, it is important to
distinguish between pandemic-related change and permanent structural change.
The Company's portfolio of retail assets is of high quality, with significant
potential for further development as we re-position them to grocery and
convenience led retail propositions. The office sector outlook is heavily
dependent on the balance struck between home-working and the need for
office-based collaborative working and social interaction. The way offices are
used will change to a more agile model and to have more collaborative space.
There has been much commentary over future demand for offices, but we are now
seeing many companies restating the future need of offices to support the
wellbeing of staff. The polarisation seen between prime and secondary office
stock is likely to become more pronounced. The need for flexibility either in
the lease structure, whether manifested as shorter lease lengths or turnover
rents, or indeed as re-purposing, is expected to persist. Most importantly, is
to acknowledge the variation in performance at the asset as well as sector
level. Stock selection and a forensic attention to detail in asset management
will be key to delivering performance.
Whilst the portfolio positioning has been challenging during the pandemic, it
remains invested in prime real estate with positive ESG credentials which will
be further enhanced as ESG becomes critically important and a key determinant
of performance. Portfolio positioning will be reviewed, and on the back of a
robust investment process a number of targeted sales will be brought forward
with proceeds re-invested into sectors and properties which have a long-term
structural future.
Richard Kirby and Matthew Howard
Fund Manager
BMO REP Asset Management plc
BMO Commercial Property Trust Limited
Consolidated Statement of Comprehensive Income (audited)
Year ended Year ended
31 December 31 December
2020 2019
£'000 £'000
Revenue
Rental income 65,273 64,380
--------- ---------
Total revenue 65,273 64,380
(Losses)/gains on investment properties
Unrealised losses on revaluation of investment (121,306) (63,045)
properties
(Losses) / Gains on sale of investment properties (22) 1,321
realised
---------- ----------
Total (loss) / income (56,055) 2,656
---------- ----------
Expenditure
Investment management fee (6,692) (7,446)
Other expenses (9,448) (5,877)
---------- ----------
Total expenditure (16,140) (13,323)
----------- -----------
Operating loss before finance costs and taxation (72,195) (10,667)
----------- -----------
Net finance costs
Interest receivable 49 42
Finance costs (11,210) (10,916)
----------- -----------
(11,161) (10,874)
----------- -----------
Loss before taxation (83,356) (21,541)
Taxation (890) (934)
---------- ----------
Loss for the year (84,246) (22,475)
---------- ----------
Other comprehensive income
Items that are or may be reclassified subsequently
to profit or loss
Movement in fair value of effective interest rate (20) (319)
swaps
---------- ----------
Total comprehensive loss for the year, net of tax (84,266) (22,794)
---------- ----------
Basic and diluted earnings per share (10.5)p (2.8)p
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 As at
31 December 31 December
2020 2019
£'000 £'000
Non-current assets
Investment properties 1,205,293 1,314,973
Trade and other receivables 20,593 20,816
------------ ------------
1,225,886 1,335,789
------------ ------------
Current assets
Investment properties held for sale - 5,235
Trade and other receivables 11,589 7,561
Taxation receivable 134 112
Cash and cash equivalents 34,896 25,894
------------ ------------
46,619 38,802
------------ ------------
Total assets 1,272,505 1,374,591
------------ ------------
Current liabilities
Trade and other payables (22,644) (17,197)
------------ ------------
(22,644) (17,197)
Non-current liabilities
Trade and other payables (1,677) (2,119)
Interest-bearing loans (308,303) (308,366)
Interest rate swaps (237) (217)
------------ ------------
(310,217) (310,702)
------------ ------------
Total liabilities (332,861) (327,899)
------------ ------------
Net assets 939,644 1,046,692
------------ ------------
Represented by:
Share capital 7,994 7,994
Special reserve 589,593 589,593
Capital reserve - investments sold (16,720) (20,725)
Capital reserve - investments held 245,613 370,946
Hedging reserve (237) (217)
Revenue reserve 113,401 99,101
------------ ------------
Equity shareholders' funds 939,644 1,046,692
------------ ------------
Net asset value per share 117.5p 130.9p
BMO Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2020 (audited)
Capital Capital
Reserve - Reserve -
Share Special Investments Investments Hedging Revenue
Capital Reserve Sold Held Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 1 January 2020 7,994 589,593 (20,725) 370,946 (217) 99,101 1,046,692
Total
comprehensive
income for the
year
Loss for the year - - - - - (84,246) (84,246)
Movement in fair
value of interest - - - - (20) - (20)
rate swaps
Transfer in
respect of
unrealised losses - - - (121,306) - 121,306 -
on investment
properties
Losses on sale of
investment - - (22) - - 22 -
properties
realised
Transfer of prior
years'
revaluations to - - 4,027 (4,027) - - -
realised reserve
Total
comprehensive - - 4,005 (125,333) (20) 37,082 (84,266)
income for the
year
Transactions with
owners of the
Company recognised
directly in equity
Dividends paid - - - - - (22,782) (22,782)
At 31 December 7,994 589,593 (16,720) 245,613 (237) 113,401 939,644
2020
Consolidated Statement of Changes in Equity
for the year ended 31 December 2019 (audited)
Capital Capital
Reserve - Reserve -
Share Special Investments Investments Hedging Revenue
Capital Reserve Sold Held Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 1 January 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 - - - - (319) - (319)
rate swaps
Transfer in
respect of
unrealised losses - - - (63,045) - 63,045 -
on investment
properties
Gains on sale of
investment - - 1,321 - - (1,321) -
properties
realised
Transfer of prior
years'
revaluations to - - (23,754) 23,754 - - -
realised reserve
Total
comprehensive - - (22,433) (39,291) (319) 39,249 (22,794)
income for the
year
Transactions with
owners of the
Company recognised
directly in equity
Dividends paid - - - - - (47,962) (47,962)
At 31 December 7,994 589,593 (20,725) 370,946 (217) 99,101 1,046,692
2019
BMO Commercial Property Trust Limited
Consolidated Statement of Cash Flows (audited)
Year ended Year ended
31 December 31 December
2020 2019
£'000 £'000
Cash flows from operating activities
Loss for the year before taxation (83,356) (21,541)
Adjustments for:
Finance costs 11,210 10,916
Interest receivable (49) (42)
Unrealised losses on revaluation of investment 121,306 63,045
properties
Losses / (gains) on sale of investment properties 22 (1,321)
realised
Increase in operating trade and other receivables (3,972) (2,617)
Increase in operating trade and other payables 5,087 1,307
----------- -----------
Cash generated from operations 50,248 49,747
----------- -----------
Interest received 49 42
Interest and bank fees paid (10,528) (10,549)
Tax paid (890) (2,076)
----------- -----------
(11,369) (12,583)
----------- -----------
Net cash inflow from operating activities 38,879 37,164
----------- -----------
Cash flows from investing activities
Sale of investment properties 5,585 34,428
Capital expenditure on investment properties (12,080) (7,863)
----------- -----------
Net cash (outflow)/inflow from investing activities (6,495) 26,565
----------- -----------
Cash flows from financing activities
Dividends paid (22,782) (47,962)
Issue costs for Barclays £100m loan facility extension (600) -
----------- -----------
Net cash outflow from financing activities (23,382) (47,962)
----------- -----------
Net increase in cash and cash equivalents 9,002 15,767
Opening cash and cash equivalents 25,894 10,127
----------- -----------
Closing cash and cash equivalents 34,896 25,894
----------- -----------
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.
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 Company are described below.
. Market - the Company's assets comprise 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 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 times. Changes to tax legislation
could have an adverse financial impact.
. Operational - The Group outsources its operations to the Managers' and other
third-party service providers. Any failure of those providers internal control
systems, and in particular the Managers' accounting systems or general
disruption to their businesses, through cyber or other threats could lead to an
inability to provide accurate reporting and monitoring control or loss of data,
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, as well as a review
by the Audit and Risk Committee of the Internal Control reports prepared in
accordance with AAF(01/06).
To mitigate investment and strategic risks the Board regularly monitors the
investment environment and the management of the Company's property portfolio.
The Managers seek to mitigate the portfolio risks through active asset
management initiatives and carrying out due diligence work on potential tenants
before entering into any new lease agreements. All of the properties in the
portfolio are insured.
As well as considering current risks quarterly, the Board and the Investment
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.
. There is also the potential for structural change in the office market as
many companies look to the feasibility of implementing a hybrid model for
staff, which would involve them working partly in the office and partly at
home. There is uncertainty how this will play out and it continues to be
monitored.
. The ESG agenda is a very prominent one and will continue to grow in its
importance to shareholders, future investors and our customers. 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. This has been compounded
over the last year as the reliance on technology, particularly with regards to
home working has increased.
. The effects of Covid-19 has been the dominant risk for the global economy,
and by extension the UK property market. The effects have been extensive with
significant disruption to all sectors worldwide. This has had 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 has been
the Company's cash flow, given the number of expected defaults from tenants
unable to trade or operating at restricted levels. Against this background, the
Board took the decision to suspend the monthly dividend in April 2020 to
maximise the cash reserves available. Collection rates have been at c.87 per
cent since the outbreak, which is ahead of those anticipated and a dividend of
50 per cent of the original monthly rate was reintroduced in August 2020 before
being increased to 70 per cent in December 2020. 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 Board Meetings 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 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 leisure sectors
Arrangements and is well diversified by has been negatively impacted
administrations in the last geography and sector and by Covid-19. The Manager is
two years. the exposure to individual in regular contact with
There is an increased risk tenants is monitored and tenants and rental
of tenant defaults in the managed to ensure there is collection is a primary
retail and leisure sectors no over exposure. focus. Collection rates
since the Covid-19 since the Covid-19 outbreak
outbreak, which has put the have been ahead of original
level of dividend cover at expectations.
risk.
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 The use of share buybacks as
basis and any material a method of reducing the
changes are investigated discount were regularly
and communicated to the considered during the year
Board more regularly. and it was decided that the
priority was the
preservation of cash and not
being a forced seller of
property. The use of share
Risk increased in the year buybacks remain under
under review consideration for the coming
year. At the Board's request
there has been increased
reporting from the broker on
the market and the
shareholder feedback they
are receiving.
Insufficient cash resources The Manager reports The Board have held
to meet capital commitments regularly on ongoing additional ad-hoc Board
or to fund the monthly revenue collection, cash Meetings since the Covid-19
dividend leading to forecasting and compliance outbreak which includes
emergency sale of assets with banking covenants. The revenue and cash
and/or cutting of dividend Group performs a solvency forecasting.
level. test in advance of each A decision was made to
dividend payment. A suspend the dividend in
detailed cash flow model is April 2020 to protect cash
included in the Board resources. Collection levels
papers, as well as a were ahead of expectations
schedule on immediate cash and a monthly dividend of 50
commitments. per cent of the original
rate was reintroduced in
August 2020. A further
increase to 70 per cent was
introduced from December
2020. The rate and
sustainability of the
dividend remains under
continual review.
Compliance with the Group's
banking covenants remain
under continual review. All
covenant tests attached to
the Group's long-term debt
with L&G were met throughout
Risk increased in the year the year. Due to the
under review challenges associated with
the pandemic and the impact
this has had on rental
collection, there was a
technical breach on the
projected interest cover
covenant test under the
Barclays £50 million loan
facility for the final
quarter of 2020. Barclays
have been supportive
throughout the year and have
confirmed that they remain
supportive in the current
environment and therefore a
waiver was provided from
this test for that quarter
which also covers the first
two quarters of 2021.
Improved shareholder The Investment Manager and The quality of communication
communication is key in the broker regularly meet continues to evolve. Actions
current environment with significant shareholders. during the year include:
valuations falling and the The Chairman and Senior . Further refreshing of the
shares trading at a Independent Director offer Company's website which has
significant discount. to meet the largest an enhanced look and feel,
It is important that all shareholder annually and providing greater detail on
shareholders have access to are available to meet other the Company's portfolio.
information on how the shareholders. . Detailed quarterly trading
Company is being run in The website is kept up to announcements.
order to make informed date and contains relevant . An increased number of
investment decisions, which information; complying with meetings with investors
will help to mitigate any regulatory through meetings arranged by
widespread selling of the requirements. the Manager's investor
Company's shares. A comprehensive Annual relations team.
Report is produced, and the
consolidated financial
Risk increased in the year statements are
under review independently audited.
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 6.0 years. It is believed that it will be
possible to satisfactorily refinance the principal loan in 2024 and an
assumption is made that the continuation vote is passed. The assessment has
been undertaken, taking into account the principal risks and uncertainties
faced by the Group, as identified above; 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 Group'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 2026, 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 most extreme UK commercial property market downturn
experienced in recent history. 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 Group remains viable.
The Group 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 level of rents collected since March 2020 to
March 2021 averaging 87.3 per cent. In order to preserve cash resources, the
Board made the decision to suspend the monthly dividend between April 2020 and
July 2020 before reintroducing a monthly dividend at 50 per cent of the
original level from August 2020 and 70 per cent from December 2020.
Detailed modelling has been performed, which has looked at the impact of the
current crisis under increasingly negative scenarios and the modelling
demonstrates that the Company remains viable.
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 39 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 71 per cent. We are comfortable
that these covenants will continue to be met.
The Group's Barclays £50 million loan facility is due to expire in July 2022
with an option to extend by two further one-year periods on receiving Barclays
consent. The LTV test should remain comfortable with a fall of 61 per cent of
the market value of the properties secured under this loan being required
before breaching. The assets secured under this loan are provided by the St
Christopher's Place Estate and the level of rental income receivable from these
assets has been significantly impacted with many tenants in the retail and
hospitality sectors unable to trade for large periods since March 2020. There
was a technical breach on the projected interest cover covenant test for the
final quarter of 2020. Barclays have been supportive throughout the year and
have confirmed that they remain supportive in the current environment and
therefore a waiver was provided from this test for that quarter which also
covers the first two quarters of 2021. The £50 million of borrowings currently
drawn down from Barclays are not material to the operation of the Group.
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 2026.
For this reason, the Board also considers it appropriate to continue adopting
the going concern basis in preparing the Annual Report and Consolidated
Accounts.
BMO Commercial Property Trust Limited
Going Concern
After making enquiries and bearing in mind the nature of the Group's business
and assets, the Directors consider that the Group has adequate resources to
continue in operational existence for the next twelve months. In assessing the
going concern basis of accounting the Directors have had regard to the guidance
issued by the Financial Reporting Council. They have considered the current
cash position of the Group, forecast rental income and other forecast cash
flows. Based on this information the Directors believe that the Group has the
ability to meet its financial obligations as they fall due for the foreseeable
future, which is considered to be for a period of at least twelve months from
the date of approval of the accounts. For this reason, they continue to adopt
the going concern basis in preparing the accounts.
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 2020, of which this statement of results is
an extract, have been prepared in accordance with applicable International
Financial Reporting Standards as adopted by the EU, on a going concern
basis, and give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Group and the undertakings included in
the consolidation taken as a whole and comply with The Companies (Guernsey)
Law, 2008; and
* The Chairman's Statement and Managers' Review include a fair review of the
development and performance of the business and the position of the Group
and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties that
they face; and
* The consolidated financial statements within the Annual Report and Accounts
for the year ended 31 December 2020 include 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
Martin Moore
Director
BMO Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year ended 31 December 2020
1. Financial Instruments and investment properties
The Group's investment objective is to provide ordinary shareholders with an
attractive level of income together with the potential for capital and income
growth from investing in a diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial property
investments. In addition, the Group's financial instruments during the year
comprised interest-bearing bank loans, cash and receivables and payables that
arise directly from its operations. The Group does not have exposure to any
derivative instruments other than the interest rate swap entered into to hedge
the interest paid on the Barclays interest-bearing bank loan.
The Group is exposed to various types of risk that are associated with
financial instruments. The most important types are credit risk, liquidity
risk, interest rate risk and market price risk. There is no foreign currency
risk as all assets and liabilities of the Group are maintained in pounds
sterling.
The Board reviews and agrees policies for managing the Group's risk exposure
including an assessment of the impact of Covid-19. These policies are
summarised below and have remained unchanged for the year under review. These
disclosures include, where appropriate, consideration of the Group's investment
properties which, whilst not constituting financial instruments as defined by
IFRS, are considered by the Board to be integral to the Group's overall risk
exposure.
Credit risk
Credit risk is the risk that 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 2.872 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 2020. The revolving credit facility pays an
undrawn commitment fee of 0.72 per cent per annum.
When the Group retains cash balances, they are ordinarily held on
interest-bearing deposit accounts. The benchmark which determines the interest
income received on interest bearing cash balances is the bank base rate of the
Bank of England which was 0.1 per cent as at 31 December 2020 (2019: 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 2020 (2019:
799,366,108).
At 31 December 2020, the Company did not hold any Ordinary Shares in treasury
(2019: nil).
3. Earnings per share
The basic and diluted earnings per Ordinary Share are based on the loss for the
year of £84,246,000 (2019: loss £22,475,000) and on 799,366,108 (2019:
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 £5,200,000 as at 31 December 2020
(2019: £2,100,000). These commitments related mainly to contracted development
work at the Group's property at Solihull, Sears Retail Park.
6. These are not full statutory accounts. The full audited accounts for
the year to 31 December 2020 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:
2020 2019
£'000 £'000
Loss for the year (84,246) (22,475)
Add back: Unrealised losses on
revaluation of investment 121,306 63,045
properties
Losses / (Gains) on sales of
investment properties 22 (1,321)
realised
Profit before investment gains and losses (a) 37,082 39,249
Dividends (b) 22,782 47,962
Dividend Cover percentage (c= a/b) (c) 162.8% 81.8%
Annualised Dividend Yield - The dividends paid during the year divided by the
share price at the year end.
Net Gearing - Borrowings less cash divided by total assets (less current
liabilities and cash).
Portfolio (Property) Capital Return - The change in property value during the
period after taking account of property purchases and sales and capital
expenditure, calculated on a quarterly time-weighted basis. The calculation is
carried out by MSCI Inc.
Portfolio (Property) Income Return - The income derived from a property during
the period as a percentage of the property value, taking account of direct
property expenditure, calculated on a quarterly time-weighted basis. The
calculation is carried out by MSCI Inc.
Portfolio (Property) Total Return - Combining the Portfolio Capital Return and
Portfolio Income Return over the period, calculated on a quarterly
time-weighted basis. The calculation is carried out by MSCI Inc.
Total Return - The theoretical return to shareholders calculated on a per share
basis by adding dividends paid in the period to the increase or decrease in the
Share Price or NAV. The dividends are assumed to have been reinvested in the
form of Ordinary Shares or Net Assets, respectively, on the date on which they
were quoted ex-dividend.
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration (Guernsey) Limited
Trafalgar Court
Les Banques
St. Peter Port
Guernsey GY1 3QL
Tel: 01481 745436
Fax: 01481 745186
Richard Kirby
BMO REP Asset Management plc
Tel: 0207 016 3577
Graeme Caton
Winterflood Securities Limited
Tel: 0203 100 0268
END
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