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BMO CommercialBMO CommercialProperty Trust LimitedProperty Trust Limited(Formerly F&C Commercial Property Trust Limited)Interim Report for the six monthsended 30 June 2019
BMO Commercial Property Trust Limited2 BMO Commercial Property Trust Limited
OVERVIEWCompany OverviewObjectiveThe investment objective of BMO Commercial Property TrustLimited (‘the Company’) is to provide ordinary shareholderswith an attractive level of income together with the potentialfor capital and income growth from investing in a diversifiedUK commercial property portfolio.The CompanyThe Company is an Authorised Closed-Ended Guernseyincorporated investment company. Its shares have a premiumlisting on the Official List of the UK Listing Authority and aretraded on the Main Market of the London Stock Exchange.Stock Code : BCPT.The Interim Report of the Company also consolidates theresults of its subsidiary undertakings, which collectively arereferred to throughout this document as ‘the Group’, details ofwhich are contained in note 10 to the accounts.At 30 June 2019 Group total assets less current liabilities were 1,400 million and Group shareholders’ funds were 1,090million.The Group elected into the UK REIT regime from 3 June 2019.ManagementThe Board has appointed BMO Investment Business Limited(referred to throughout this document as ‘the InvestmentManagers’) as the Company’s investment managers andBMO REP Asset Management plc (referred to throughout thisdocument as ‘BMO REP’ or ‘the Property Managers’) as theCompany’s property managers. The Investment Managersand BMO REP are both part of the BMO Asset Management(Holdings) plc group (‘BMO’) and, collectively, are referred toin this document as ‘the Managers’.BMO is wholly owned by Bank of Montreal and is part of theBMO Global Asset Management group of companies.Capital StructureThe Company’s equity capital structure consists of ordinaryshares (‘Ordinary Shares’). Subject to the solvency testprovided for in The Companies (Guernsey) Law, 2008, beingsatisfied, ordinary shareholders are entitled to all dividendsdeclared by the Company and to all of the Company’s assetsafter repayment of its borrowings and ordinary creditors.Guernsey Regulatory StatusThe Company is an Authorised Closed-Ended InvestmentScheme domiciled in Guernsey and was granted anauthorisation declaration by the Guernsey Financial ServicesCommission in accordance with Section 8 of The Protection ofInvestors (Bailiwick of Guernsey) Law, 1987, (as amended) andrule 6.02 of the Authorised Closed-Ended Investment SchemesRules 2008, on 9 June 2009.How to InvestThe Investment Managers operate a number of investmentplans which facilitate investment in the shares of theCompany. Details are contained on page 29. You may alsoinvest through your usual stockbroker.Alternative Performance Measures (‘APM’)The Company uses a number of alternative performancemeasures in the discussion of its business performance andfinancial position. Further information is provided on page 30.Visit our website at:bmocommercialproperty.comLegal Entity Indentifier: 213800A2B1H4ULF3K397Front Cover Photo: Revolution Park, ChorleyInterim Report 2019 3
BMO Commercial Property Trust LimitedFinancial HeadlinesDelivering long-term growth in capital and income-8.0per cent-0.4per cent5.4per centShare price total return*Share price total return of -8.0 per cent for the 6 months.Net asset value total return*Based on net assets calculated under International Financial ReportingStandards. Net asset value total return is calculated assumingdividends are re-invested.Annualised dividend yield*Maintained annualised dividend at 6.0 pence per share giving a yieldof 5.4 per cent on the period end share price.Potential investors are reminded that the value of investments and the income from them may go down as well as up and investors maynot receive back the full amount invested. Tax benefits may vary as a result of statutory changes and their value will depend on individualcircumstances.*See Alternative Performance Measures on page 30.4 BMO Commercial Property Trust Limited
OVERVIEWPerformance SummaryYear ended31 December2015Half yearended30 June 2019Total Returns for the period*15.9%(0.4)%2.8%(8.0)%Portfolio14.3%0.5%MSCI UK Quarterly Property Universe13.3%0.9%1.0%13.0%Half yearended30 June 2019Year ended31 December2018% change1,400,3461,427,310(1.9)136.3p139.8p(2.5)Net asset value per shareOrdinary Share priceFTSE All-Share IndexCapital ValuesTotal assets less current liabilities ( ’000)Net asset value per shareOrdinary Share price111.8p124.6p(10.3)FTSE All-Share Index4,056.883,675.0610.4Discount to net asset value per share*(18.0)%(10.9)%20.4%21.2%Net Gearing*Half yearended30 June 2019Half yearended30 June 2018Earnings and DividendsEarnings per Ordinary Share6.9p(0.4)p5.0pDividends per Ordinary Share3.0p3.0p3.0pAnnualised dividend yield*4.1%5.4%4.0%Sources: BMO Investment Business, MSCI Inc and Refinitiv Eikon.* See Alternative Performance Measures on page 30.Interim Report 2019 5
BMO Commercial Property Trust LimitedChairman’s StatementFor the Six Months Ended 30 June 2019Martin Moore,ChairmanPerformance for the PeriodThe first six months of 2019 has seen continueduncertainty surrounding commercial propertymarkets in the UK, with the trading environment forretailers and the potential impact of Brexit causingparticular concern. This has been challenging forthe listed real estate sector with many of the largecap companies trading at significant discountsto their Net Asset Values (‘NAV’s). Against thisbackdrop, the Company’s share price total return toshareholders over the six-months to 30 June 2019was (8.0) per cent. The share price at the periodend was 111.8p, representing a discount of 18.0 percent to the NAV per share of 136.3p.The NAV total return over the six months was (0.4)per cent. The following table provides an analysis ofthe movement in the NAV per share for the period:NAV per share as at 31 December 2018Unrealised decrease in valuation ofdirect property portfolioOther net revenueDividends paidNAV per share as at 30 June 2019Pence139.8(2.9)2.4(3.0)136.3The total return from the underlying portfolio was0.5 per cent, compared with a total return of 0.9 per6 BMO Commercial Property Trust Limitedcent from the MSCI Quarterly Property Universe. TheIncome return from the portfolio over the periodwas 2.1 per cent, offset by negative capital returnsof (1.7) per cent. Unsurprisingly the weakest sectorin the MSCI Quarterly Universe was retail with thestrongest returns again coming from industrials,driven by rental growth and further modest yieldcompression.One of our priorities has been the selectivedisposal of assets which were felt to have limitedfuture growth prospects and we were delightedto complete the sales of Thames Valley Park 1,Thames Valley Park 2 and Building A, WatchmoorPark, Camberley during the period. We will look torecycle some of this capital into a number of theadvanced asset management opportunities theManager is currently working on and where weexpect the outcomes will deliver sustainable, longterm income and support future fund performance.Another current priority is to replace the incomelost or at risk at both Newbury Retail Park inNewbury and Sears Retail Park in Solihull. Wehave already completed a large letting to Lidl atNewbury for a 25 year lease with a break option atyear 20. Beyond this, there are significant ongoingnegotiations at both Parks and we hope to reporton these at a later date.St. Christopher’s Place continues to enjoy strongoccupier demand although this popular WestEnd estate has not been immune to the currentchallenges facing the retail sector and we expectrental growth may be muted here in the shortterm.BorrowingsThe Group’s available borrowings comprise a 260million term loan with Legal & General PensionsLimited, maturing on 31 December 2024 and a
STRATEGIC REPORT 50 million term loan facility and an undrawn 50million revolving credit facility, both with Barclaysand available until June 2021. The Group’s netgearing was 20.4 per cent at the end of the periodand the weighted average interest rate on totalcurrent borrowings is 3.3 per cent.Dividends and Dividend CoverMonthly interim dividends of 0.5p per sharecontinued during the period, maintaining theannual dividend of 6.0p per share paid since 2006and providing a dividend yield of 5.4 per cent basedon the period-end share price. Barring unforeseencircumstances, your Board intends that dividendswill continue to be paid monthly at the same rate.The Company’s level of dividend cover for theperiod was 81.7 per cent, slightly higher than theequivalent period last year (79.2 per cent). Therehas been a small fall in rental income comparedwith the same period last year due to the sale ofthe property at Thames Valley Park 2 and to theloss of income at Solihull and Newbury. This wasmore than compensated for by a fall in the levelof taxation payable and a reduction in expenses,where a one-off surrender premium was paidin 2018.REIT ConversionShareholders voted in favour of the REIT proposalsat an extraordinary general meeting held on 30 May2019 and the Group entered the UK REIT regimeon 3 June 2019. The adoption of REIT status by theGroup will alter the shareholders’ tax positions inrespect of the receipt of distributions under the REITregime, as the majority of the distributions from theCompany will be property income distributions. Thefirst distribution that the Company will make underthe REIT regime will relate to profits earned fromOne Cathedral Square, BristolJune 2019. The amount and payment date of suchproperty income distribution will be announced inOctober 2019.Board CompositionHaving served nine years on the Board, ChrisRussell stepped down as Chairman of the Companyand retired from the Board at the annual generalmeeting on 30 May 2019. I became Chairman fromthat date and Paul Marcuse took on the role ofSenior Independent Director. Chris joined the Boardin 2009 and became Chairman in 2011. He excelledin this role and I would like to thank him for hissignificant contribution and leadership over theyears.Following the approval of the REIT conversionproposals, Peter Cornell and David Preston, bothGuernsey directors, also stood down from theInterim Report 2019 7
BMO Commercial Property Trust LimitedBoard with effect from 30 May 2019. I’d like to thankthem too, at the same time welcomingLinda Wilding. Linda is UK based and joined theBoard on 3 June 2019.Following these changes, the Board now consists offive Directors, three male and two female, four ofwhom are based in the UK and one in Guernsey.OutlookThe property market continues to deliver positivetotal return, but the pace has slowed andinvestment activity has weakened. The market islikely to encounter continued headwinds related toBrexit and its political and economic ramifications.Slower economic growth and political uncertaintiesinternationally are also affecting sentiment.However, post Brexit, if there is some easing infiscal policy and interest rates are kept low, as themarket expects, then this should provide some8 BMO Commercial Property Trust Limitedsupport for property, particularly from investorsseeking a higher-yielding alternative to gilts.Total returns are expected to be low single-digitand will be driven by income, with well-specifiedand well-let assets in established locations likely toout-perform.Notwithstanding the short-term pressures in theretail sector, the Company has a well-positionedand resilient portfolio with exciting opportunitiesacross many sectors to add value and deliversustainable long-term rental income. Our effortscontinue to be focused on delivering these over themonths ahead.Martin MooreChairman16 September 2019
STRATEGIC REPORTManagers’ ReviewProperty highlights over the period Six-month total return of 0.5 per cent versus the MSCI UK QuarterlyProperty Universe (‘MSCI’) return of 0.9 per cent.Richard Kirby,Fund Manager Completed the sales of Thames Valley Park 1 & 2 and Watchmoor ParkBuilding A, as part of the strategic office sales programme. Signed new lease agreements to Lidl and Hobbycraft at NewburyRetail Park and made good progress in attracting new retailers to bothNewbury and Solihull retail parks. Completed the lease to Shore Capital who took the 4th and 5th floors atCassini House, London SW1.Matthew Howard,Deputy Fund ManagerProperty Market ReviewThe market total return for the six months to 30June 2019, as measured by the MSCI UK QuarterlyProperty Universe (‘MSCI’) was 0.9 per cent. Returns,although positive, are moderating, with capitalvalues falling by 1.3 per cent and income returnsof 2.2 per cent. Rental growth was (0.2) per cent atthe all-property level, although the fall was largelyattributable to problems in the retail market, whererents fell by 1.9 per cent.Key Benchmark Metrics – All-PropertyJan-June2019%Jan-June2018%Total Returns0.93.7Income Return2.22.2Capital Growth(1.3)1.5Open Market RentalValue Growth(0.2)0.5Initial Yield4.64.5Equivalent Yield5.55.5Source: MSCI IncPerformance was led by a 3.4 per cent total returnfor industrials. Alternatives (such as hotels andstudent accommodation) delivered 2.6 per cent,with offices returning 2.1 per cent and retail theweakest sector at (2.4) per cent.The UK economy saw modest growth over theperiod. Monetary policy and interest rates wereunchanged although gilt yields continued to fall,finishing the period below 1.0 per cent. Investorsentiment was affected by growing politicaluncertainty involving the lack of agreement inBrexit negotiations, which looks set to continueas we enter the autumn. The weakening in globalgrowth prospects and the advance of protectionismglobally are also areas of concern. This uncertaintyhas caused a sharp drop in investment activityacross all sectors. Net investment from overseasbuyers was still positive, demonstrating thecontinued attraction of UK commercial real estate.Local authorities were also net purchasers ofproperty, whilst institutions were marginal netsellers during the period, as were listed andunlisted property companies.Interim Report 2019 9
BMO Commercial Property Trust LimitedManagers’ Review (continued)Geographical Analysisas at 30 June 2019, % of total property portfolioSector Analysisas at 30 June 2019, % of total property portfolioSouth East (21.6%)Offices (39.5%)London – West End (36.0%)Retail (22.4%)Eastern (2.2%)Retail Warehouses (10.6%)Midlands (11.9%)Industrial (18.2%)Scotland (12.6%)Alternative (9.3%)North West (11.8%)Rest of London (1.5%)South West (2.4%)Source: BMO REP Asset Management plcCBRE market data showed yields moving higheracross most parts of the retail market, with officeand industrial yields broadly stable. There was someyield compression in the alternatives space, notablyfor student accommodation, and for propertiessecured on long leases with inflation linked uplifts,where investor appetite remains strong. Theall-property initial yield moved higher during theperiod, leading to some widening in the yield gapbetween property and ten-year gilts. Property,measured on this basis, looks fairly priced in relationto the average margin over the longer-term.The occupational market has been less affected,but not immune, to the political and economicclimate. Offices saw 0.5 per cent rental growth andindustrials 1.4 per cent in the six-month period.Occupiers most affected appear to be large multinational corporates with pan-European presencewho are generally waiting until after Brexit beforemaking any long-term strategic decisions.The structural problems and challenges in the retailsector have continued. Although central Londonshops delivered a positive total return, performancehas slipped compared with the same period a yearago. Most other parts of the retail market recordeda negative total return, with shopping centresand retail warehousing being particularly weak.The central London office market has remained10 BMO Commercial Property Trust LimitedSource: BMO REP Asset Management plcresilient despite Brexit uncertainty, with higherthan average occupancy rates and continued rentalgrowth. Overall, property performance was drivenby the strength in the industrials market with bothdistribution warehousing and standard industrialsoutperforming the all-property average.Valuation and PortfolioThe total return from the portfolio over the periodwas 0.5 per cent compared with the MSCI returnof 0.9 per cent. The Company’s underperformanceat portfolio level over the period has been drivenby valuation movements of the two large retailTotal Portfolio PerformanceNo of propertiesValuation ( ’000)Average Lot Size ( ’m)Six months to30 June 2019Portfolio Capital Return*30 June2019Year ended31 o(%)MSCI(%)(1.7)(1.3)Portfolio Income Return*2.12.2Portfolio Total Return*0.50.9Source: BMO REP Asset Management plc, MSCI Inc*See Alternative Performance Measures on page 30
STRATEGIC REPORTLease Expiry ProfileAt 30 June 2019 the weighted average lease length forthe portfolio, assuming all break options are exercised,was 6.8 years% of leases expiring (weighted by rental value)50%45.8%44.4%Covenant Strengthas at 30 June 2019, % of income by risk band30 June 2019Unscored and ineligible (6.0%)31 December 2018Maximum (9.9%)40%High (1.7%)33.5%Medium to High (3.1%)30.2%30%Low to Medium (2.0%)Low (18.2%)20%14.9%8.3%10%0%Negligible and Government(59.1%)17.1%5.8%0 - 5 years5 - 10 years10 - 15 years15 - 25 yearsLease LengthSource: BMO REP Asset Management plcSource: IRIS Report, MSCI Incwarehouse parks, with the valuation of Newburyfalling by 10.2 per cent and Solihull falling by 2.2per cent. Despite the challenges faced in the sectorthe portfolio’s retail total return outperformed MSCIwhich was helped by the fact that the Companydoesn’t hold any shopping centres which was theweakest performing retail sub-sector.Company experienced a concentrated period ofdefaults or Company Voluntary Arrangements (CVAs)on its two large retail parks (Newbury and Solihull)during the middle part of 2018.The office portfolio also outperformed MSCI witha 2.3 per cent total return versus 2.1 per cent,although industrials were lower at 1.3 per centversus 3.4 per cent, predominantly owing to arelatively quiet period of asset management.Income AnalysisThe portfolio continues to benefit from a resilientand secure income stream. We have reducedthe void rate to 5.0 per cent (31 December 2018:8.5 per cent) through a combination of assetmanagement initiatives, such as the letting of twofloors at Cassini House, London and the sale ofnon-core assets which were largely vacant. Otheropportunities are in hand to reduce the void levelfurther.RetailIt has been a busy period for the Company with anumber of significant retail leases either completedor in negotiation. The challenges faced by UKretailers have been well documented and theNewburyWe have recently completed an important lettingon the retail park to Lidl, who signed an agreementfor a 25-year lease with CPI linked reviews (breakat year 20) at a rent equating to 23.00 persquare foot to occupy the majority of the formerHomebase unit. Landlord works have commenced,and Lidl are expected to open for trade in early2020. This follows the letting to Hobbycraft at Unit8A ( 215,578 per annum for 10 years) replacingPoundworld, who went into administration last year.We are also close to exchanging an agreement withanother large retailer to occupy part of the formerMothercare store. These lettings demonstratethe resilience of the park and its attractivenessto retailers and shoppers alike. There remain twosmall units to let at the park and we hope to putthese under offer shortly.SolihullWe are now under offer to a major UK retailer tooccupy the former Homebase store and hope toexchange a conditional agreement for lease shortly.The store was vacated in February 2019 and canstill require significant
BMO Commercial Property Trust Limited 4 BMO Commercial Property Trust Limited Financial Headlines Delivering long-term growth in capital and income Potential investors are reminded that the value of investments and the income from them may go down as well as up and
