Results in Respect of the Year Ended 31 Dec 2022
To: RNS
Date: 19 April 2023
From: Balanced Commercial Property Trust Limited (the “Company”)
L.E.I. 213800A2B1H4ULF3K397
Results in Respect of the Year Ended 31 December 2022 (audited)
Headlines
- -11.7* per cent share price total return.
- -6.5* per cent portfolio total return.
- 104.8* per cent dividend cover on a cash basis (102.3 per cent on an accounting basis).
- 5.3* per cent dividend yield on year-end share price.
- 10.6 per cent dividend increase during the year.
- As at 31 December 2022, the void rate was 5.9 per cent, excluding property being developed or refurbished, which compares to a rate of 2.0 per cent at the start of the calendar year. The void rate was 1.4 per cent excluding the asset at Stockley Park, Uxbridge where redevelopment opportunities are being actively reviewed.
- 26 per cent reduction in absolute carbon emissions since 2021.
- Rent collection has stabilised at pre-pandemic levels with collection of 99 per cent for the year ended 31 December 2022.
*see Alternative Performance Measures
Chairman’s Statement
The second half of 2022 saw a marked reversal of the positivity seen in the early part of the year. As the year progressed, geopolitical challenges and inflationary pressures resulted in rising interest rates and slowing economic growth. This had an inevitable impact on consumer confidence and economic activity.
September’s mini budget marked a distinct turning point and proved the catalyst for one of the worst quarters of capital performance from the UK commercial real estate market on record. A significant increase in gilt yields compounded the sustained tightening of monetary policy and precipitated a rapid pricing correction across the real estate sub-markets. October 2022 saw the largest monthly decline in capital value on record (as measured by the MSCI Monthly index), closely followed by November 2022 as the second, as the investment market was marred by uncertainty and illiquidity that have spilled over into the beginning of 2023.
The capital value declines were particularly marked in the industrial and logistics sector and the retail warehousing sector. These sectors had experienced the highest levels of yield compression in the first half of the year and had performed strongly in recent years.
Company Performance
Against this challenging economic backdrop, the Company has delivered a net asset value (‘NAV’) total return of -9.2 per cent and the NAV per share as at 31 December 2022 was 118.5 pence, down from 135.1 pence per share as at 31 December 2021 (a decrease of 12.3 per cent).
The potential downside risk attached to real estate asset values has been reflected in share prices and share price volatility within the sector. At the year-end the discount was 25.3 per cent, compared to 22.3 per cent at 31 December 2021. The share price total return for the year was -11.7 per cent. The share price discount remains a major frustration and a reflection of the challenges that the real estate sector has been facing, exacerbated by the rising interest rate environment. Against this market background, the Board will continue to consider value-enhancing strategic opportunities, alongside supporting the Managers in investments and significant asset management initiatives at portfolio level.
The following table provides an analysis of the movement in the NAV per share for the year:
| Pence per share * | |
| NAV per share as at 31 December 2021 | 135.1 |
| Unrealised decrease in valuation of property portfolio | (17.9) |
| Share buybacks | 1.1 |
| Movement in fair value of interest rate swap | 0.1 |
| Other net revenue | 4.8 |
| Dividends paid | (4.7) |
| NAV per share as at 31 December 2022 | 118.5 |
*Based on the average number of shares in issue during the year
Portfolio Performance
The Company’s portfolio delivered a total return of -6.5 per cent over the 12-month reporting period, outperforming the MSCI UK Quarterly Property Index (‘MSCI’ or ‘Index’) return of -8.9 per cent. Outperformance was driven by a capital return of -10.5 per cent against the Index return of -12.4 per cent and an income return of 4.5 per cent against the Index at 4.0 per cent.
The balanced nature of the portfolio has proven to be a structural benefit and the Managers have executed a number of accretive asset management activities to deliver both capital and income outperformance over the year. More detail on these activities is provided in the Managers’ Review.
The performance of the largest asset within the portfolio, the mixed-use holding at St Christopher’s Place in London, has been particularly notable. Having endured a challenging period since the on-set of the Covid pandemic, it has been the top performing asset over the 12 months.
The Company has identified a number of assets as potential disposal targets as part of a capital recycling strategy, primarily focussing on a down-weighting of the portfolio’s office exposure. However, any future disposals are to be executed within a supportive market context and the Company will continue to review its investment strategy as market conditions evolve.
Borrowings and Cash
The Company has maintained a liquid position over the period and as at 31 December 2022, the Company had £54.8 million of available cash.
There is a £260 million term loan in place with L&G which matures in December 2024 and the Board has engaged debt advisors to consider the financing options available at this early stage. The Company believes that there is lender appetite for this type of debt based on advice received and we are closely monitoring the financial markets as we move closer to the refinancing date.
The Company also has a £50 million term loan with Barclays, along with an additional undrawn £50 million revolving credit facility. The Barclays facility expires on 31 July 2024, with the Company having taken up the option earlier this month of a one-year extension. As at 31 December 2022, the Company’s loan to value, net of cash (‘LTV’), was 23.4 per cent and the weighted average interest rate on the Group’s total current borrowings was 3.6 per cent.
Continuation Vote
As set out in the Articles of Incorporation, the Directors shall put an ordinary resolution to shareholders in relation to the continuation of the Company at a general meeting which has to be held in 2024. We will be consulting with shareholders later this year as part of this process and will advise on a date for the meeting in due course.
Share Buybacks
The Company has continued share buybacks during the year, using some of the proceeds from property sales in 2021. The Company purchased 51.6 million shares during the year at an average discount at the time of purchase of 19.6 per cent and a cost of £58.5 million. This has enhanced the NAV by 1.1 pence per share during the year while providing additional liquidity in the Company’s shares.
The buybacks were transacted between January and September 2022 but have subsequently been put on hold, with the preservation of cash in current markets taking precedence.
Dividends
The Company paid twelve interim dividends totalling 4.7 pence per share during the year, a 10.6 per cent increase on the prior year. There were four monthly dividends of 0.375 pence per share, followed by an increase in May 2022 to 0.4 pence per share. Monthly dividends have remained at this rate, however, with the dividend fully covered and with further rental growth expected to materialise, the Board will continue to keep the level of dividend under review.
Board Composition
Having served on the Company’s Board for 9 years, Trudi Clark will retire from her role as non-executive director and Chairman of the Audit and Risk Committee with effect from the Annual General Meeting in May 2023. I would like to thank Trudi for the considerable contribution she has made during her time on the Board.
I am delighted to confirm that Isobel Sharp, who has been actively involved on the Board since her appointment as non-executive Director in November 2022, will assume Trudi’s duties as Audit and Risk Committee Chairman when she steps down. Isobel has extensive accounting, auditing and corporate governance experience. She was with Deloitte LLP as the firm’s Senior Technical Partner until 2012, has served as President of The Institute of Chartered Accountants of Scotland and on the UK Accounting Standards Board and the Financial Reporting Review Panel.
Environmental, Social and Governance (‘ESG’)
The ESG agenda continues to gather pace and the Board, alongside our Managers, maintain a commitment to high standards and best practice. The Company has a Global Real Estate Sustainability Benchmark ("GRESB") rating of 70, giving it a two-star green rating, as well as a gold standard EPRA award for disclosure.
The Company’s 2022 ESG report is due to be published in April 2023, and our strategy is continually developing along with the swift evolution of the ESG landscape.
The key focus for the Company in 2023 is the refinement of our Net Zero Carbon pathway. Independent Net Zero Carbon assessments were completed for all of the Company’s properties, mapping the interventions necessary to meet our commitment to deliver net zero by 2040 or earlier. Asset-level pathway modelling is now underway and will underpin a refined portfolio strategy in the coming months. However, we are making considerable inroads into pathway delivery with a significant number of interventions already in progress, particularly relating to the generation of renewable energy through solar panel installations.
Our Net Zero Carbon pathway offers clear synergies with the futureproofing of the portfolio to meet the requirements of the Minimum Energy Efficiency Standards (“MEES”). All portfolio assets have now been assessed to enable us to develop a portfolio strategy to meet the hardening of thresholds under MEES, which we will refine alongside our Net Zero Carbon pathway.
Outlook
The Bank of England has continued to raise interest rates in response to persistent inflationary pressures and economic output has remained muted. However, the labour market remains tight, inflation is slowing as energy costs abate and global supply chain pressures are easing. The Bank of England is still anticipating a fall in GDP throughout the rest of 2023 and into Q1 2024, although not at the levels previously forecast.
Across the real estate sectors, occupational markets have generally been more robust than might have been expected, and investment market activity at least in some sectors has rebounded in the early stages of 2023. A short period of negative economic growth would limit the impact on the occupational markets and on this basis, we are hopeful that the UK real estate sector will begin to see a recovery in the second half of 2023, particularly if there is not sustained tightening in the credit markets.
In the meantime, income is expected to be the primary driver of total returns and remains a key focus of Company strategy. Following the disposal of ex-growth properties in 2021, the portfolio is delivering a steady income during uncertain markets, with strong reversionary potential. The Managers believe there to be significant latent value within the portfolio to unlock through accretive redevelopment, securing key leasing initiatives, repositioning assets and making ESG-led investment.
Our ability to deliver these initiatives is supported by the quality of our underlying asset base. The resilience of a balanced, diversified portfolio provides comfort in less certain markets craving a return of greater stability and confidence.
Paul Marcuse
Chairman
18 April 2023
Managers’ Review
Property Headlines over the Year
· A portfolio total return -6.5* per cent over the 12 months to 31 December 2022 versus the MSCI UK Quarterly Property Index ('MSCI') return of -8.9 per cent.
· Sector allocations have been critical in delivering relative long-term outperformance, underlining the value of a balanced portfolio.
· The portfolio’s largest holding, St Christopher’s Place in Central London continues its recovery phase and has been a key driver of performance over the 12 months.
· Asset management activity delivered in the period has been accretive to both income and capital performance, underlining strong asset fundamentals, attractive sector exposures and significant latent income reversion within the portfolio.
· As at 31 December 2022, the void rate was 5.9 per cent, significantly below the MSCI Index at 8.0 per cent. The void rate was 1.4 per cent excluding the asset at Stockley Park, Uxbridge, where redevelopment opportunities are being actively reviewed.
· Rent collection has stabilised at pre-pandemic levels with collection of 99 per cent for the year.
· Development fundings totalling £25.7m, enhancing the Company’s exposure to the Industrial sector, which retains strong growth prospects.
*see Alternative Performance Measures
Property Market Review
At the time of the Interim Report in June, inflationary headwinds were mounting against the UK economy. The second half of 2022 was marked by a period of illiquidity and pricing discovery amidst a rapid repricing of the UK commercial real estate market, which saw equivalent yields at the all property level move out by 84 basis points in the final quarter. This challenged backdrop has resulted in the MSCI UK Quarterly Property Index generating a total return of -8.9 per cent over the year, driven by capital decline of -12.4 per cent.
The inflationary environment has resulted in ten consecutive increases to the base rate, which has risen from 0.25 per cent to 4.25 per cent since the start of 2022. Wider yield expansion put downward pressure on real estate values and was compounded by September’s mini budget, which saw gilt yields rise rapidly. Mounting headwinds of higher interest rates, a weaker economic backdrop and volatility in the financial markets resulted in the rapid repricing of real estate and marked investor caution. In the month of October, UK real estate experienced its sharpest monthly value decline on record, amid a subdued investment market alongside examples of forced selling of real estate spurred by the need to satisfy redemption and reweighting pressures in the wake of the LDI crisis. Overall investment volumes in H2 2022 were down 40 per cent against H1 2022 and down 45 per cent year-on-year[1].
However, the current price correction that continues to unfold in the early stages of 2023 is not expected to remain entrenched. An increased level of transactional activity was notable in December 2022 and this cautious optimism continues into 2023. Tentative investor confidence is predicated on occupational markets that for the meantime remain highly active and continue to show resilience despite the wider economic pressures. Over the year, the MSCI Index reported an income return of 4.0 per cent, slightly below long-term average. Provided that any potential future period of negative growth is limited, occupational markets are expected to remain robust, assisted by a muted development pipeline constrained by rising construction and debt costs that will keep levels of supply in check.
This supply-demand imbalance has been particularly prevalent in the industrial and logistics sector, which generated rental growth in excess of 10 per cent[2] in the 12 months to December 2022. Take up levels for 2022 were the third strongest on record, despite declining in the second half of the year. Rental growth is expected to moderate as occupier margins come under pressure, although remains a key feature of the sector. The sector’s vacancy rate remains at near historic lows of circa 4 per cent[3] and a wide occupier base continues to support strong levels of demand, principally driven by e-commerce, the push for supply chain resilience and increasing on- and near-shoring. The sustained yield compression the sector has experienced in recent years left it exposed to the inflationary environment. Prime yields moved out by as much as 150 basis points in the 6 months to December, leaving yields at levels last seen in 2018. Over the year, the sector saw a total return of -14.4 per cent.
The retail warehousing sector has followed a similar trajectory as the rapid yield compression witnessed in 2021 and H1 2022 was reversed in the latter stages of 2022, as prime yields moved out by 100-125 basis points. This resulted in the sector seeing capital declines of -6.4 per cent over the year, in turn generating a total return of -1.0 per cent. While the sector has been subject to a market-led yield correction, strong fundamentals remain in the form of a robust occupier pool, the critical role of the sector in omni-channel retailing and the inherent flexibility of the real estate for both owner and occupier. Over the course of 2022, the sector’s vacancy rate fell from 6.1 per cent to circa 5 per cent[4], driven by the expansion of discount and convenience led retailers. As we enter a period of more constrained consumer spending, the sector’s tenant base is aligned to continue to drive footfall and turnover, with the additional benefit of a business rates revaluation that will see rating liabilities fall, lending further support to retailer profitability. The occupational market remains in a strong position and has generated an attractive income return of 5.7 per cent over the year.
The high street retail sector has been less exposed to the pricing correction seen over the period, as the sector benefitted from a relative yield defence afforded by higher starting yields. Despite the structural changes to the sector that have driven this yield expansion, the occupational markets again remain resilient, helping to support an attractive income return from the sector. In Central London, we have seen a rebasing of rents to realistic levels, which in turn has spurred occupier activity and is forming a basis for a recovery in rental tone, supported by increasing footfall.
[1] Real Capital Analytics
[2] MSCI UK Quarterly Property Index December 2022
[3] Savills, UK Logistics: Big Shed Briefing January 2023
[4] https://pdf.euro.savills.co.uk/uk/commercial-retail-uk/uk-retail-warehousing-december-2022.pdf
The office sector is the most nuanced and remains highly polarised between prime and secondary stock. Occupiers are seeking high quality space with strong amenity provision to serve as an attractive environment for employees within hybrid working structures. A key tenet of office specification is the ESG credentials, which are being prioritised by occupiers and investors alike given the cost implications from both an operational efficiency perspective and the potential capital expenditure liability of retro-fitting obsolescent office stock. This has served as the primary driver of the polarisation in the sector, as core assets are able to generate the rental uplift required to underpin the financial viability of Grade-A refurbishment, while occupier demand for secondary space has declined rapidly. Over the period, the sector produced a total return of -9.5 per cent, driven by capital declines of -12.6 per cent. However, as an indicator of the divergence within the sector, the West End office sub-sector generated a total return of -6.0 per cent predicated on lesser capital declines of -8.6 per cent.
Portfolio performance
The total return from the portfolio was -6.5 per cent over the 12 months, compared with the MSCI return of -8.9 per cent. The portfolio has outperformed the wider Index on both capital and income returns over the period. Capital growth from the portfolio was -10.5 per cent compared with the MSCI return of -12.4 per cent, while the portfolio generated a 4.5 per cent income return, against the Index at 4.0 per cent.
| Sector Analysis (% of total property portfolio) | ||
| 2022 (%) |
2021 (%) |
|
| Offices | 31.6 | 32.3 |
| Industrial | 28.9 | 30.6 |
| Retail | 17.4 | 15.6 |
| Retail Warehouses | 11.6 | 10.9 |
| Alternative | 10.5 | 10.6 |
Source: Columbia Threadneedle REP AM plc
| Geographical Analysis (% of total property portfolio) | ||
| 2022 (%) |
2021 (%) |
|
| London – West End | 27.5 | 25.4 |
| South East | 23.4 | 24.0 |
| Midlands | 21.3 | 21.4 |
| North West | 12.2 | 13.4 |
| Scotland | 11.6 | 11.7 |
| South West | 2.3 | 2.5 |
| Rest of London | 1.7 | 1.6 |
Source: Columbia Threadneedle REP AM plc
| Lease Expiry Profile | ||
| At 31 December 2022 the weighted average lease length for the portfolio, assuming all break options are exercised, was 5.2 years (2021: 5.2 years) | ||
| % of leases expiring (weighted by rental value) | 2022 (%) |
2021 (%) |
| 0 – 5 years | 40.1 | 56.0 |
| 5 – 10 years | 36.7 | 29.3 |
| 10 – 15 years | 15.0 | 9.8 |
| 15 – 25 years | 8.2 | 4.9 |
Source: Columbia Threadneedle REP AM plc
The largest occupiers, based as a percentage of contracted rent, as at 31 December 2022, are summarised as follows:
| Income Concentration | |
| Company name | % of Total Income |
| Apache North Sea Limited | 4.7 |
| CNOOC Petroleum Europe Limited | 4.6 |
| JP Morgan Chase Bank, National Association | 4.3 |
| Marks & Spencer plc | 3.6 |
| Kimberley-Clark Limited | 3.6 |
| Virgin Atlantic Limited | 3.6 |
| University of Winchester | 3.5 |
| Transocean Drilling UK Limited | 3.3 |
| Nestle Purina UK Commercial Operators Limited | 3.3 |
| DHL Supply Chain Limited | 3.2 |
| Total | 37.7 |
Source: Columbia Threadneedle REP AM plc
Valuation and capital performance
In a reversal of recent trends that had seen the portfolio’s industrial assets act as the engine of performance, the portfolio’s top performers over the 12 months have come from the wider retail sector. Most notably, the portfolio’s largest asset, the mixed-use Central London holding at St Christopher’s Place. The asset has endured a number of years of yield expansion and is valued approximately 20 per cent lower than pre-pandemic levels. As activity in London West End recovers, a number of asset management initiatives to generate rental growth have been progressed.
The Company’s retail warehousing holdings have also delivered strong outperformance with a positive total return of 1.9 per cent against the Index at -1.0 per cent. In recent years, we have been repositioning our retail parks towards grocery, convenience and discount retailers, aligning our assets to essential retailing at a time of more constrained consumer spending. The attractive tenant line-ups have driven footfall, in turn generating strong occupier demand that has resulted in all available units becoming fully committed in the course of the year. This accretive asset management activity has insulated the parks from the wider market-led yield decompression, delivering relative outperformance alongside an attractive income return of 5.3 per cent.
The Company’s office assets, which comprise high quality buildings with robust fundamentals in resilient locations, have delivered a total return of -7.2 per cent, against the Index return of -9.5 per cent. We have been able to make accretive investment into our core holdings, driving occupier demand, rental growth and capital performance.
The industrial sector experienced the most severe capital falls in the second half of the year following a reversal of the significant and sustained yield compression of recent years. Consequently, the portfolio’s industrial holdings generated a total return of -15.8 per cent, against the Index return of -14.4 per cent, predicated on capital declines. Despite this, we remain confident with our industrial holdings as the sector retains strong occupational fundamentals and growth prospects, with portfolio assets offering reversionary income potential in excess of 40 per cent.
The Company’s exposure to the alternatives sector is dominated by Burma Road Student Village in Winchester. While the asset benefits from an attractive long-term inflation-linked lease, the leasing structure is closely correlated with the financial markets and therefore saw yield expansion over the period, resulting in a capital decline of -10.8 per cent. However, the student housing sector itself retains strong fundamentals supported by a variety of economic and demographic drivers.
Income Analysis and Voids
As we enter a lower growth environment the ability to generate a yield advantage will be a key driver of relative performance. Over the 12-month period, the Company’s portfolio has delivered an income return of 4.5 per cent, against the Index at 4.0 per cent.
The portfolio vacancy rate increased from 2.0 per cent by ERV to 5.9 per cent. The increase in vacancy can be attributed to a 92,000 sq ft office at Stockley Park, Uxbridge following the tenant vacating at lease expiry in March 2022. Given the strategic location of the holding, the asset carries significant alternative use value, and we are working alongside prospective occupiers and the planning authorities to progress a value-accretive redevelopment strategy.
Excluding the holding at Stockley Park, the vacancy rate stands at 1.4 per cent. This is testament to the continued resilience of the occupational markets across the sub-sectors.
At 31 December 2022 the weighted average unexpired lease term (WAULT) for the portfolio, assuming all break options are exercised, was 5.2 years. The portfolio WAULT offers an attractive balance between income security and the availability of lease events as opportunities to convert rental growth into income. This is particularly relevant within the Company’s industrial portfolio. The average period to lease events including rent reviews on the industrial holdings is 4.1 years, an attractive characteristic within a sector that continues to be characterised by an in-built reversion and rental growth.
Rent collection has been an area of keen focus in recent years following the impact of the Coronavirus pandemic. Rent collection has now normalised at pre-pandemic levels, with collection for 2022 standing at 99 per cent.
Approximately 27 per cent of the portfolio’s income profile is supported through the presence of fixed-uplifts and inflation-linked rent review mechanisms within occupational leases.
Asset Management
Industrial and Logistics
As mentioned above, the Company’s industrial portfolio offers an in-built income reversion in excess of 40 per cent. The conversion of this potential into tangible growth will therefore be central to maintaining and growing the portfolio income return. During the course of the year, we have completed a number of successful asset management initiatives, which demonstrate the continued rental growth in the sector.
The Cowdray Centre, Colchester
This multi-let industrial estate has seen significant leasing activity. Unit 2 Mason Road was let to UK Plumbing Supplies on a new 15-year lease at a rent that underlines a steady improvement in the estate’s rental tone. The letting was delivered following the completion of fabric upgrade works which enhanced the unit’s ESG credentials, including a B-rated EPC. Following this letting, the adjacent unit has been placed under offer to a major UK occupier, at a rent again showing further growth.
Refurbishment works are being rolled out across the estate and investment of this nature has proven a driver of occupational demand and value appreciation, while also protecting the asset’s long-term liquidity. During the course of the year, Units 12 and 13 were also refurbished and relet, achieving record rents for the estate.
The estate is also subject to a wider capital project for the development of a multi-let trade counter scheme, which is now in the planning phase. Viability is under close review given the wider market impact on construction costs and capitalisation rates, although strong occupier demand and sustained rental growth lend support to the scheme.
Units 1 & 2 Strategic Park, Southampton
The tenants of this two-unit scheme had signalled an intention to vacate at their lease expiries in August 2022, enabling us to progress a significant refurbishment strategy to modernise the assets, enhance ESG credentials and drive the rental value. Significant dilapidations settlements were agreed and we have received planning permission for the enhanced scheme which is due to complete in June 2023. Marketing of the units is underway, and we anticipate strong demand for the highly specified and strategically located accommodation.
Hams Hall Industrial Estate, Birmingham
This 226,000 sq ft prime distribution facility was subject to outstanding rent review as at July 2021. The review has now been settled at a rent representing a 9 per cent uplift against the previous passing rent.
Quintus Business Park, Burton-upon-Trent and Hurricane 52, Estuary Business Park, Liverpool.
The development fundings of these two industrial assets have now completed, enhancing portfolio exposure to this strategically important sector.
Unit 4, Quintus Business Park in Burton-upon-Trent was committed under a forward-funding arrangement in December 2021 for a price of £21.5m. The highly specified logistics unit of 170,000 sq ft, which carries an A-rated EPC and a BREEAM Excellent certification, reached practical completion in September 2022. A new 15-year lease to Werner UK completed and the already reversionary rent is subject to inflation-linked increases.
The speculative development of the 52,000 sq ft Hurricane 52 in Speke, Liverpool also reached practical completion at a cost of circa £4.2m. This mid-box logistics was developed on land already owned and adjoins an existing ownership. Since completion, the unit has received a good level of occupier interest, aided by its specification which includes solar photovoltaic panels.
Across the industrial portfolio, we are looking at a number of solar installations to boost our renewable energy generation capacity. We are actively engaged with occupiers on assets in Burton-upon-Trent, Markham Vale, Liverpool and Daventry.
Retail Warehouses
Our prime retail parks have been a key driver of relative outperformance, following significant asset management activity. All units across both parks have become fully committed to multi-national occupiers that compliment an attractive and resilient tenant mix, while competitive tension has seen both rent and rental values grow by 3 per cent across the parks. Across both schemes footfall remains very strong, with both car parks operating at near-full capacity.
Newbury Retail Park, Pinchington Lane, Newbury
During the year units have been leased to Pets at Home, JD Sports, Cancer Research and Tim Hortons, resulting in all landlord available space on Newbury Retail Park being fully committed. We have also seen existing occupiers committing to the scheme, with Currys PC World taking a new 10-year lease on renewal at a rent in advance of ERV. The leasing successes underline not only the resilience of the occupational market, but also the dominance of Newbury Retail Park within this affluent and growing catchment.
Sears Retail Park, Solihull
Following the 2021 development of a flagship Marks & Spencer’s anchor store, we have built on the momentum generated to secure the full occupation of the park. The lettings completed not only maximise the scheme’s income stream but also widen the range of uses to appeal to a growing customer base.
Pure Gym have taken a new 15-year lease of Unit 2 and Mountain Warehouse have completed a new 5-year lease of Unit 3, with both deals being executed in line with ERV. Similarly to Newbury Retail Park, the lettings facilitate the upgrade of the units’ facades as part of a phased upgrade programme.
Retail
St. Christopher’s Place (‘Estate’) (retail/office/alternatives)
The Company’s flagship asset is a unique property; a prime Central London estate comprising 172 lettable units and 40 buildings, diversified across the retail, leisure, residential and office sectors. The Covid pandemic had a significant impact on the asset and its valuation remains at 21 per cent discount to its pre-pandemic level. However, the asset is now in a recovery phase and has been the Company’s strongest performer over the 12 months.
The year has seen a marked stabilisation and recovery in the Central London retail market. As hybrid working models have taken hold and domestic and international travel recovered to pre-pandemic levels, footfall statistics within London’s West End continue to improve. This has been assisted by the opening of the Elizabeth Line at Bond Street, which has seen footfall through the station increase by circa 25 per cent.
Occupational demand has also rebounded as prime rents have been rebased and the revaluation of business rates will see an approximate 40 per cent reduction in the rates payable on Oxford Street. In December 2022 there were 10 retail units on the prime stretches of Oxford Street under offer, with a consistent rental tone emerging. Within this improving context, St Christopher’s Place has returned to capital growth for the first time since 2018 and the portfolio’s top performing asset over the year.
Market-led recovery has been supplemented by a strategic repositioning of the asset towards the Food & Beverage (‘F&B’) sector. From an asset perspective the strategy has been conceived to drive footfall, consumer spend and dwell time, while from a fund perspective the F&B markets offer longer leases alongside a higher rental tone. The strategy has begun to yield tangible results; the Estate is outperforming the wider West End in terms of footfall recovery with footfall over the festive period showing a 15 per cent increase from 2019. Strong tenant retention has maintained the income profile while occupier demand across the holding’s sub-markets has seen the Estate’s rental value grow during the course of the year.
Key initiatives delivered over the period include:
· The enhancement of the Estate’s F&B offering, with lease renewals concluding with the Lamb & Flag pub and restaurants Olivelli and Sofra. Restaurant concept Bao (part of the JKS group) has been added to the occupier line-up, while terms are agreed with a new anchor restaurant tenant alongside a wine bar.
· Lease renewals and regears have been concluded with retailers Whistles, L’Occitane and Castle Fine Art.
· Numerous pop-up retail lettings completed to maintain net operating income and vibrancy of the shopping environment.
· Refurbishment works have completed across a number of office suites, while seven new office leases have completed.
· The residential portfolio of 66 apartments represents 21.1 per cent of the capital value of the estate and has completed its recovery in both income and occupancy levels and is now ahead of pre-pandemic levels.
· Plans for the ongoing enhancement of the public realm continues in stages, with new feature lighting due to be installed and productive discussions ongoing with key stakeholders concerning long term improvement proposals for James Street and Barrett Street.
· Strategic ancillary holdings placed under offer to boost the wider asset’s liquidity.
Offices
Our office portfolio is characterised by prime assets which are occupied by a high-quality tenant base. This has allowed us to make accretive investment into our offices, in turn spurring tenant demand and rental growth which has underpinned income outperformance. In a nuanced market context, the portfolio’s assets are well positioned given their strong fundamentals derived from a strategic focus on high-quality holdings in core locations.
Alhambra House, Glasgow
This office holding in central Glasgow is subject to an ongoing repositioning and refurbishment strategy, leveraging the asset’s strong residual value. In the interim, the existing tenant JP Morgan has extended their lease by a further year to March 2024, generating an additional £1.9m in rent alongside a significant contractual dilapidation settlement. This lease extension allows us to progress the planning process in the background, helping us to minimise interruption to the development programme on expiry.
2-4 King Street, London
All office suites at this prime multi-let holding are occupied and a number of tenants have committed to new leases at increased rents, driving a 7 per cent uplift in rental value over the course of the year. The art gallery tenant of the ground and basement levels has committed to a 10-year reversionary lease at a rent showing a 16 per cent uplift to the previous passing rent. Similarly, the tenant of the 4th floor office suite has entered into a 5-year reversionary lease at a rent representing a 22 per cent premium to the previous passing rent.
17A Curzon Street, London
This prime multi-let asset in London’s West End is subject to a phased refurbishment, repositioning the asset and boosting ESG credentials. The year has seen two lease regears complete, delivered at a combined uplift to the passing rents. The lease of the sixth floor was surrendered, releasing the suite for repositioning which will enable us to push the rental tone to in excess of £100 psf for this terraced top floor suite, with collateral benefit to the wider building.
82 King Street, Manchester
This substantial 82,000 sq ft multi-let office holding in Manchester’s office core has seen significant leasing activity as existing tenants continue to commit to the building. Most notably, NM Rothschild entered into a 10-year reversionary lease of their 7th floor suite at a rent showing a 12 per cent uplift to the passing level. Post-period, Lloyds Bank have completed a new 5-year lease on their 10th floor suite.
Alternatives
The portfolio’s alternatives holdings include the purpose-built student accommodation in Winchester, residential properties at St. Christopher’s Place and the leisure units at Wimbledon Broadway.
Burma Road Student Village in Winchester holds benefits from a long lease to the university, with the benefit of annual RPI linked rent reviews. During the course of the year, the University has made significant investment into the holding, installing solar panels and air source heat pumps throughout the estate, which materially enhances the asset’s ESG credentials.
The long-let residential holdings at St Christopher’s Place are fully occupied, while the occupancy levels and rental values of the serviced apartments are now ahead of 2019 levels. The residential element of St Christopher's Place is significant and accounts for 4.7 per cent of the value of the portfolio.
Investment Activity
Following asset disposals totalling some £200m in 2021, there were no further sales during 2022. The key driver for these sales was a strategy to recycle capital and adjust sector weightings towards our favoured sectors of industrial/logistics, retail warehousing and alternatives (primarily student housing and hotels).
While this strategy carried through to the early stages of 2022, pricing for assets within our favoured sectors had become extremely competitive. While a number of bids were made, primarily in the alternative sectors, we did not consider the investment market to offer long-term fair value and therefore withdrew from bidding in Q2 2022.
The first half of 2023 is likely to be characterised by continued pricing pressure and in this market context, there may be the opportunity to acquire high quality assets at attractive long-term pricing. We continue to closely appraise the investment market, seeking exceptional value for assets that accord with our investment strategy. As liquidity in the wider investment market improves in the latter part of 2023, we anticipate further disposals from the portfolio to advance our capital recycling strategy. We have identified potential asset sales, principally focussing on down-weighting exposure to offices as we continue to align the portfolio towards targeted growth sectors. The timing of any such disposals will be instigated to take advantage of both asset and market cycles to deliver optimal value to the Company.
Outlook
The challenges that impacted the real estate market in 2022 remain as we enter 2023 and investors have maintained a risk averse approach to the sector, awaiting greater clarity on pricing in the first quarter of the year. The investment market remains relatively muted as value protection is at the forefront of investor thinking, with a prevailing disconnect in expectations between buyers and sellers.
Inflationary pressures and the cost of debt are easing, gilt and swap markets have settled, and the Bank of England has signalled that their forecast for growth for 2023 is less negative than previously feared. There is therefore an expectation that the real estate market will move to a recovery phase in the second half of 2023 although the impact of credit tightening from the recent banking market volatility has created further uncertainty.
As capital growth returns, the diversification of the Company’s portfolio offers both a steady footing alongside growth potential. We expect continued recovery at St Christopher’s Place to be a bedrock of returns. The industrial and retail warehousing sectors – which account for over 40 per cent of the portfolio – have been oversold but retain a strong performance outlook founded on their critical role in UK business and consumer infrastructure. Much has been made of the uncertain outlook for the offices sector, but the portfolio is aligned towards prime assets that continue to deliver occupier demand. The portfolio is therefore aligned to continue to deliver capital outperformance, founded on the portfolio’s prime nature that will benefit from a flight to quality.
Income is the driver of real estate returns in the long run. Across the sectors, the occupational markets have been relatively resilient. The Company’s portfolio is generating an attractive yield premium at a time when income will dominate totals returns. The portfolio offers strong reversionary rental potential alongside ample opportunity for delivery of this income upside, with priority projects for the year ahead including the repositioning of Stockley Park, Uxbridge, the redevelopment and reletting of Strategic Park, Southampton and the delivery of continued incremental growth at St Christopher’s Place. Maintaining a low vacancy and exploiting lease events to crystallise rental uplifts will be of paramount importance in generating a stable and growing income stream, alongside capital appreciation.
Richard Kirby and Daniel Walsgrove
Fund Managers
Columbia Threadneedle REP AM plc
Please note that past performance is not necessarily a guide to the future and that the value of investments and the income from them may fall as well as rise. Investors may not get back the amount they originally invested.
Balanced Commercial Property Trust Limited
Consolidated Statement of Comprehensive Income (audited)
|
Year ended
31 December 2022 |
Year ended
31 December 2021 |
||
| £000 | £000 | ||
| Revenue | |||
| Rental income | 58,676 | 55,843 | |
| Other income | 42 | 3,008 | |
| --------- | --------- | ||
| Total revenue | 58,718 | 58,851 | |
| (Losses)/gains on investment properties | |||
| Unrealised (losses)/gains on revaluation of investment properties | (129,096) | 86,976 | |
| (Losses)/gains on sale of investment properties realised | (5) | 34,397 | |
| ---------- | ---------- | ||
| Total (loss)/income | (70,383) | 180,224 | |
| ---------- | ---------- | ||
| Expenditure | |||
| Investment management fee | (6,861) | (7,195) | |
| Other expenses | (6,479) | (4,540) | |
| ---------- | ---------- | ||
| Total expenditure | (13,340) | (11,735) | |
| ----------- | ----------- | ||
|
Operating (loss)/profit before finance costs and taxation |
(83,723) |
168,489 |
|
| ----------- | ----------- | ||
| Net finance costs | |||
| Interest income | 807 | 1 | |
| Finance costs | (11,116) | (11,140) | |
| ----------- | ----------- | ||
| (10,309) | (11,139) | ||
| ----------- | ----------- | ||
| (Loss)/profit before taxation | (94,032) | 157,350 | |
| Taxation | (345) | (1,327) | |
| ---------- | ---------- | ||
| (Loss)/profit for the year | (94,377) | 156,023 | |
| ---------- | ---------- | ||
| Other comprehensive income | |||
| Items that are or may be reclassified subsequently to profit or loss | |||
| Movement in fair value of effective interest rate swap | 723 | 544 | |
| ---------- | ---------- | ||
| Total comprehensive (loss)/income for the year | (93,654) | 156,567 | |
| ---------- | ---------- | ||
| Basic and diluted earnings per share | (13.1)p | 19.8p |
All of the profit and total comprehensive income or losses for the year is attributable to the owners of the Group.
All items in the above statement derive from continuing operations.
Balanced Commercial Property Trust Limited
Consolidated Balance Sheet (audited)
| As at 31 December 2022 £000 |
As at 31 December 2021 £000 |
|
| Non-current assets | ||
| Investment properties | 1,075,082 | 1,180,486 |
| Trade and other receivables | 20,372 | 19,319 |
| Interest rate swap asset | - | 466 |
| ------------ | ------------ | |
| 1,095,454 | 1,200,271 | |
| ------------ | ------------ | |
| Current assets | ||
| Trade and other receivables | 12,811 | 8,832 |
| Interest rate swap asset | 1,030 | - |
| Cash and cash equivalents | 54,837 | 138,081 |
| ------------ | ------------ | |
| 68,678 | 146,913 | |
| ------------ | ------------ | |
| Total assets | 1,164,132 | 1,347,184 |
| ------------ | ------------ | |
| Current liabilities | ||
| Trade and other payables | (21,140) | (18,448) |
| Interest rate swap liability | - | (159) |
| Interest bearing loan | (49,889) | - |
| ------------ | ------------ | |
| (71,029) | (18,607) | |
| Non-current liabilities | ||
| Trade and other payables | (2,250) | (2,416) |
| Interest-bearing loans | (259,388) | (308,641) |
| ------------ | ------------ | |
| (261,638) | (311,057) | |
| ------------ | ------------ | |
| Total liabilities | (332,667) | (329,664) |
| ------------ | ------------ | |
| Net assets | 831,465 | 1,017,520 |
| ------------ | ------------ | |
| Represented by: | ||
| Share capital | 7,994 | 7,531 |
| Special reserve | 485,840 | 544,813 |
| Capital reserve – investments sold | 75,005 | 75,010 |
| Capital reserve – investments held | 146,160 | 275,256 |
| Hedging reserve | 1,030 | 307 |
| Revenue reserve | 115,436 | 114,603 |
| ------------ | ------------ | |
| Equity shareholders’ funds | 831,465 | 1,017,520 |
| ------------ | ------------ | |
| Net asset value per share | 118.5p | 135.1p |
Balanced Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2022 (audited)
|
Share Capital £000 |
Special Reserve £000 |
Capital
Reserve - Investments Sold £000 |
Capital Reserve –
Investments
Held
£000 |
Hedging Reserve £000 |
Revenue Reserve £000 |
Total £000 |
|
| At 1 January 2022 | 7,531 | 544,813 | 75,010 | 275,256 | 307 | 114,603 | 1,017,520 |
| Total comprehensive income for the year | |||||||
| Loss for the year | - | - | - | - | - | (94,377) | (94,377) |
| Movement in fair value of interest rate swap |
- |
- |
- |
- |
723 |
- |
723 |
| Transfer in respect of unrealised losses on investment properties |
- |
- |
- |
(129,096) |
- |
129,096 |
- - |
| Losses on sale of investment properties realised |
- |
- |
(5) |
- |
- |
5 |
- |
| Total comprehensive income for the year |
- |
- |
(5) |
(129,096) |
723 |
34,724 |
(93,654) |
| Transactions with owners of the Company recognised directly in equity | |||||||
| Transfer from share capital to special reserve | 463 | (463) | - | - | - | - | - |
| Buyback to Treasury | - | (58,510) | - | - | - | - | (58,510) |
| Dividends paid | - | - | - | - | - | (33,891) | (33,891) |
|
At 31 December 2022 |
7,994 |
485,840 |
75,005 |
146,160 |
1,030 |
115,436 |
831,465 |
Consolidated Statement of Changes in Equity
for the year ended 31 December 2021 (audited)
|
Share Capital £000 |
Special Reserve £000 |
Capital
Reserve - Investments Sold £000 |
Capital Reserve –
Investments
Held
£000 |
Hedging Reserve £000 |
Revenue Reserve £000 |
Total £000 |
|
| At 1 January 2021 | 7,994 | 589,593 | (16,720) | 245,613 | (237) | 113,401 | 939,644 |
| Total comprehensive income for the year | |||||||
| Profit for the year | - | - | - | - | - | 156,023 | 156,023 |
| Movement in fair value of interest rate swaps |
- |
- |
- |
- |
544 |
- |
544 |
| Transfer in respect of unrealised gains on investment properties |
- |
- |
- |
86,976 |
- |
(86,976) |
- |
| Gains on sale of investment properties realised |
- |
- |
34,397 |
- |
- |
(34,397) |
- |
| Transfer of prior years’ revaluation to realised reserve |
- |
- |
57,333 |
(57,333) |
- |
- |
- |
| Total comprehensive income for the year |
- |
- |
91,730 |
29,643 |
544 |
34,650 |
156,567 |
| Transactions with owners of the Company recognised directly in equity | |||||||
| Buyback to Treasury | (463) | (44,780) | - | - | - | - | (45,243) |
| Dividends paid | - | - | - | - | - | (33,448) | (33,448) |
|
At 31 December 2021 |
7,531 |
544,813 |
75,010 |
275,256 |
307 |
114,603 |
1,017,520 |
Balanced Commercial Property Trust Limited
Consolidated Statement of Cash Flows (audited)
| Year ended 31 December 2022 | Year ended 31 December 2021 | |
| £000 | £000 | |
| Cash flows from operating activities | ||
| (Loss)/profit for the year before taxation | (94,032) | 157,350 |
| Adjustments for: | ||
| Finance costs | 11,116 | 11,140 |
| Interest income | (807) | (1) |
| Unrealised losses/(gains) on revaluation of investment properties | 129,096 | (86,976) |
| Losses/(gains) on sale of investment properties realised | 5 | (34,397) |
| (Increase)/decrease in operating trade and other receivables |
(5,032) |
4,165 |
| Increase/(decrease) in operating trade and other payables | 3,412 | (4,761) |
| ----------- | ----------- | |
| Cash generated from operations | 43,758 | 46,520 |
| ----------- | ----------- | |
| Interest received | 807 | 1 |
| Interest and bank fees paid | (10,987) | (10,063) |
| Taxation paid | (345) | (1,327) |
| ----------- | ----------- | |
| (10,525) | (11,389) | |
| ----------- | ----------- | |
| Net cash inflow from operating activities | 33,233 | 35,131 |
| ----------- | ----------- | |
| Cash flows from investing activities | ||
| Purchase of investment properties | (812) | (50,821) |
| Sale of investment properties | - | 201,920 |
| Capital expenditure on investment properties | (23,258) | (4,050) |
| ----------- | ----------- | |
| Net cash (outflow)/inflow from investing activities | (24,070) | 147,049 |
| ----------- | ----------- | |
| Cash flows from financing activities | ||
| Dividends paid | (33,891) | (33,448) |
| Issue costs for Barclays £100m loan facility extension | (6) | (304) |
| Buybacks to Treasury | (58,510) | (45,243) |
| ----------- | ----------- | |
| Net cash outflow from financing activities | (92,407) | (78,995) |
| ----------- | ----------- | |
| Net (decrease)/increase in cash and cash equivalents | (83,244) | 103,185 |
| Cash and cash equivalents at the beginning of the year | 138,081 | 34,896 |
| ----------- | ----------- | |
| Cash and cash equivalents at the end of the year | 54,837 | 138,081 |
| ----------- | ----------- |
Balanced Commercial Property Trust Limited
Principal Risks and Future Prospects
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.
It has been a turbulent year, the catalyst for which was the war in Ukraine which led to a global energy and cost of living crisis and rising inflation in excess of 10 per cent in the UK. The Bank of England has raised interest rates a number of times and at the time of writing they are 4.25 per cent. This volatile economic environment has had an ongoing effect on many of our principal risks during the year and the Board met regularly with the Managers to assess these risks and how they could be managed. More detail is included in the Chairman’s Statement and the Managers’ Review.
The principal risks and uncertainties are set out in the table below. The Board seeks to mitigate and manage these risks and uncertainties 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(01/20).
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 Managers carry out a separate 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:
· Economic and geopolitical uncertainties leading to inflation and interest rate increases. This has been compounded by the military invasion of Ukraine by Russia which is clearly a humanitarian tragedy and is having widespread economic consequences. From a macro-economic perspective, higher medium-term oil, gas and food prices alongside financial market disruption and sanctions on Russia has put upward pressure on inflation and is supressing economic growth. There remains a risk of further interest rate increases. Against this background, real estate valuations experienced a significant pricing correction in the second half of 2022 as the risk premium for investing in property adjusted to reflect a higher interest rate environment.
· Interest rates have increased from 0.25 per cent to 4.25 per cent in just over a year. The Company is currently looking at refinancing its debt with both facilities due to mature in 2024. The likelihood is that any new debt arrangements will be more expensive than the current debt and the terms of any future debt arrangement are under active review, alongside the appropriate level of gearing.
· The ESG agenda is a very prominent one and will continue to grow in its importance to shareholders, future investors, our customers and the wider community. We have already made significant strides in this area and we intend to continue to do so. The increasing market attention being paid to climate risk, to net zero carbon ambition and to social impact have been notable features of the evolving agenda over recent years and those need to be considered more explicitly in property investment and management activity than has been the case previously. Failure to respond to the evolving regulatory requirements and public expectations would be reputationally damaging and could have a negative effect on property valuations leaving some properties difficult to let.
· The structural change in the office market continues to evolve following Covid-19. Appetite for offices appears to be finding some equilibrium with a clear focus on higher quality space in central locations, as companies look to offer a more structured hybrid model of operation where strong ESG and wellbeing credentials will be essential. This will be at the expense of lower quality stock and the emergence of a two-tier market is already in evidence with the rebasing of both capital values and rents. This is still evolving and continues to be monitored.
· There continues to be an increasing emerging risk from cyber threats. As an externally managed investment company we are dependant on the controls and systems of our Managers and other third party providers. The Board reviews on an annual basis, the systems and procedures that they have in place to control these threats.
The highest risks encountered during the year, how they are mitigated, and actions taken to address these are set out in the table below:
| Highest Risks | Mitigation | Actions taken in the year |
|
Investment Performance Risk
Unfavourable markets, poor stock selection, including inappropriate asset allocation and underperformance against the benchmark. This risk may be exacerbated by gearing levels. Economic backdrop of inflationary pressures and increasing interest rates. An illiquid investment market with a significant negative pricing adjustment in the second half of 2022. ESG risk attached to the developing regulatory backdrop and capital expenditure required to maintain compliance. |
The investment performance, gearing and income forecasts are reviewed with the Investment Managers at each Board Meeting. The Managers provide regular information on the expected level of rental income that will be generated from underlying properties. The portfolio is well diversified by geography and sector and the exposure to individual tenants is monitored and managed to ensure there is no over exposure. The Managers in-house ESG team continually monitor regulatory background and best practice standards, while the overall quality of the portfolio provides some protection against this. |
The Board reviews the Managers’ performance at quarterly Board meetings against key performance indicators. Significant lettings achieved, particularly in the industrial portfolio and the retail parks, at increased rents helping performance during a period of falling valuations. The practical completion of development fundings on two industrial assets with high ESG specifications has removed a substantial element of development risk from the portfolio. All portfolio assets have been subject to net zero carbon assessments and MEES building reports to enable the modelling of a pathway to compliance. A number of ESG initiatives have been progressed over the year, most notably the progression of solar PV schemes across the industrial portfolio. |
|
Risk increased in the year under review |
|
Discount/Premium Risk
Share price of the investment company is lower/higher than the NAV. As a result of such imbalances, the attractiveness of the Company to investors is diminished. The discount has widened during the year as interest rates increased and sentiment reduced. |
The discount is reported to and reviewed by the Board at least quarterly. Share buybacks as a means of narrowing the discount or as an attractive investment for the Company are considered and weighed up against the risks. The position is monitored by the Managers and Broker on a daily basis and any material changes are investigated and communicated to the Board. | Investors have access to the Managers and the underlying team who will respond to any queries they have on the discount. The level of discount is kept under constant review and the Company conducted share buybacks during the year to help manage this. The Broker and the Managers’ sales team liaise with current and prospective investors to try and generate demand for the Company’s shares. |
| Risk increased in the year under review | ||
|
Financial Risk Management
Risk of financial or reputational damage due to a failure to appropriately manage financial risk. This includes management of cash resources and debt. The Company’s principal £260 million debt facility expires on 31 December 2024 and the £100 million facility with Barclays expires in July 2024. New finance will have to be put in place against a backdrop of higher interest rates. |
The level of cash is continually monitored by the Managers. A financial model is maintained, which includes a 5-year cash flow forecast and is reviewed at quarterly Board meetings. The cash position is also reviewed by the Board on a monthly basis as part of the dividend approval process. Loan covenants are monitored carefully by the Managers and reviewed at least quarterly at Board meetings. The strategy for the refinancing of debt is under active consideration. |
The Company paused share buybacks since September 2022, with the preservation of cash taking precedence in current markets. The Company elected to use a one-year extension option of its £100 million facility with Barclays, which was due to expire in July 2023. This has been extended to July 2024. The Company has been reviewing its options on longer term debt and believes that, based on advice received and current market conditions there is lender appetite for refinancing the Company’s debt. Since the year-end the Board has engaged debt advisors to consider the financing options available in order to formulate a long-term debt strategy in terms of cost and the appropriate level of gearing. |
|
Risk increased in the year under review |
|
Product Strategy Risk
Risk that the Product Strategy (including investment guidelines and policies) lacks sustainability or is not relevant. Risk that the strategy is not clearly defined/articulated or directed to the correct target audience. ESG related initiatives are a core part of the long-term strategy. |
The underlying investment strategy is kept under constant appraisal and the Board will have a strategy session annually, in conjunction with the Managers. | The strategy of having a balanced portfolio has aided performance in a declining market with the significant retail investment at St Christopher’s Place outperforming the wider real estate market. The strategy is communicated to interested parties on a regular basis via stock exchange announcements, the interim and annual report and investor/consultant calls and visits. Significant ongoing work on the Company’s ESG strategy including the collection of relevant ESG data and the formation on individual asset plans. ESG enhancements performed on some of the Company’s assets where opportunities have arisen. |
|
Risk unchanged in the year under review |
Viability Assessment and Statement
The Board conducted this review over a five-year time horizon, a period thought to be appropriate for a Group investing in commercial property with a long-term investment outlook and with an average unexpired lease length of 5.2 years. The Group has its principal borrowings with L&G secured until 31 December 2024 and is also subject to a continuation vote which will take place by the end of 2024.
Preparations with regards to the continuation vote will commence this year. The Viability Statement has been prepared on the assumption that the Board recommends continuation and that shareholders approve the Board’s recommendation. The assessment also takes into account the principal risks and uncertainties faced by the Group which could threaten its objective, strategy, future performance, liquidity and solvency.
The major risks identified as relevant to the viability assessment were those relating to a downturn in the UK commercial property market and its resultant effect on the valuation of the investment property portfolio, the level of rental income being received and the effect that this would have on cash resources and financial covenants. The UK commercial real estate market has experienced a downturn in the second half of 2022, driven by geopolitical challenges, high levels of inflation, rising interest rates and a slowdown of economic growth. There has been a dramatic repricing of property valuations with the sector experiencing capital falls of 17.2 per cent over the six months to 31 December 2022, as measured by the MSCI UK Quarterly Property Index (‘MSCI’).
A stress test was conducted over the five-year period to April 2028. Taken into account that the portfolio has already experienced a significant valuation adjustment in the last two quarters, the modelling used a foreseeable severe but plausible scenario which took into account the illiquid nature of the Group’s property portfolio, further significant future falls in the investment property values, the continuation of the long-term borrowing facility and substantial falls in property income receipts.
The viability assessment modelling used the following assumptions:
· We have modelled using the most negative of all property capital returns as measured by MSCI over one to five years using historic data that goes back to 1985, with capital values falling by as much as 36.5 per cent. This takes into account that the property market has already experienced capital falls of 17.2 per cent since June 2022.
· Debt refinanced at 1 per cent above the current long-term debt forecasts.
· Loan covenant tests remain the same as those currently in place following a refinancing of debt.
· Tenant defaults of 10 per cent for the first year, followed by 5 per cent for the following year before returning to normal levels thereafter.
· Tenant lease breaks are exercised at the earliest opportunity, followed by a substantial void period.
· Dividends are maintained at current levels.
· £2 million per annum on ESG related capital expenditure.
The results of this modelling were as follows:
| NAV | Dividend Cover | LTV (Net) | |
| 2024 | 89.5p | 79.0% | 30.0% |
| 2025 | 79.8p | 62.7% | 33.7% |
| 2026 | 81.2p | 79.0% | 34.0% |
| 2027 | 86.3p | 75.4% | 33.5% |
| 2028 | 87.6p | 102.9% | 33.1% |
Even under this extreme scenario the Group remains viable with loan covenant tests passed and the current dividend rate maintained. The level of the NAV remains positive under this extreme scenario. The Group continues to have sufficient assets to ensure that it could pay down its debt in an orderly fashion through sales should it choose to do so and would also have an option of reducing the level of dividend to preserve cash.
In the ordinary course of business, the Board reviews a detailed financial model on a quarterly basis, incorporating forecast returns for the portfolio, projected out for five years. This model uses realistic assumptions and factors in any potential capital commitments.
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 a further 25 per cent from 31 December 2022 valuations before breaching the Loan to Value (‘LTV’) test on the facility. The loan interest cover test would only be breached by a fall in net rental income of 65 per cent. We are comfortable that these covenants will continue to be met.
The Group’s Barclays £50 million loan facility and £50 million revolving credit facility is due to expire in July 2024. We calculate that the market value of the properties secured under this loan would have to drop by 66 per cent before breaching the LTV test on the facility. The loan interest cover test would only be breached by a fall in rental income of 48 per cent. We are comfortable that these covenants will continue to be met.
The Group has a further £95 million of properties which are not secured against any lender and could be transferred to L&G or Barclays to support covenant tests if required.
The Company believes that based on advice received and current market conditions there is lender appetite for refinancing the Company’s debt and that it will be able to satisfactorily refinance existing debt well in advance of the repayment dates.
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 2028. For this reason, the Board also considers it appropriate to continue adopting the going concern basis in preparing the Annual Report and Consolidated Financial Statements.
Balanced Commercial Property Trust Limited
Going Concern
In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. They have reviewed detailed cash flow, income and expense projections in order to assess the Group’s ability to pay its operational expenses, bank interest and dividends. The Directors have examined significant areas of possible financial risk including cash and cash requirements and the debt covenants, in particular those relating to loan to value and interest cover. They have not identified any material uncertainties which cast significant doubt on the ability to continue as a going concern for the foreseeable future, which is considered to be for a period of not less than 12 months from the date of approval of the financial statements. The Board believes it is appropriate to adopt the going concern basis in preparing the financial statements.
Statement of Directors' Responsibilities in Respect of the Annual Report and Accounts
In accordance with Chapter 4 of the Disclosures Guidance and Transparency Rule 4.1.12, each of the Directors confirm that to the best of their knowledge:
· The financial statements contained within the Annual Report and Accounts for the year ended 31 December 2022, of which this statement of results is an extract, prepared in accordance with International Financial Reporting Standards as adopted by the EU, 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 Strategic Report (comprising the Chairman’s Statement; Business Model and Strategy; Promoting the Success of the Company; Key Performance Indicators, Principal Risks and Future Prospects; Managers’ Review; Property Portfolio; Environmental, Social and Governance and Spotlight: big strides, small steps) and the Directors’ Report includes a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole together with a description of the principal risks and uncertainties that they face; and
· The consolidated financial statements and Directors’ Report within the Annual Report and Accounts for the year ended 31 December 2022 include details of related party transactions; and
· The Annual Report and consolidated 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
Paul Marcuse
Director
Balanced Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year ended 31 December 2022
1. Financial Risk Management
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 loans, cash, trade 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. 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 a counterparty will default on its contractual obligation and will cause a financial loss for the other party by failing to discharge an obligation, and principally arises from the Group’s receivables from customers. The Group has no significant concentrations of credit risk as the Group has a diverse tenant portfolio. The largest single tenant at the year end accounted for 4.7 per cent (2021: 4.8 per cent) of the current annual rental income.
The Managers have a credit department which has set out policies and procedures for managing exposure to credit. Some of the processes and policies include:
· an assessment of the credit worthiness of the lessee and its ability to pay is performed before lease is granted;
· where appropriate, guarantees and collateral is held against such receivables;
· after granting the credit, the credit department assesses the age analysis on a monthly basis and follows up on all outstanding payments;
· management of the credit department determine the appropriate provision, receivables which should be handed over for collection and which amounts should be written off.
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.
Deposits refundable to tenants may be withheld by the Group in part or in whole if receivables due from the tenant are not settled or in case of other breaches of contract. The fair value of cash and cash equivalents as at 31 December 2022 and 31 December 2021 approximates the carrying value.
Cash balances are held and derivatives are agreed only with financial institutions with a 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. The utilisation of credit limits is regularly monitored. As at 31 December 2022, the Group's cash balances are held with Barclays Bank PLC.
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 Barclays term loan on which the rate has been fixed through an interest rate swap at 2.367 per cent per annum until 31 July 2023. Since the year-end, the Company has signed up to extending the Barclays loan for one-year to 31 July 2024. The obligation to maintain an interest rate swap does not need to be extended to 31 July 2024 and therefore the rate of interest does not need to be hedged from 1 August 2023. 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 2022. The revolving credit facility pays an undrawn commitment fee of 0.74 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 3.5 per cent as at 31 December 2022 (2021: 0.25 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 701,550,187 Ordinary Shares in issue at 31 December 2022 (2021: 753,105,830).
At 31 December 2022, the Company held 97,815,921 Ordinary Shares in treasury (2021: 46,260,278).
3. Basic and diluted earnings per share
The basic and diluted earnings per Ordinary Share are based on the loss for the year of £94,377,000 (2021: profit £156,023,000) and on 720,956,458 (2021: 786,825,807) 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. These are not full statutory accounts. The full audited accounts for the year to 31 December 2022 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: balancedcommercialproperty.co.uk
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.
|
2022
pence |
2021
pence |
||
| Net Asset Value per share | (a) | 118.5 | 135.1 |
| Share price per share | (b) | 88.5 | 105.0 |
| Discount (c = (b-a)/a) | (c) | (25.3)% | (22.3)% |
Dividend Cover on a cash basis – The percentage by which Profits for the year (less gains/losses on investment properties) adjusted by capital and rental lease incentives amortisation and interest bearing loans amortisation of set-up costs cover the dividends paid.
| 2022 | 2021 | |||
| £000 | £000 | |||
| (Loss)/profit for the year | (94,377) | 156,023 | ||
| Add back: | Unrealised losses/(gains) on revaluation of investment properties |
129,096 |
(86,976) |
|
| Losses/(gains) on sales of investment properties realised |
5 |
(34,397) |
||
| Capital and rental lease incentives amortisation |
155 |
5,575 |
||
| Interest bearing loans amortisation of set-up costs |
642 |
642 |
||
| Profit before investment gains and losses and amortisation | (a) | 35,521 | 40,867 | |
| Dividends | (b) | 33,891 | 33,448 | |
| Dividend Cover on a cash basis percentage (c= a/b) | (c) | 104.8% | 122.2% | |
Accounting Dividend Cover – The percentage by which profits for the year (less gains/losses on investment properties and non-recurring other income) cover the dividend paid.
| 2022 | 2021 | |||
| £000 | £000 | |||
| (Loss)/profit for the year | (94,377) | 156,023 | ||
| Add back: | Unrealised losses/(gains) on revaluation of investment properties |
129,096 |
(86,976) |
|
| Losses/(gains) on sales of investment properties realised |
5 |
(34,397) |
||
| Other income | (42) | (3,008) | ||
| Profit before investment gains and losses | (a) | 34,682 | 31,642 | |
| Dividends | (b) | 33,891 | 33,448 | |
| Accounting Dividend Cover percentage (c= a/b) | (c) | 102.3% | 94.6% | |
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 excluding current Barclays loan).
|
2022 |
2021 |
||
| £000 | £000 | ||
| Interest bearing loans | 310,000 | 310,000 | |
| Less cash and cash equivalents | (54,837) | (138,081) | |
| Total | (a) | 255,163 | 171,919 |
| Total assets less current liabilities and cash excluding current Barclays loan | (b) | 1,088,155 | 1,190,496 |
| Net Gearing (c=a/b) | (c) | 23.4% | 14.4% |
Ongoing Charges – All operating costs incurred by the Group, expressed as a proportion of its average Net Assets over the reporting year. The costs of buying and selling investments and derivatives are excluded, as are interest costs, taxation, non-recurring costs and the costs of buying back or issuing Ordinary Shares. An additional Ongoing Charge figure is calculated which excludes direct operating property costs as these are variable in nature and tend to be specific to lease events occurring during the year.
| 2022 | 2021 | ||||||
|
£000 |
£000 |
||||||
| Investment management fee | 6,861 | 7,195 | |||||
| Other expenses | 6,479 | 4,540 | |||||
| Less non-recurring costs – impairment provision | 478 | 1,103 | |||||
| Less other non-recurring costs | (30) | - | |||||
| Total | (a) | 13,788 | 12,838 | ||||
| Average net assets | (b) | 991,293 | 982,789 | ||||
| Ongoing charges (c=a/b) | (c) | 1.39% | 1.31% | ||||
| 2022 | 2021 | ||||||
|
£000 |
£000 |
||||||
| Investment management fee | 6,861 | 7,195 | |||||
| Other expenses | 6,479 | 4,540 | |||||
| Less direct operating property costs | (5,255) | (3,996) | |||||
| Less non-recurring costs – impairment provision | 478 | 1,103 | |||||
| Less other non-recurring costs | (30) | - | |||||
| Total | (a) | 8,533 | 8,842 | ||||
| Average net assets | (b) | 991,293 | 982,789 | ||||
|
Ongoing charges excluding direct operating
property costs (c=a/b) |
(c) | 0.86% | 0.90% | ||||
Portfolio (Property) Capital Return – The change in property value during the year 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 year 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 year, 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 year 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.
| 2022 | 2021 | ||
| NAV per share at start of year - pence | 135.1 | 117.5 | |
| NAV per share at end of year - pence | 118.5 | 135.1 | |
| Change in the year | -12.3% | +15.0% | |
| Impact of dividend reinvestments | +3.1% | +3.9% | |
| NAV total return for the year | -9.2% | +18.9% | |
| 2022 | 2021 | ||
| Share price per share at start of year - pence | 105.0 | 80.0 | |
| Share price per share at end of year - pence | 88.5 | 105.0 | |
| Change in the year | -15.7% | +31.3% | |
| Impact of dividend reinvestments | +4.0% | +6.5% | |
| Share price total return for the year | -11.7% | +37.8% |
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
Columbia Threadneedle REP AM plc
Tel: 0207 016 3577
Innes Urquhart
Winterflood Securities Limited
Tel: 0203 100 0265
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