Balanced Commercial Property Trust Regulatory News (BCPT)

BMO Commercial Property Trust Ltd - Results for the Year Ended 31 December 2019 (audited)

PR Newswire

London, April 15

To: RNS

Date: 16 April 2020

From: BMO Commercial Property Trust Limited (the “Company”)

L.E.I. 213800A2B1H4ULF3K397

Results in Respect of the Year Ended 31 December 2019 (audited)

Financial Headlines

· Share price total return of -2.4 per cent*

· Portfolio total return of -0.1 per cent*

· Dividend cover increased to 81.8 per cent from 80.2 per cent*

· Yield on year-end share price of 5.2 per cent*.

*see Alternative Performance Measures

Chairman’s Statement

Introduction

The UK direct commercial property market delivered an income driven, positive total return in 2019. This was lower than 2018, and influenced by muted economic growth, the approaching Brexit deadline and widespread weakness in the retail property market. The industrial and distribution sector continued to perform relatively well, delivering both rental and capital growth, and the office market, led by the regions, performed broadly in line with its income return. Investment volumes held up well and, although lower than 2018, were around the longer-term average.

Performance for the Year

The Company’s net asset value (‘NAV’) total return for the year was -2.1 per cent and the share price total return was -2.4 per cent. The total return from the portfolio was -0.1 per cent, lagging the total return of 1.3 per cent from the MSCI UK Quarterly Property Index (‘MSCI’).

Our share price at the year-end was 115.6p, representing a discount of 11.7 per cent to the NAV per share of 130.9p (compared to a 10.9 per cent discount as at 31 December 2018), reflecting continued uncertainties in the market surrounding Brexit and concerns over the retail sector.

The following table provides an analysis of the movement in the NAV per share for the year:

During 2019 the capital return for the portfolio was -4.3 per cent, compared to MSCI which recorded a capital return of -3.1 per cent.

Unsurprisingly, our retail portfolio was a primary reason for the negative returns and underperformance against MSCI. There was a fall in value of the St. Christopher’s Place Estate, almost entirely as a result of a mark down in the valuation of its two Oxford Street retail units. This was in response to the challenging investment environment and a material rebasing of rental values to bring them in line with recent market evidence.

Unfortunately, our prime retail parks at Newbury and Solihull didn’t escape the retail headwinds either and were marked down in value too as yields continued to move out. However, on the positive side, construction work has started at Newbury Retail Park to create new stores for Lidl and Deichmann Shoes. They will fill space previously leased to Homebase and Mothercare and we are optimistic such significant lettings will attract other new occupiers to the park. Hobbycraft opened to trade in August 2019, having replaced Poundworld, who went into administration in 2018.

We had further good news post year-end following the completion of an unconditional letting to Marks & Spencer at Sears Retail Park in Solihull. This significantly expands their presence, combining the former Homebase unit with their existing food hall and is a valuable addition to the park, showing that M&S share our confidence in the location. Notwithstanding the challenges facing the high street, our recent experience at both Newbury and Solihill demonstrates the confidence of some retailers to continue to invest but only for the right space in the right locations.

Our industrial portfolio also underperformed in 2019 with the undoubted quality of the underlying assets failing to offset the impact of a handful of near-term lease expiries and break-clauses. This effect was compounded by our distribution unit at Daventry, let to Mothercare, where the valuation was reduced due to future occupational uncertainty, notwithstanding a rental guarantee from a Mothercare company not in administration.

The strongest return contribution came from the office sector where, in absolute terms, the best performance was from Cassini House, St James’s Street, London, following the successful refurbishment and letting of the vacant 4th and 5th floors to Shore Capital. Amongst other increases, there was also a pleasing uplift in the valuation of Watchmoor Park, Camberley, where rental income had been secured on part of Building C until 2030, and the sale of land for residential development at Cowdray Avenue, Colchester eventually went unconditional during the year, ahead of the 2018 valuation.

Borrowings and Loan Refinancing

The Group’s available borrowings comprise a £260 million term loan with Legal & General Pensions Limited, maturing on 31 December 2024, together with a £50 million term loan facility and an undrawn £50 million revolving credit facility, both with Barclays and available until June 2021. All loan covenants were comfortably met. The Group’s total loan to value, net of cash, was 21.3 per cent at the end of the year and the weighted average interest rate on total current borrowings is 3.3 per cent.

Dividends and Dividend Cover

Twelve monthly interim dividends, each of 0.5p per share, were paid during the year. This maintains the annual dividend of 6.0p per share paid since 2006 and provides a dividend yield of 5.2 per cent based on the year-end share price.

The Company’s level of dividend cover for the year (excluding capital gains on properties) was 81.8 per cent. This was marginally higher than the 80.2 per cent cover achieved last year. There was a small decrease in the level of rental income collected, primarily due to the sale of the office building at Thames Valley Park 2 in Reading and the loss of income caused by the vacancies at Solihull and Newbury. This was more than compensated by a fall in the level of taxation payable and a reduction in expenses.

REIT Conversion

Shareholders voted in favour of the REIT proposals at an extraordinary general meeting held on 30 May 2019 and the Group entered the UK REIT regime on 3 June 2019. The adoption of REIT status by the Group alters the shareholders’ tax positions in respect of the receipt of distributions under the REIT regime, as the majority of the distributions from the Company will be property income distributions (“PID’s”). The first distribution that the Company made under the REIT regime related to profits earned from 3 June 2019 and the first monthly PID was paid on 31 October 2019.

Board Composition

Having served nine years on the Board, Chris Russell stepped down as Chairman of the Company and retired from the Board at the annual general meeting on 30 May 2019. I became Chairman from that date and Paul Marcuse took on the role of Senior Independent Director. Chris joined the Board in 2009 and became Chairman in 2011. He excelled in this role and my Board colleagues and I would like to thank him for his significant contribution and leadership over many years.

As part of the REIT conversion, Peter Cornell and David Preston, both Guernsey directors, also stood down from the Board at the AGM. I’d like to thank them too, at the same time welcoming Linda Wilding who is UK based and joined the Board on 3 June 2019. Following these changes, our Board now consists of five Directors, three males and two females, four of whom are based in the UK and one in Guernsey.

By the AGM this year, I will have served nine years on the Board. There has been a significant amount of change in the composition of the Board following REIT conversion and in order to ensure a smooth transition, I will stand for re-election at the next AGM in June 2020. Further to this, it is my intention to retire from the Board at the AGM in 2021.

Environmental, Social and Governance (ESG)

I am delighted with the progress the Company continues to make in advancing its ESG strategy and with the improvement demonstrated in a number of key industry indicators. A significant increase in the Company’s annual Global Real Estate Sustainability Benchmark (GRESB) score is a notable achievement this year and provides a pleasing independent assessment of the successful results our Property Manager has delivered across a broad array of sustainability related initiatives. I was also particularly pleased to see the Company receive a gold award from EPRA, the European Public Real Estate Association, for the implementation of its sustainability best practice recommendations and to have been recognised as the most improved performer in 2019.

Our portfolio level successes are driven by many and varied interventions at local property level where we strive for efficiency and impact. When combined, this has created a solid platform from which to drive further success. As a Board, we continue to give considerable attention to our ESG commitments and support our Property Manager in responding proactively to this ever-changing landscape.

Annual General Meeting

The Annual General Meeting will be held at 2.00pm on Tuesday 30 June 2020 at the offices of BMO Global Asset Management, Exchange House, Primrose Street, London, EC2A 2NY.

We are closely monitoring the impact of COVID-19 and it is currently the intention of the Company to hold the meeting as planned. However, the Board notes the guidance issued by the Government, restricting social gatherings in view of the COVID-19 pandemic, and the fact that if such guidance remains in place on the date of the AGM, shareholders will be prohibited from attending the AGM. Given the current guidance and the general uncertainty on what additional and/or alternative measures may be put in place, the Board requests that shareholders do not attend the AGM in person but instead appoint a proxy and provide voting instructions in advance of the AGM, in accordance with the instructions explained in the Notice of AGM.

Outlook

The emergency measures put in place to limit the spread of COVID-19 have led to a collapse in the financial markets and significant downgrades to the economic outlook. There have been major shifts in both monetary and fiscal policies in the UK and globally to try to mitigate the economic impact, but their likely effectiveness is unclear at present and sentiment has deteriorated sharply. Property has not been immune, with valuers unable to determine “true value” in these conditions and share prices across the real estate sector have fallen sharply. Performance in 2020 is likely to be severely affected across the board.

It will take time for the markets to re-balance following such a major shock. Changes to lifestyles and working patterns may persist beyond the crisis period, which for property may present opportunity as well as challenges. However, the economic outlook will still be affected by Brexit and this represents another area of uncertainty. Given this backdrop, we expect capital values to remain under pressure and rental growth, especially in retail, to be by exception. Optimising and protecting income will be paramount in the difficult period ahead.

As at the current date more information has been gathered on the effects of COVID-19 on the Company. A trading update has been released to the market in parallel with this announcement, which gives information regarding a temporary suspension to monthly dividends and the NAV as at 31 March 2020. This announcement is available on the Company's website at bmocommercialproperty.com.

These are challenging times for property markets, and for the retail sector in particular, and your Company hasn’t been immune to this. Although longer-term performance has been solid, we have had a number of events in recent years which has led to relative underperformance from our portfolio. That said, we share the Manager’s conviction in the quality of the current portfolio and are encouraged by the many accretive opportunities it presents.

Martin MooreChairman

Managers’ Review

Property headlines over the year

• Void rate reduced from 8.5 per cent to 4.8 per cent at year end.

• The Company produced a total return of -0.1* per cent versus the MSCI UK Quarterly Property Index (‘MSCI’) return of 1.3 per cent.

• Completed the sale of Thames Valley Park 1&2 and Watchmoor Park Building A.

• Land at Colchester sold to residential developer.

• Completed new lease agreement to Lidl, Deichmann Shoes and Hobbycraft at Newbury Retail Park. M&S signed to take new general merchandise store at Solihull Retail Park.

*see Alternative Performance Measures

Property Market Review

The benchmark total return for the year, as measured by the MSCI UK Quarterly Property Index (‘MSCI’) was 1.3 per cent. Total returns were substantially lower than in 2018, affected by continued Brexit uncertainty, concerns over the general election, a sluggish economy, and structural problems in the retail sector.

Source: MSCI Inc

Investment activity in 2019 was lower than in the previous year with most sectors of the commercial real estate market affected. However, strong investor demand for residential assets saw a marked increase, accounting for approximately 22 per cent of all investment in 2019. Investment from overseas buyers remained positive but institutions were net sellers of property and the open-ended property funds witnessed persistent outflows. There were signs of an upturn in the second half of the year, with improved sentiment and activity by year-end.

The distress in retail dominated the UK market as cyclical factors combined with structural changes took their toll. As a consequence, the retail market continued to drag down performance at the all-property level. Shopping centres and department stores were particularly weak but as the Company Voluntary Arrangements (‘CVAs’), administrations and store rationalisation programmes continued, stronger performing retailers demanded rent cuts, flexibility in the form of turnover rents and shorter leases. The year saw the problems in retail accelerate and spread to affect prime property both in and out of town and the hitherto resilient Central London market. Business rates remained largely unreformed and this occupier cost burden restricted the ability of landlords to increase or maintain rental income. As a result, rental growth has been negative while concerns about the prospects for the sector have hit investment activity, especially in the shopping centre sector. Yields have moved out; transaction activity has fallen away in both the occupational and investment markets, and capital values have registered double-digit falls.

On a more positive note, the industrials and logistics market continued to outperform, with occupational and investor demand remaining healthy but discriminating in their asset choices. The office market delivered a solid performance helped by restricted new supply. Central London offices seemingly shrugged off earlier Brexit concerns and regional offices benefited from a lack of new buildings and Grade A supply, an improved rental tone and comparatively attractive yields. The alternatives market continued to attract investment with some large deals taking place, often involving overseas purchasers.

The year was characterised by both economic and political uncertainty. Economic growth was positive, if anaemic, but the market was supported by continued low interest rates. This led to some investors increasing their exposure to property with a focus on yield and secure income streams, especially where it involved some form of inflation protection. In a global context, UK prime yields can appear relatively attractive against other core property markets.

Our established ESG approach, which we continue to advance all the time, has ensured that the Company is well positioned to anticipate and respond to shareholder priorities in this regard. This has been reflected in the very positive feedback we have received on the continued progress the Company has been making.

Valuation and Portfolio

Source: BMO REP Asset Management plc

The 2019 total return from the portfolio was -0.1 per cent compared with the MSCI return of 1.3 per cent. The Company’s underperformance was primarily attributable to the valuation falls on retail properties, a common theme for the UK real estate market. Capitalisation rates moved out at Solihull and Newbury retail parks, with the valuations falling by 13.7 per cent and 16.8 per cent respectively. Unfortunately, Oxford Street in Central London experienced a tough trading environment with a number of stores closing, especially large units incurring high rents and high business rates. This has led to vacancies increasing and a rebasing of rents, and this pressure on rental levels impacted the valuation of St. Christopher’s Place Estate.

Disappointingly, our industrial portfolio also underperformed as a result of shorter lease durations secured on our logistics properties. Specifically, we had an exposure to Mothercare at Daventry where the value was hit due to the uncertainty over the tenancy even though the rent is guaranteed by a Group company which is not in administration.

Source: BMO REP Asset Management plc

Source: BMO REP Asset Management plc

Income analysis

The void rate at the commencement of the year was 8.5 per cent, excluding property being developed or refurbished. As a result of both the strategic sales of non-core assets and the leasing of space, this had reduced to 4.8 per cent by year-end.

Source: BMO REP Asset Management plc

Source: IRIS Report, MSCI Inc

The largest occupiers, based as a percentage of contracted rent, as at 31 December 2019, are summarised as follows:

Source: BMO REP Asset Management plc

*has a rental guarantee from a Mothercare company not in administration.

Retail

We have emphasised the challenges faced by UK retailers and the impact of CVAs and retailer default. We have been extremely focused on managing properties affected to secure new tenants to occupy vacant units as well as to protect and sustain rental income through lease event negotiations. Several of our initiatives have involved complex and wide-ranging negotiations with local authorities to secure planning consents to facilitate change of use and physical works and have involved lengthy and protracted lease negotiations with retailers. We are able to report the following successes:

Newbury

We completed a letting to Lidl on the majority of the former Homebase unit. Following a CVA, Homebase were occupying their store at a concessionary rent of £430,950 per annum. Their lease was surrendered at our instigation to reduce immediate covenant risk and to introduce new retailers with more appeal to shoppers to the park.

The permitted use of the premises was widened to allow the sale of food and the sub-division of units, which resulted in Lidl taking on a new 25-year lease (tenant break at year 20) with CPI-linked reviews, at a rent of £430,000 per annum, receivable from November 2020.

Works to create the sub-divided unit are on site and progressing to schedule and will result in much improved retail frontages. The remaining 9,500 sq. ft. unit is being marketed to let.

We are also on site with construction works to split a 12,000 sq. ft. unit formally occupied by Mothercare who had a CVA in place. They had been paying a concessionary rent of £118,000 per annum before closing and vacating the unit. Half of this unit has now been let to Deichmann Shoes on a new 10-year lease (tenant break at year 6) at a rent of £168,000 per annum, receivable from March 2021. The other half-unit is being marketed to let.

This significant leasing activity followed on from the letting to Hobbycraft at a rent of £215,578 per annum, having replaced Poundworld, who went into administration in 2018. Hobbycraft opened to trade in August 2019, and their rent-free period expires in September 2020.

The successful rental negotiations evidenced by these lettings has also enabled us to start to agree lease renewals on the park. A renewal with Sports Direct has completed on a new 10-year lease (tenant break at year 5) at a rent of £198,025 per annum with no rent-free period. This is a 5.7 per cent reduction from the previous rent of £210,000 per annum and is a good result in the current environment.

These lettings demonstrate the resilience of the park, its dominance in the local catchment area and its attractiveness to retailers and shoppers alike.

Solihull

A 36,500 sq. ft. store on the retail park was vacated by Homebase in January 2019 following their CVA. We have spent the last eighteen months negotiating a sequence of planning consents on the use of the store to permit a far wider range of goods to be sold, as well as for the demolition of existing premises and the construction of a new store.

Post year-end we completed an unconditional letting to Marks & Spencer for a redeveloped 35,000 sq. ft. store on a 20-year lease (breaks at year 10 and 15).

As part of the redevelopment, the new store will be combined with the adjacent M&S Food Hall. The combined store will create an 82,000 sq.ft. store incorporating general merchandise, a larger Food Hall as well as an M&S Café. The retail park is a well situated, popular trading venue and this expansion from M&S reinforces our confidence in the park.

St. Christopher’s Place Estate

The estate is the principal food and beverage destination for the area around the Bond Street/Oxford Street interchange and is a core investment with a history of strong performance. The estate ownership includes two retail stores located on Oxford Street and their revaluation accounted for approximately 90 per cent of an overall reduction in the estate’s value of 5.6 per cent during 2019.

As mentioned previously, Oxford Street has recently experienced many challenges, with some significant large store vacancies, redevelopments and an increase in smaller store availability, especially at either end of the street. This is evidenced by prime Zone A rental values falling from a peak of £990 per sq. ft. to £850 per sq. ft., and capitalisation rates moving out by around 50 basis points. The ongoing delay in the opening of the Elizabeth Line has not helped the situation. On the positive side, key stakeholders have been investing in the immediate vicinity including Westminster City Council with the Oxford Street District Realm Project, and Selfridges’ ongoing investment in both its department store and an important redevelopment of the corner of Duke Street and Oxford Street.

Our asset management strategy for the estate has been a combination of refurbishment, repurposing and selective re-lettings. We have completed lettings to Leica Camera, Flat Iron and HighBrook Investors during the year.

Offices

We completed the major refurbishment of Ness & Nevis House, Edinburgh Park in April 2019, and the letting to Diageo completed in December 2019. This is now Diageo’s Scottish headquarters and they occupy the building on a new 16-year lease (break at year 10) at a rent of £21 per sq. ft.

We also let two floors at the refurbished Cassini House, London SW1. Shore Capital took the fourth and fifth floors at headline rents of £105 sq. ft. for a 10-year term (tenant break at year 5). This letting was in line with the valuers estimated rental value (ERV) and had an accretive impact on valuation.

Post the reporting period, we have let the sixth floor to Mitsui Fudosan on a new 10-year lease (break at year 5) at a rent of £106 per sq. ft. This letting completes the major refurbishment project, which commenced in early 2018 at a total cost in excess of £9 million, and which has resulted in significant valuation uplifts. Cassini House is a prime freehold office building of exceptional quality in a core St. James’ location with an attractive lease profile.

Having sold two buildings at Watchmoor Park, Camberley, Building C is the Company’s remaining ownership. There was successful leasing activity ahead of the Novartis lease expiry in 2020, with lettings to Alcon (approximately 19,000 sq. ft.) and Sandoz (approximately 8,000 sq. ft.), both at a rent of £22.50 per sq. ft, which represents a significant uplift on the current passing rent of £14.00 per sq. ft. There remains 20,000 sq. ft. to be let and this is currently being marketed.

Due to lease breaks and expiries at 17a Curzon Street, a full refurbishment of the first, second and fourth floors were undertaken. The works completed in November 2019 at a cost of £1.25 million. These floors are being marketed at £85 per sq. ft. with the fourth floor under offer.

Office Sales

During the twelve months, we progressed our strategic sales programme disposing of non-income producing assets with challenging re-letting prospects. The largest of these, Thames Valley Park One and Thames Valley Park Two, exchanged in December 2018 and completed in January 2019 at a combined sale price of £24.5 million. This sale removed 103,900 sq. ft. of vacant office space from the portfolio, which would have required around £8 million of reinvestment to undertake an extensive refurbishment. In April 2019, Building A, Watchmoor Park, Camberley, sold for a net price of £3.94 million. We believe these sales were well timed, as investor sentiment and pricing for “risk on” assets diminished during the second half of the year.

Industrial and logistics

The performance of the industrial and logistics assets was hindered by the stagnation of business activity arising from political and Brexit uncertainty.

Frustratingly this coincided with a lack of any significant lease event dates occurring naturally within the calendar year. These traditionally offer an opportunity to outperform, be it through a strong rent review settlement, or a value enhancing lease renewal. Despite our continued direct engagement and in some cases lengthy negotiations, the vast majority of logistics tenants continued to resist concluding any short or medium-term initiatives. In most instances these opportunities are deferred as opposed to lost for good. In line with this general deferral strategy, we elected to deploy it ourselves in pushing out two potential break dates with tenants in Southampton and Hams Hall, Birmingham, which was sensible given the risk and potential timescale for vacancies.

The letting of Hurricane 47, Estuary Business Park, Liverpool, has been slower than envisaged, having been impacted by concerns regarding the UK’s motor vehicle production industry. Leasing agents have been reporting interest from prospective tenants from a wider manufacturing and services base. Construction works for a second warehouse on the adjacent site have not started and the programme has been deferred.

Industrial sale

The sale of Phase 1 of the former Ozalid Works site in Colchester completed to Persimmon Homes at a price of £6.0 million. The sale of Phase 2 will complete in July 2020. The sale followed extensive and lengthy negotiations to secure a revised residential planning consent and was an excellent result for the Company, allowing us to dispose of a non-income producing site and obsolete light industrial units at above market valuation.

The Alternative Property Sector

Alternatives comprise 9.8 per cent of the portfolio and relate to the purpose-built student accommodation in Winchester, residential properties at St. Christopher’s Place and the leisure units at Wimbledon Broadway. Winchester continues to benefit from a long lease and annual RPI-linked rent reviews.

Outlook

The improved sentiment seen at the close of 2019 and in early 2020 dissipated and went into sharp reverse as fears about the impact of COVID-19 gathered force. The crisis has led to major changes to fiscal and monetary policy both in the UK and abroad and a significant downgrading of economic forecasts. The financial markets are in disarray and in property, open-ended funds have been gated as valuers cannot determine “true value” in such a climate. The severity and duration of the COVID-19 outbreak is unknown but inevitably such a shock will affect performance. With businesses struggling, prospects for rental growth are limited and capital values are expected to remain under pressure.

As we continue to monitor ongoing developments regarding the outbreak of COVID-19, the Manager is taking every precaution to safeguard the health and wellbeing of staff, occupiers and customers. The Manager has robust business continuity plans to ensure they can maintain operations in these challenging times. Policies have been thoroughly reviewed again since the outbreak, and the Board are in close contact with senior management and business continuity teams across the BMO Financial Group to assess the situation and react accordingly. A work from home policy has been introduced by the Manager across all geographies with all employees to follow government advice regarding personal travel.

The economy and the property market still has to contend with Brexit and although the triggering of the transition period in January 2020 provided some clarity, it is by no means assured that a deal will be reached and the exit terms and their impact on the economy are still to be determined. We also believe that the structural adjustments in the retail sector are not yet complete.

Whilst the current situation is extremely difficult and the short-term outlook is filled with uncertainty and risk, in due course the retail market will reach an equilibrium, Brexit will be determined and COVID-19 will pass or be a measurable risk. In the longer-term, the changes to lifestyles and working practices may persist and present opportunities for `the property industry. The period ahead is likely to be volatile and characterised by a focus on optimising and protecting the income stream.

Richard KirbyFund ManagerBMO REP Asset Management plc

BMO Commercial Property Trust LimitedConsolidated Statement of Comprehensive Income (audited)

All of the profit and total comprehensive income for the year is attributable to the owners of the Group.

All items in the above statement derive from continuing operations.

BMO Commercial Property Trust LimitedConsolidated Balance Sheet (audited)

BMO Commercial Property Trust LimitedConsolidated Statement of Changes in Equityfor the year ended 31 December 2019 (audited)

Consolidated Statement of Changes in Equityfor the year ended 31 December 2018 (audited)

BMO Commercial Property Trust LimitedConsolidated Statement of Cash Flows (audited)

BMO Commercial Property Trust Limited

Principal Risks and Future Prospects

Each year the Board carries out a comprehensive, robust assessment of the principal risks and uncertainties that could threaten the Company's success. The consequences for its business model, liquidity, future prospects and viability form an integral part of this assessment.

The Board applies the principles detailed in the internal control guidance issued by the Financial Reporting Council, and has established an ongoing process designed to meet the particular needs of the Company in managing the risks and uncertainties to which it is exposed.

Principal risks and uncertainties faced by the Company are described below and in note 1, which provides detailed explanations of the risks associated with the Company’s financial instruments.

• Market – the Company’s assets comprise direct investments in UK commercial property and it is therefore exposed to movements and changes in that market.

• Investment and strategic – poor investment decisions and incorrect strategy, including sector and geographic allocations, use of gearing, inadequate asset management activity and tenant defaults could lead to poor returns for shareholders.

• Regulatory – breach of regulatory rules could lead to suspension of the Company’s London Stock Exchange listing, financial penalties or a qualified audit report.

• Environmental – inadequate attendance to environmental factors by the Managers, including those of a regulatory and market nature and particularly those relating to energy performance, health and safety, climate risk and environmental liabilities, leading to the reputational damage of the Company, reduced liquidity in the portfolio, and/or negative asset value impacts.

• Tax structuring and compliance – the Company should ensure compliance with relevant tax rules and thresholds at all time. Changes to tax legislation could have an adverse financial impact.

• Operational – failure of the Managers’ accounting systems or disruption to its business, or that of other third party service providers, could lead to an inability to provide accurate reporting and monitoring, leading to a loss of shareholders’ confidence.

• Financial – inadequate controls by the Managers or other third party service providers could lead to misappropriation of assets. Inappropriate accounting policies or failure to comply with accounting standards could lead to a qualified audit report, misreporting or breaches of regulations. Breaching Guernsey solvency test requirements or loan covenants could lead to a loss of shareholders’ confidence and financial loss for shareholders.

The Board seeks to mitigate and manage these risks through continual review, policy-setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Company’s property portfolio. The Managers seek to mitigate these risks through active asset management initiatives and carrying out due diligence work on potential tenants before entering into any new lease agreements. All of the properties in the portfolio are insured.

As well as considering current risks quarterly, the Board and the Investment Manager carry out a separate annual assessment of emerging risks when reviewing strategy and evaluate how these could be managed or mitigated. However, the Board considers that the line between current and emerging risks is often blurred and many of the emerging risks identified are already being managed to some degree where their effects are beginning to impact.

The principal emerging risks identified are outlined below:

· The structural changes in the retail market is a significant emerging risk, particularly as the prominence of online shopping continues to increase. Over the last two years the market has experienced a number of high-profile retailers going out of business, downsizing, closing stores and negotiating flexible leases at lower rents. With an increasing number of vacant stores, the challenge is to find different uses for commercial property, whether that’s for residential, leisure, food and beverage, or other alternative uses.

· The ESG agenda is a very prominent one and will continue to grow in its importance to Shareholders, future investors and our customers. As discussed in our ESG report, we have already made significant strides in this area and we will continue to do so. The increasing market attention being paid to climate risk and social impact have been notable features of the evolving agenda over the last year, and those need to be considered more explicitly in property investment and management activity than has been the case previously.

· The political climate continues to be uncertain and as well as the ongoing effects of Brexit, there are strong calls for another Scottish referendum. During times of heightened uncertainty, a key benefit to the Company is its closed-ended structure, in that it is not forced to sell property during stressed times.

· Legislative changes are always a risk, particularly where they are politically driven and may cause changes in our property allocation. Such issues might involve some style of rent control or an escalation of regulatory oversight on ESG factors, particularly in responding to the climate emergency.

· The impact of technology increasingly means that things change very quickly which is an opportunity as well as a risk, and it is important that we continue to keep abreast of what is happening in this space.

· Post period end, the developing threat from COVID-19 is the dominant risk for the global economy, and by extension the UK property market. The severity of the threat is becoming clearer by the day with the likelihood of significant disruption to all sectors worldwide. This threat has an ongoing effect on many of our principal risks and the Board will be meeting regularly with the Manager to assess these risks and how they can be managed. More detail is included in the Chairman’s Statement and the Manager’s Report. Of particular concern is the Company’s cash flow, given the number of expected tenant defaults in the short-term. The Board and the manager review on a daily basis the cash collected and have taken the decision to temporarily suspend the monthly dividend and to defer capital expenditure to maximise the cash reserves available. In addition, the Group is in regular contact with its lenders in case the decline in rent collected causes certain covenants to be breached or become close to being breached.

To help manage emerging risks and discuss other wider topics affecting property, the Board invites to its annual strategy meeting various experts to give their views and promote discussion. The Board considers having a clear strategy is the key to managing and mitigating emerging risk.

The highest residual risks encountered during the year, how they are mitigated and actions taken to address these are set out in the table below.

Viability Assessment and Statement

The Board conducted this review over a five-year time horizon, a period thought to be appropriate for a Company investing in commercial property with a long-term investment outlook, with primary borrowings secured for a further four years, a continuation vote in 2024 and a property portfolio with an average unexpired lease length of 6.6 years. The assessment has been undertaken, taking into account the principal risks and uncertainties faced by the Group which could threaten its objective, strategy, future performance, liquidity and solvency.

The major risks identified as relevant to the viability assessment were those relating to a downturn in the UK commercial property market and its resultant effect on the valuation of the investment property portfolio, the level of rental income being received and the effect that this would have on cash resources and financial covenants. The Board took into account the illiquid nature of the Company’s property portfolio, the existence of the long-term borrowing facility, the effects of any significant future falls in investment property values and property income receipts on the ability to repay and re-negotiate borrowings, maintain dividend payments and retain investors. These matters were assessed over a period to April 2025, and the Directors will continue to assess viability over five year rolling periods, taking account of foreseeable severe but plausible scenarios.

In the ordinary course of business, the Board reviews a detailed financial model on a quarterly basis, incorporating market consensus forecast returns, projected out for five years. This model uses prudent assumptions and factors in any potential capital commitments. For the purpose of assessing the viability of the Group, the model has been stress tested with projected returns comparable to the commercial property market crash experienced between 2007 and 2009. The model projects a worst-case scenario of an equivalent fall in capital and diminution of rental values over the next two years, followed by three years of zero growth. The model demonstrated that even under these extreme circumstances the Company remains viable.

Based on this assessment, and in the context of the Group’s business model, strategy and operational arrangements set out above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period to April 2025. For this reason, the Board also considers it appropriate to continue adopting the going concern basis in preparing the Annual Report and Consolidated Accounts.

The Company continues to monitor the potential impact of the COVID-19 virus on cash flows. Particular attention is paid to the circumstances of all the tenants in the portfolio and detailed modelling is performed on a day to day basis as events unfold. At this stage it is not possible to predict what the full impact will be.

Detailed modelling has been performed, which has looked at the impact of the current crisis under increasingly negative scenarios and the effect of a suspension in paying out dividends to preserve cash. The modelling demonstrates that the Company remains viable.

We have also reviewed the Company’s position regarding its loan covenants.

The Group's £260 million long-term debt with L&G does not need to be refinanced until December 2024. We calculate that the market value of the properties secured under this loan would have to drop by 42 per cent before breaching the Loan to Value (‘LTV’) test on the facility. The loan interest cover test would only be breached by a fall in rental income of 69 per cent. We are comfortable that these covenants will continue to be met.

The Group’s Barclays £50 million loan facility is due to expire in June 2021. The LTV test should remain comfortable with a fall of 64 per cent of the market value of the properties secured under this loan being required before breaching. The assets secured under this loan relate to the St Christopher’s Place Estate and the level of rental income receivable from these assets will be significantly impacted. The interest cover test is therefore expected to become more challenging. This particular covenant test has been discussed with Barclays, who are sympathetic given current events, and they have confirmed that they are prepared to support the business through this uncertain period.

BMO Commercial Property Trust Limited

Going Concern

In assessing the going concern basis of accounting the Directors have had regard to the guidance issued by the Financial Reporting Council. They have reviewed detailed cash flow, income and expense projections in order to assess the Company’s ability to pay its operational expenses, bank interest and dividends. The Directors have examined significant areas of possible financial risk including cash and cash requirements and the debt covenants, in particular those relating to loan to value and interest cover. Having taken the decision to suspend the dividend and held discussions with lenders, they have not identified any material uncertainties which cast significant doubt on the ability to continue as a going concern for the foreseeable future, which is considered for a period of not less than 12 months from the date of the approval of the financial statements. The Board believes it is appropriate to adopt the going concern basis in preparing the financial statements.

Statement of Directors' Responsibilities in Respect of the Annual Report and Accounts

In accordance with Chapter 4 of the Disclosure and Transparency Rules, we confirm that to the best of our knowledge:

· The financial statements contained within the Annual Report and Accounts for the year ended 31 December 2019, of which this statement of results is an extract, have been prepared in accordance with applicable International Financial Reporting Standards as adopted by the EU, on a going concern basis, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and the undertakings included in the consolidation taken as a whole and comply with The Companies (Guernsey) Law, 2008; and

· The Chairman’s Statement and Managers’ Review include a fair review of the development and performance of the business and the position of the Group and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

· The consolidated financial statements include details of related party transactions; and

In the opinion of the Directors:

· The Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.

On behalf of the BoardMartin MooreDirector

BMO Commercial Property Trust LimitedNotes to the audited Consolidated Financial Statementsfor the year ended 31 December 2019

1. Financial Instruments and investment properties

The Company’s investment objective is to provide ordinary shareholders with an attractive level of income together with the potential for capital and income growth from investing in a diversified UK commercial property portfolio.

Consistent with that objective, the Group holds UK commercial property investments. In addition, the Group’s financial instruments during the year comprised interest-bearing bank loans, cash and receivables and payables that arise directly from its operations. The Group does not have exposure to any derivative instruments other than the interest rate swap entered into to hedge the interest paid on the Barclays interest-bearing bank loan.

The Group is exposed to various types of risk that are associated with financial instruments. The most important types are credit risk, liquidity risk, interest rate risk and market price risk. There is no foreign currency risk as all assets and liabilities of the Group are maintained in pounds sterling.

The Board reviews and agrees policies for managing the Group’s risk exposure. These policies are summarised below and have remained unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group’s investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group’s overall risk exposure.

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable or unwilling to meet a commitment that it has entered into with the Group.

In the event of default by an occupational tenant, the Group will suffer a rental shortfall and incur additional costs, including legal expenses, in maintaining, insuring and re-letting the property. The Board receives regular reports on concentrations of risk and any tenants in arrears. The Managers monitor such reports in order to anticipate, and minimise the impact of, defaults by occupational tenants.

All of the Group’s cash is placed with financial institutions with a long-term credit rating of A or better. Bankruptcy or insolvency of such financial institutions may cause the Group’s ability to access cash placed on deposit to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, cash holdings would be moved to another bank.

Liquidity risk

Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments. The Group’s investments comprise UK commercial property. Property and property-related assets in which the Group invests are not traded in an organised public market and may be illiquid. As a result, the Group may not be able to liquidate quickly its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.

The Group’s liquidity risk is managed on an ongoing basis by the Managers and monitored on a quarterly basis by the Board. In order to mitigate liquidity risk, the Group aims to have sufficient cash balances (including the expected proceeds of any property sales) to meet its obligations for a period of at least twelve months.

Interest rate risk

Some of the Group’s financial instruments are interest bearing. They are a mix of both fixed and variable rate instruments with differing maturities. As a consequence, the Group is exposed to interest rate risk due to fluctuations in the prevailing market rate.

The Group’s exposure to interest rate risk relates primarily to its long-term debt obligations. Interest rate risk on long-term debt obligations is managed by fixing the interest rate on such borrowings, either directly or through interest rate swaps for the same notional value and duration. Long-term debt obligations and the interest rate risk they confer to the Group is considered by the Board on a quarterly basis. Long term debt obligations consist of a £260 million L&G loan on which the rate has been fixed at 3.32 per cent until the maturity date of 31 December 2024. The Group also has a £50 million interest-bearing bank loan with Barclays on which the rate has been fixed through an interest rate swap at 2.522 per cent per annum until the maturity date of 21 June 2021. The Group has agreed an additional revolving credit facility of £50 million with Barclays over the same period, which has not been drawn down as at 31 December 2019. The revolving credit facility pays an undrawn commitment fee of 0.60 per cent per annum.

When the Group retains cash balances, they are ordinarily held on interest-bearing deposit accounts. The benchmark which determines the interest income received on interest bearing cash balances is the bank base rate of the Bank of England which was 0.75 per cent as at 31 December 2019 (2018: 0.75 per cent). The Company’s policy is to hold cash in variable rate or short-term fixed rate bank accounts and not usually in fixed rate securities with a term greater than three months.

Market price risk

The Group’s strategy for the management of market price risk is driven by the investment policy. The management of market price risk is part of the investment management process and is typical of commercial property investment. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders. Investments in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.

2. Share Capital

There were 799,366,108 Ordinary Shares in issue at 31 December 2019 (2018: 799,366,108).

At 31 December 2019, the Company did not hold any Ordinary Shares in treasury (2018: nil).

3. Earnings per share

The basic and diluted earnings per Ordinary Share are based on the loss for the year of £22,475,000 (2018: profit £36,398,000) and on 799,366,108 (2018: 799,366,108) Ordinary Shares, being the weighted average number of shares in issue during the year.

4. List of Subsidiaries

The Company owns 100 per cent of the issued ordinary share capital of FCPT Holdings Limited, a company registered in Guernsey. The principal activity of FCPT Holdings Limited is to act as a holding company and it owns 100 per cent of the ordinary share capital of F&C Commercial Property Holdings Limited, a company registered in Guernsey whose principal business is that of an investment and property company, and 100 per cent of the ordinary share capital of Winchester Burma Limited, a company registered in Guernsey whose principal business is that of an investment and property company.

The Company owns 100 per cent of the issued ordinary share capital of SCP Estate Holdings Limited, a company registered in Guernsey. The principal activity of SCP Estate Holdings Limited is to act as a holding company and it owns 100 per cent of the ordinary share capital of SCP Estate Limited, a company registered in Guernsey whose principal business is that of an investment and property company, and 100 per cent of the ordinary share capital of Prime Four Limited, a company registered in Guernsey whose principal business is that of an investment and property company.

The Company owns 100 per cent of the issued ordinary share capital of Leonardo Crawley Limited, a company registered in Guernsey whose principal business is that of an investment and property company.

The results of the above entities are consolidated within the Group financial statements.

5. Capital Commitments

The Group had capital commitments totalling £2,100,000 as at 31 December 2019 (2018: £3,600,000). These commitments related mainly to contracted development work at the Group’s property at 56 James Street, St. Christopher’s Place Estate, London.

6. Post Balance Sheet Events and COVID-19 impact

The outbreak of the Novel Coronavirus (COVID-19), declared by the World Health Organisation as a “Global Pandemic” on the 11 March 2020, has had a significant effect on the global economy and by extension the UK property market and stock markets. Of particular concern is the Company’s cash flow, given the number of expected tenant defaults in the short-term and the Board has therefore taken the decision to temporarily suspend future dividends with immediate effect. The Chairman’s Statement and the Manager’s Report consider the possible impact upon the Company.

The Group has billed c.£9m of its quarter 2 rent due on 25 March and has collected 74 per cent of this amount to date (compared to 96 per cent for the same period last year). The total quarterly rent amounts to c.£16 million and a high proportion of the balance relates to rent at St. Christopher’s Place, not scheduled to be billed until 21 April. Based on dialogue with tenants at St. Christopher’s Place we would expect the overall percentage collected across the portfolio for quarter 2 to drop. We also suspect the quarter 3 rent collection commencing in June will be equally challenging. Given this background, the Board has taken the decision to temporarily suspend future dividends with immediate effect. The Board currently intends to re-introduce monthly distributions when deemed appropriate, based on their assessment of the likely duration of continued market disruption as a result of COVID-19 and the level of retained cash reserves within the Group.

7. These are not full statutory accounts. The full audited accounts for the year to 31 December 2019 will be sent to shareholders and will be available for inspection at Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1 3QL, the registered office of the Company, and from the Company’s website: bmocommercialproperty.com

Alternative Performance Measures

The Company uses the following Alternative Performance Measures (‘APMs’). APMs do not have a standard meaning prescribed by GAAP and therefore may not be comparable to similar measures presented by other entities.

Discount or Premium – the share price of an Investment Company is derived from buyers and sellers trading their shares on the stock market. This price is not identical to the NAV. If the share price is lower than the NAV per share, the shares are trading at a discount. This could indicate that there are more sellers than buyers. Shares trading at a price above the NAV per share, are said to be at a premium.

Dividend Cover – The percentage by which Profits for the year (less Gains/losses on investment properties) cover the dividend paid.

A reconciliation of dividend cover is shown below:

Dividend Yield – The annualised dividend divided by the share price at the year end.

Net Gearing – Borrowings less cash divided by total assets (less current liabilities and cash).

Portfolio (Property) Capital Return – The change in property value during the period after taking account of property purchases and sales and capital expenditure, calculated on a quarterly time-weighted basis. The calculation is carried out by MSCI Inc.

Portfolio (Property) Income Return – The income derived from a property during the period as a percentage of the property value, taking account of direct property expenditure, calculated on a quarterly time-weighted basis. The calculation is carried out by MSCI Inc.

Portfolio (Property) Total Return – Combining the Portfolio Capital Return and Portfolio Income Return over the period, calculated on a quarterly time-weighted basis. The calculation is carried out by MSCI Inc.

Total Return – The theoretical return to shareholders calculated on a per share basis by adding dividends paid in the period to the increase or decrease in the Share Price or NAV. The dividends are assumed to have been reinvested in the form of Ordinary Shares or Net Assets, respectively, on the date on which they were quoted ex-dividend.

All enquiries to:

The Company SecretaryNorthern Trust International Fund Administration (Guernsey) LimitedTrafalgar CourtLes BanquesSt. Peter PortGuernsey GY1 3QL

Tel: 01481 745436Fax: 01481 745186

Richard KirbyBMO REP Asset Management plcTel: 0207 016 3577

Graeme CatonWinterflood Securities LimitedTel: 0203 100 0268