BREI.L Regulatory News (BREI)

BMO Real Estate Investments Ltd - Annual Report

PR Newswire

London, October 7

To: RNS

Date: 8 October 2021

From: BMO Real Estate Investments Limited

LEI: 231801XRCB89W6XTR23

* See Alternative Performance Measures

Chairman’s Statement

The UK has now formally left the EU and the Covid-19 vaccination programme is well progressed. The economy has moved into a recovery phase with consumer spending up and the government continuing its policy of fiscal and monetary support. The pandemic has presented entirely new challenges with real estate very much affected by the changing market.

Against this background, the Group showed a positive outcome with a net asset value (‘NAV’) total return for the year ended 30 June 2021 of 9.1 per cent and NAV per share as at 30 June 2021 of 102.1 pence, up from 96.6 pence per share at the prior year-end.

The share price total return for the year was 32.9 per cent with the shares trading at 71.0 pence per share at 30 June, a discount of 30.5 per cent to the NAV. The discount has narrowed since the year end and at the time of writing the share price is 74.0 pence per share representing a discount of 27.5 per cent.

Rent Collection

It has been a challenging period for both landlord and tenant since the outbreak of Covid-19, with much focus rightly on rent collection. Notwithstanding the obvious pressures, collection for the last twelve months stands at a pleasing 97 per cent. The pandemic has had a significant effect on collection rates, especially in retail, hospitality, and leisure, however, the portfolio has limited exposure to these sectors. Supermarkets, essential and convenience retail, offices and industrial were far more resilient, which explains the Group’s high collection levels.

Property Market

Despite the cautious sentiment at the start of the period linked to the pandemic and the associated lockdowns, the market showed some signs of steadying throughout the latter part of 2020, and a return to greater optimism as the financial year came to a close. The UK commercial property market delivered a total return of 6.5 per cent in the twelve months to 30 June 2021 as measured by the MSCI UK Quarterly Property Index (‘MSCI’), with a return to capital growth of 1.9 per cent. Annual income return remained stable at 4.5 per cent.

This recovery in sentiment was not evenly distributed by sector. Industrials, logistics and distribution warehousing assets (‘Industrials’) were again the standout performers delivering 22.7 per cent over the year driven by a significant weight of money and robust occupational demand, while the retail sector remained weak, delivering a total return of -2.5 per cent. Within the Retail sector, Shopping Centres were by far the poorest performing subsector with the High Street also under pressure. Retail warehousing performed more strongly, with returns improving markedly towards the end of the period as buyers returned to the market.

The Office market recorded a marginally positive total return of 1.6 per cent over the year, as uncertainty linked to the future shape of working patterns weighed on both investor sentiment, and occupational take up. Total returns for alternatives were 3.5 per cent in the twelve-month period, led by Residential property which was the second-best performing area of the market after Industrials.

The continuing success of the vaccine roll-out and further relaxation of lockdown restrictions has driven improving consumer, business and investor sentiment which has now been evidenced in some strong GDP numbers for the last quarter and forecasts of further growth for 2021. Investment activity maintains its recovery from the depths of 2020, with a greater range of potential buyers.

Portfolio

The Group’s property portfolio delivered a total return of 9.0 per cent over the 12-month period, compared with 6.5 per cent for MSCI. Both capital and income returns were again ahead of the Index. Over the five years to June 2021 the Group’s property portfolio produced an ungeared total return of 5.8 per cent per annum, 143 basis points of annual outperformance against the Index.

There was capital growth of 3.7 per cent for the Group’s assets over the year, alongside an income return of 5.2 per cent. The portfolio continues to deliver an above market income yield and a below market vacancy rate of 4.1 per cent. Average unexpired lease length has remained steady at six years following successful asset management initiatives.

The portfolio’s Industrial assets were again the main driver for performance over the year delivering 18.3 per cent. These holdings continue to experience high levels of occupier activity with new supply unable to satisfy demand, leaving favourable conditions for existing owners. The Industrial assets at Hemel Hempstead, Bracknell, Southampton International and Colnbrook, Heathrow were amongst the top performers over the period. The exposure to this segment of the market is now 47 per cent of assets by value and the expectation is that this could increase further by virtue of capital growth and/or acquisition. This was a key motivation for calling the recent EGM where shareholder's approved the easing of the Group’s current investment restrictions.

Office assets delivered a positive return of 2.5 per cent over the period, outperforming the Index peers, albeit against a backdrop of capital falls particularly within Central London and more recently on the business park assets. Relative performance was led by the completion of asset management initiatives particularly the redevelopment at County House, Chelmsford.

The Company’s retail assets delivered a positive total return of 1.4 per cent over the 12 months, outperforming the MSCI Index of -2.5 per cent by some margin. This relative outperformance was entirely on account of the strong showing of, and the relative weighting to low rented, essential, non-fashion and convenience led retail warehousing, and the absence of Shopping Centres, department stores and hospitality and leisure assets. The redevelopment project at Enterprise Way, Luton was a key contributor to performance, driven by strengthening sentiment towards supermarkets and the delivery of the project on time and under budget.

The strategy to reduce exposure to High Street Retail continued in the first half of 2021 with two further disposals at High Street, Winchester and The Parade, Sutton Coldfield. The High Street element of the portfolio remains under continual review despite the high level of income it currently delivers. While we remain wary of illiquidity in parts of the High Street market, we have continued to see interest in the Group’s assets, which tend to be in the smaller lot sizes, and which has allowed for selective sales.

There has been significant activity since the year end and the Company completed the disposal of the office holding at Marlborough House, St Albans for £7.9 million, a 7.8 per cent premium to the year end valuation. The Company has also completed the purchase of

two properties, a DIY-led retail warehousing scheme in Banbury for £7.3 million and an industrial asset in Colnbrook for £12.1 million.

Borrowings and Cash

The Group had approximately £16.6 million of available cash as at 30 June 2021 and an undrawn revolving credit facility of £20 million. £10 million of the revolving credit facility was drawn down in September 2021 to facilitate the recent acquisitions highlighted above and provide sufficient working capital. The Group’s £90 million long-term debt with Canada Life and the loan facility with Barclays do not need to be refinanced until November 2026 and March 2025 respectively. As at 30 June 2021, the Group’s net gearing was 24.4 per cent and there was significant headroom under debt covenants. The weighted average interest rate (including amortisation of refinancing costs) on the Group’s total current borrowings was 3.1 per cent. The Company continues to maintain a prudent attitude to gearing.

Dividends

Three interim dividends of 0.85 pence per share were paid for the year. Given the strong level of rent collection and improved performance the Board has decided to increase the dividend for the coming quarter and a fourth interim dividend of 1.0 pence per share was paid on 30 September 2021. It is the intention of the Board that subsequent distributions will continue to be paid at this increased rate for the foreseeable future. The level of future dividends will continue to be kept under review.

Board Composition

Having served 16 years, Andrew Gulliford retired from the Board in March 2021. I would like to express our thanks to Andrew for his years of service, his commitment and in-depth knowledge of the Company and its portfolio has been invaluable.

The Board was pleased to announce the appointment of Rebecca Gates as an independent non-executive Director of the Company with effect from 10 March 2021. Rebecca is an experienced property professional who has many years of experience in the real estate investment management business.

Environmental, Social and Governance (‘ESG’)

As a Board, we continue to give considerable attention to our ESG commitments and support to our Property Manager in responding proactively to this important requirement. An ESG Report, detailing the current status and progress made on the portfolio is available on the Group's website. An immediate focus will revolve around net zero carbon emissions and establishing the Company’s strategy and ambition around achieving this position on the portfolio. We aim to publish our target date and pathway for success in the latter half of 2021.

BMO

Our Manager is part of BMO Global Asset Management which is ultimately owned by the Bank of Montreal. It was announced on 12 April 2021 that Bank of Montreal has agreed to sell its European, Middle East and African (EMEA) asset management activities to AMERIPRISE Inc. This sale is expected to conclude towards the end of 2021. For the UK element of this transaction the new owners will be Columbia Threadneedle, a subsidiary of AMERIPRISE. Columbia Threadneedle does not have an Investment Trust business in the UK and the Board has been informed that this will be a welcome addition to its portfolio. Both companies have confirmed the importance of maintaining the stability and continuity of the teams which presently support your Company, but the change of ownership and subsequent developments are issues that the Board will monitor closely in the coming months.

Annual General Meeting

The AGM will be held at the offices of BMO Global Asset Management, Quartermile 4, 7a Nightingale Way, Edinburgh, EH3 9EG on 17 November 2021 at 1pm. Given the ongoing Covid-19 situation the Company may, in accordance with its Articles of Incorporation, impose entry restrictions on certain persons wishing to attend the AGM or may be required to adjourn the AGM. Other restrictions may be imposed as the Chairman of the meeting may specify in order to ensure the safety of those attending the AGM. In any case, shareholders should give careful consideration as to whether attendance in person this year is in their best interests.

Outlook

The improvement in both the economy and in the real estate market over the recent months has been encouraging, with fiscal and monetary stimulus from government and increased consumer spending giving the majority of sectors a lift. Uncertainties linked to the impact of post Brexit trade and the recent upsurge in energy prices will persist in the short term at least and we expect to see changes in working practices linked to the pandemic which will have lasting implications for the property market.

While long-term secure income streams remain in demand, we are now seeing a little more risk appetite emerge. Property’s relatively attractive yield profile remains compelling, while prospects for income growth, particularly in the Industrial sector, remain strong. The advancement of the e-commerce sector looks set to continue with the restructuring of supply chains likely to be a feature of the coming years. Offices look set for a period of softer demand while the market evaluates the impact of working from home.

The diversification of the Company’s asset and tenant base, albeit with a significant allocation in Industrial assets, alongside the quality of income derived from the portfolio should continue to generate performance in the current environment. This has been demonstrated by the encouraging rent collection and vacancy statistics achieved over the course of the pandemic to date. Capital projects undertaken by the Manager over recent years have proven fruitful, and the expectation is that the portfolio will generate further capital enhancing opportunities in the future.

Vikram Lall

Chairman

Manager’s Review

Portfolio headlines over the year

UK Property Market

Despite a challenging period in the wake of the Covid-19 pandemic and the largest collapse in economic output since 1921, the economic recovery is now underway. Headwinds remain, not least the rising number of cases and increase in hospitalisations. Compounded by the impact of Brexit trade friction, manufacturing has stalled, impacted by supply issues and staffing shortages. The labour market continues to improve however, with the furlough scheme having thus far shielded the workforce from the direst of unemployment predictions. The potential impact of the end of the furlough scheme in September 2021, along with a phased withdrawal of other policy support measures is yet to be fully felt, although the economy has had some opportunity to adjust before assistance is fully withdrawn. Inflation has been on the rise as sectors previously closed reopened and have started to raise prices. The expectation is for these effects to only have a temporary impact, allowing the Bank of England to keep short-term interest rates on hold, which is a positive for real estate markets.

The pandemic in combination with the impact of Brexit trade disruption has further polarised the fortunes of the various segments of the commercial property market. Some sectors have experienced a beneficial demand shift, with the reimagining of food-stores as essential infrastructure and the continued growth of ecommerce delivery being two of the most obvious. On the other hand, nervous consumers, government mandated store closures, and the encouragement of employees to work from home have brought unprecedented challenges for our city centres. There is expectation that the easing of lockdown will see a return to previous patterns of consumption. While this is likely to be true for the most part, we do expect to see a lasting impact in behavioural changes, particularly via an acceleration of trends that had already taken root prior to the onset of the pandemic. Prime and core real estate assets are commanding premiums, with some marginalised locations and asset types risking becoming stranded. The growing awareness and application of the ESG agenda with a new focus on net zero carbon will play an increasingly important part in investment decisions.

Liquidity has returned to the Investment market, with transaction levels having increased considerably since the depths of 2020. Industrial, distribution and logistics (‘Industrial’) property continues to be the most sought after, experiencing the strongest half year of volumes on record. Despite the uncertainty around the ‘return to office’, the Office sector is seeing an uptick in activity to complement an improvement in the occupational markets. Not all retail has been affected in the same way by the pandemic and divergence within the sector continues.

Supermarkets are the most sought after with demand returning for well let retail parks, especially those supported by alternative use angles. Investment activity in the Alternatives sector was boosted by residential and student housing, but also a recent pickup in hotel deals. Foreign investors accounted for well over half of second quarter deals, much more active than the equivalent quarter in 2020 when lockdowns and travel bans were first introduced.

Structural concerns remain for Open-ended property funds which continue to dispose of assets to satisfy redemptions, while property company dividend payments were reduced over the year on account of cutting back or suspending distributions in light of uncertainty surrounding rent collection. While the majority of diversified portfolios have come through the pandemic with manageable levels of arrears or bad debt, the sector splits are sobering, with c£6.5bn of as yet uncollected rent from the retail, hospitality and leisure sectors. The

implication for those heavily exposed to this area of the market is clear. In terms of pricing, the majority of Property Investment Companies have now partially recovered from the heavy discounting to NAV that was a feature of the listed market early in the reporting period.

Against this backdrop the UK commercial property market delivered a total return of 6.5 per cent in the year to June 2021 as measured by the MSCI UK Quarterly Property Universe (“MSCI”) marking a significant turnaround from the previous financial year. Performance was driven by an annual income return of 4.5 per cent, with capital value growth of 1.9 per cent.

Turning to the underlying sectors, Industrials delivered 22.7 per cent total return over the year, led by a stellar 17.7 per cent of capital growth. Over the last three quarters the Industrial sector has delivered two of the best quarterly performances on record. Distribution warehousing continues to marginally outperform Standard Industrial. Over the year to June 2021 the London geography was the strongest performer, albeit with the north and north east posting the strongest returns over the most recent quarter to June 2021, demonstrating the widespread strength and depth of sentiment towards the market. The Industrial sector has seen upward pressure on rents as demand has risen. Investors are eager to increase their allocation to the sector, attracted by the favourable structural tailwinds such as the growth in online retail and ecommerce. This weight of money has pushed prime yields to compress to around 3.75 per cent. The first half of 2021 saw record breaking levels of take-up, with retailers and distribution firms dominating leasing activity. Take-up continues to erode availability, which is already low, especially for high quality space.

All Offices delivered 1.6 per cent over the year, some way below the All Property average. Returns were held back by the West End & Midtown segment but with better news on offer from the Rest of UK and City markets. Structural change in the sector has been accelerated by the health crisis, and as the phased return to the office begins for many, investor confidence has been steadily improving. After a slow start to the year trading volumes have improved, with both London and key regional cities outside the capital seeing a pick-up. With Brexit headwinds easing buyers are identifying a mismatch in pricing between London and rival Global cities and European Capitals. Across the key regional centres, prime yields have been relatively stable with a clear focus on core assets offering long income. Assets with an element of leasing risk remain liquid at a price, but to a far smaller pool of capital.

Uncertainty remains around how much office space will be needed in the future, but it seems likely that in the short term at least, aggregate demand could suffer as a consequence of the evolution in flexible working practices. There remains an acceptance that offices will remain a core feature of our urban areas, albeit with a renewed focus from occupiers on location, quality, wellness, and the provision of flexible collaboration space, all of which is likely to create more of a tiered market moving forward. Office availability in Central London is still rising but the pace is slowing as leasing activity picks up. Regional cities have seen a noticeable improvement in take-up towards the end of the period, albeit still well down on the long run average, and are beginning to see the benefit of the commitment from the government to decentralise their footprint.

Retail continues to look challenged, although with the pace of value falls declining and significant polarisation within the sector. Demand for supermarkets is strong and there was some noticeable improvement in sentiment towards Retail Warehousing late in the period. For many, High Street and Shopping Centre asset pricing has yet to reach a floor and liquidity remains poor. The annual return from All Retail was -2.5 per cent, significantly higher than the -13.0 per cent for the year to June 2020. The stabilisation in values was evident in the most recent quarterly data to June, with All Retail posting a 1.7 per cent quarterly total return, the first positive performance of the sector for three years, driven primarily by Retail Warehouses.

The structural move towards retail consumption by ecommerce has intensified, accelerated by the advent of Covid-19 and highlighting the importance of omni-channel retailing. With the traditional ‘bricks and mortar’ retailing model under pressure, a re-basing of rents has been underway for some time. Of relevance to physical stores is the potential for growth in click & collect to outpace growth in online (Global Data) over the same period. With that in mind, Retail Warehouse parks are proving popular, particularly those with a food/convenience line-up and offering flexibility of format, while rents for fashion and lifestyle remain under pressure.

Rent collection for the sector has been poor over the course of the pandemic with landlords having been limited in their options when faced with non-payment of rent. Recent court precedent has offered some support to property owners overlooked by government measures, but there is still a significant shortfall in collection for the sector. The distinction between the various subsectors is important, with collection from food stores, trade and DIY operators and the majority of essential retailers being significantly higher than that from hospitality, high street and shopping centres.

Portfolio

The Company’s portfolio delivered an ungeared return of 9.0 per cent over the 12 months to June versus the Index of 6.5 per cent, with returns strengthening as the period wore on. The mainstay of historic performance has been the income return, which held steady over the year at 5.2 per cent, supported by capital growth of 3.7 per cent. The portfolio has delivered in excess of the MSCI Index over 1, 3, 5, 7, 10 and 17 years since inception, with this long run outperformance now reaching 100bps per annum.

The relative outperformance continues to be driven by favourable asset allocation, particularly by the high exposure to Industrials (47 per cent of portfolio weighting by capital value) and the sustained yield premium, assisted by the consistently low vacancy rate which currently stands at 4.1 per cent (versus 8.0 per cent for the Index). The portfolio has no exposure to shopping centres, department stores, hotel and leisure assets. This has proved particularly telling when it comes to rent collection, which is at over 97 per cent over the 12-month period. The success of asset management initiatives has been particularly pleasing with the redevelopment and leasing at County House, Chelmsford and Enterprise Way, Luton key contributors to returns. These will make a meaningful contribution to portfolio income moving forward. The low average lot size of the remaining high street assets continues to offer liquidity, which has allowed for further disposals from this part of the portfolio over the period.

Industrials

The Company’s Industrial assets continued to be the primary driver of returns, with the margin of outperformance against the other sectors increasing over the period. Industrials produced an 18.3 per cent total return for the year led by 12.9 per cent capital growth. The weighting of 47 per cent to this sector has been a primary reason for outperformance of the MSCI Index with four of the top five performers by weighted contribution over the year originating from this sector, including the multi-let assets at Colnbrook, Hemel Hempstead and Bracknell.

Leasing and asset management successes on the portfolio’s Industrial assets have crystallised rental growth into income, including the removal of a break option at Lister Road, Basingstoke and successful rent reviews at Southampton International Park, Eastleigh. At the time of writing lease regears are under way at Hemel Gateway, Hemel Hempstead and negotiations are ongoing with occupiers at Network, Bracknell, Echo Park, Banbury and Lakeside Industrial Estate, Colnbrook where positive outcomes are anticipated.

Offices

The Company’s Office portfolio is geographically diverse with holdings in the West End of London and core regional markets, but with the majority of exposure taken across the satellite South East. The Company’s Offices delivered a 2.5 per cent total return over the year, with capital falls of 2 per cent. The South East Office assets have been the key driver of performance, spurred by successful asset management at both Chelmsford and High Wycombe. The Central London holding at Berkeley Street has dragged performance on account of the vacancies of the 2nd and 6th floor suites, where leasing prospects were materially stymied by the pandemic. The West End segment was the worst performing for both the Index and the Company, with the asset at 14 Berkeley Street, London acting as a brake, given both its total return and its relative size.

While occupational activity in the Office market has been muted, the refurbishment of County House in Chelmsford concluded in Q1 2021 with the building now 75 per cent let, setting a record rent in the town. The remaining ground floor suite is being actively marketed, and we are in receipt of a number of encouraging tenant enquiries which are under review at the time of writing. The refurbishment of two office suites at Berkeley Street, London also concluded during the period. These are currently being actively marketed against a backdrop of increasing take-up and improving confidence in the Central London market with terms now agreed for a letting of the 2nd floor.

Retail

Whilst the Retail segment was the worst performing part of the portfolio over the 12 months, it did deliver a positive total return of 1.5 per cent. The portfolio’s standard shops (now only 7 per cent of assets by value) have no vacancies but suffered from continued capital falls, albeit alongside the benefit of a strong income return. The big story has been the recent rebound in sentiment towards the retail warehouse market, and the Company’s relatively high weighting

to this subsector of 17 per cent. The portfolio’s Retail Warehouse assets consist of favourable convenience and essential occupiers and have well specified accommodation let off affordable rents. This has proven to be a strong driver of returns over the last 12 months with the portfolio’s holdings achieving a total return of 8.9 per cent.

Asset management activity in the Retail sector has been focussed on income retention via a successful programme of lease renewals and regears at High Street, Rayleigh and Beverley Way, New Malden. In the two instances in which control of units was returned to the landlord, the units were immediately re-let, maintaining occupancy. The redevelopment of a Homebase unit on Enterprise Way in Luton reached practical completion in August 2021, delivering a food-led retail park, anchored by Aldi alongside Homebase and a Costa Coffee drive-thru. The redevelopment has increased the income from the asset by in excess of 260 per cent while also seeing material yield compression on account of the strength of sentiment towards the food sector and preference for new build, long income linked to inflation.

Rent collection

Rent collection has been a key focus since the start of the pandemic with payment patterns now beginning to normalise as restrictions continue to ease and business and consumer confidence returns. The Company’s portfolio has maintained consistent and robust levels of rent collection, with combined collection since the onset of the pandemic of 96.3 per cent (over the 15 months billing from March 2020 to June 2021). Recovery for the current year to June stands at 97 per cent.

Portfolio composition has been beneficial, with 100 per cent rent collection from the 47 per cent weighting towards Industrial, and 99.4 per cent from the Offices sector which makes up 29.2 per cent of the portfolio. The Retail and Leisure sectors have been most acutely impacted by the pandemic, with collection from Standard Retail currently lagging at 77.1 per cent. However, collection from the current quarter to date is at 98.7 per cent which suggests an improvement in prospects for the sector. Throughout the course of the pandemic, we have remained acutely aware of the challenges faced by retail occupiers in particular and have worked closely with the occupier base to seek mutually beneficial outcomes. This flexible approach, along with the quality of the tenants, has ultimately helped to deliver these relatively healthy rent collection statistics.

Transactions

The recent programme of strategic sales from the High Street Retail sector has continued over the period with two further disposals from the High Street Retail portfolio. There were disposals at High Street, Winchester for £2.85m in March 2021 and The Parade, Sutton Coldfield for £1.5m in May 2021. While caution must be exercised when selling into a relatively weak investment market, the High Street remains structurally challenged and faces the prospect of further fall-out as governmental support measures continue to unwind. Parts of the sector retain merit at a price, and it is recognised that the holdings deliver both diversification and generate an attractive income return for the Company.

These disposals have been undertaken with a view to medium-term fair value. We remain content to hold, and even increase, exposure to selected parts of the Retail Warehousing sector.

Post period end, the Company completed the disposal of the office holding at Marlborough House, St Albans for £7.9m. This was at 7.8 per cent premium to the year-end valuation. The asset had been identified as a disposal because the accommodation was considered obsolete by modern office standards, requiring wholesale redevelopment.

Following a number of successful disposals, the Company’s cash position was such that the redeployment of capital was a key priority. Outside of capital expenditure on the existing portfolio, a route which has proved particularly accretive over recent periods, the principal target sectors for deployment were Industrial and Retail Warehousing. There remains a significant weight of capital seeking exposure to the most favoured sectors, meaning that the bidding environment is extremely competitive and yields under significant downward pressure. This emphasises the importance of sourcing and stock selection to avoid being pushed up the risk curve in the pursuit of deployment.

Since the year-end, the Company has successfully completed the purchase of a DIY-led retail warehousing scheme in Banbury for £7.325m. The asset is fully occupied by Wickes and Topps Tiles and offers both a robust occupational underwrite and alternative use underpin, combining to generate an attractive returns profile and protect long-term value. The Company has also recently completed the acquisition of a south east industrial asset in Colnbrook for £12.1m which offers excellent prospects for both capital and income growth. Combined, deliverable pricing for these assets is accretive to both capital and income return and the successful conclusion of the acquisitions will put existing cash reserves to productive use.

Extraordinary General Meeting

An EGM was held on the 9th September at which an amendment to the Company’s investment policy was proposed, the principal purpose of which was to remove weighting limits applied to the commercial property sectors in which the Company invests. The proposed amendment was to ensure the Company retains flexibility in managing the existing portfolio, while also facilitating appropriate decision-making to capitalise on opportunities present in the current market environment.

This was particularly relevant in relation to the Company’s Industrial holdings, which made up 47.0 per cent of the portfolio by capital value at the year-end, and which had a weighting capped at 50 per cent by the investment policy. The portfolio’s existing Industrial assets have been experiencing both rental and capital growth, while strong occupational and site fundamentals offers opportunity for further investment into the sector. The existing weighting restriction was therefore considered unduly restrictive, potentially preventing the Company from capitalising on strong income and capital growth within the sector.

The resolution was passed with near-unanimous approval and an announcement made to shareholders on the 9th September 2021.

Outlook

The last domestic restrictions have recently been lifted, providing a welcome boost to business sentiment in the UK. While the rising number of Covid-19 cases poses a downside risk to the outlook, the recent rebound in economic activity has been somewhat stronger than anticipated. Wage inflation will be unwelcome to many businesses trying to recover from the trauma of the last 12 months, with continued staff shortages and supply chain friction linked both to the pandemic and to Brexit likely to continue to impact upon productivity in the near term at least. Encouragement should be taken from improved savings rates, the pickup in consumer confidence and resilience in the labour market.

While the outlook for the next six months is certainly more positive, there are headwinds that require careful navigation. There are numerous behavioural changes that are here to stay, trends that may have been evident prior to lockdown, but are now more embedded in everyday life. Increasing online consumption, more flexible working patterns, and an acceleration of the drive towards convenience are but a few examples. The wellness agenda will rise in importance and portfolios will need to reflect the desires of occupiers, consumers and regulators in that regard. Town centres will need to be creative and innovative to survive before they can thrive. Meanwhile demographic demands and lifestyle choices look set to support significant parts of the Alternatives sector, particularly Healthcare and Residential.

Looking forward, we expect to see the All Property yield at least supported if not hardening further, driven largely by industrials, residential and supermarkets. Retail warehouses saw values improve at the end of the period, and we expect more to come from that subsector. Income growth is likely to remain patchy outside of the Industrial sector. Leasing structures will continue to evolve but talk of a wholesale switch to a flexible, turnover model is likely premature.

The Company portfolio, being significantly comprised of Industrial assets remains well placed to capitalise on the current drivers of performance. The persistently low vacancy rate is attributable to the quality of the Company’s portfolio, with the sector bias and consistency of the rent collection demonstrating resilience. Activity to improve the portfolio’s ESG credentials continues as a priority. Near term focus has been on the search for suitable buying opportunities for the redeployment of sales proceeds and enhancement of portfolio revenues and the successful acquisition of two assets in favoured sub-sectors has recently completed. There will also be further spend on capital projects within the existing portfolio, an approach that has proven particularly productive for the Company over recent years.

Peter Lowe

BMO Rep Property Management Limited

BMO Real Estate Investments Limited

Consolidated Statement of Comprehensive Income

All items in the above statement derive from continuing operations. 

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

BMO Real Estate Investments Limited

Consolidated Balance Sheet

BMO Real Estate Investments Limited

Consolidated Statement of Changes in Equity

For the year ended 30 June 2021

For the year ended 30 June 2020

BMO Real Estate Investments Limited

Consolidated Statement of Cash Flows

BMO Real Estate Investments Limited

Principal Risks and Future Prospects

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

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

Consideration has been given to the impact from Covid-19 which has had a significant effect on the commercial real estate market. This has resulted in a number of the residual risks increasing as highlighted in the table below.

Principal risks and uncertainties faced by the Group are described below and in note 2, which provides detailed explanations of the risks associated with the Group’s financial instruments.

The Board seeks to mitigate and manage these risks through continual review, policy-setting and enforcement of contractual obligations. It also regularly monitors the investment environment and the management of the Group’s property portfolio. 

The Manager seeks to mitigate these risks through active asset management initiatives and carrying out due diligence work on potential tenants before entering into any new lease agreements. All 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 effects of Covid-19 has been the dominant risk for the global economy, and by extension the UK property market. This has had an ongoing effect on many of our principal risks and the Board meet regularly with the Manager to assess these risks and how they can be managed. Of particular concern has been the Company’s cash flow, given the number of expected tenant defaults in the short-term. The Board took the decision to half the rate of the quarterly dividend in June 2020 to maximise the cash reserves available. Collection rates

have been strong under the circumstances at c.96 per cent and the dividend rate was increased by 36 per cent in December 2020 with a further increase of 17 per cent being announced post year end in September 2021.

To help manage emerging risks and discuss other wider topics affecting property, the Board has an annual strategy meeting. The Board considers having a clear strategy is the key to managing and mitigating emerging risk.

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

Viability Assessment and Statement

The Board conducted this review over a 5 year time horizon, a period thought to be appropriate for a commercial property investment company with a long term investment outlook, borrowings secured over an extended period and a portfolio with a weighted average unexpired lease length of 5.9 years. The assessment has been undertaken taking into account the principal risks and uncertainties faced by the Group which could threaten its objective, strategy, future performance, liquidity and solvency.

The major risks identified as relevant to the viability assessment were those relating to a downturn in the UK commercial property market and its resultant effect on the valuation of the investment portfolio, the level of rental income being received and the effect that this would have on cash resources and financial covenants. The Board took into account the illiquid nature of the Group’s portfolio, the existence of the long-term borrowing facilities, the effects of any significant future falls in investment values and income receipts on the ability to repay and re-negotiate borrowings, maintain dividend payments and retain investors. These matters were assessed over an initial period to September 2026, and the Directors will continue to assess viability over 5 year rolling periods, taking account of foreseeable severe but plausible scenarios.

In the ordinary course of business, the Board reviews a detailed financial model on a quarterly basis, incorporating market consensus forecast returns, projected out to the maturity of its principal loan of £90 million which is due to mature in 2026. This model uses prudent assumptions and factors in any potential capital commitments. For the purpose of assessing the viability of the Group, the model has been adjusted to look at the next 5 years and is stress tested with projected returns comparable to the most extreme UK commercial property market downturn experienced historically. The model projects a worst case scenario of an equivalent fall in capital and income values over the next two years, followed by three years of zero growth. The model demonstrated that even under these extreme circumstances the Group remains viable.

Based on their assessment, and in the context of the Group’s business model, strategy and operational arrangements set out above, the Directors have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the 5 year period to September 2026. For this reason, the Board also considers it appropriate to continue adopting the going concern basis in preparing the Annual Report and Consolidated Financial Statements.

The Company continues to monitor the potential impact of the Covid-19 virus on cash flows. Particular attention is paid to the circumstances of all the tenants in the portfolio and detailed modelling is performed on a day to day basis as events unfold. Rental collection since the outbreak has been in excess of the levels originally anticipated, with the level of rents collected from March 2020 to June 2021 at 96 per cent and collection for the June to September 2021 quarter at 99 per cent. The dividend is currently at 80 per cent of pre-Covid levels.

Detailed modelling has been performed, which has looked at the impact of the current crisis under increasingly negative scenarios. 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 September 2026. For this reason, the Board also considers it appropriate to continue adopting the going concern basis in preparing the Annual Report and Consolidated Accounts.

BMO Real Estate Investments Limited

Going Concern

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

Directors’ Responsibilities in Respect of the Annual Report & Consolidated Accounts

We confirm that to the best of our knowledge:

On behalf of the Board

V Lall

Chairman

7 October 2021

BMO Real Estate Investments Limited

Notes to the Consolidated Financial Statements

for the year ended 30 June 2021

1. The audited results of the Group which were approved by the Board on 7 October 2021 have been prepared on the basis of International Financial Reporting Standards as adopted by the EU, interpretations issued by the IFRS Committee, applicable legal and regulatory requirements of the Companies (Guernsey) Law, 2008 and the Listing Rules of the UK Listing Authority as well as the accounting policies set out in the statutory accounts of the Group for the year ended 30 June 2021.

2. Financial Risk Management

The Group’s financial instruments comprise cash, receivables, interest-bearing loans and payables that arise directly from its operations.

The Group is exposed to various types of risk that are associated with financial instruments. Financial risks are risks arising from financial instruments to which the Group is exposed during or at the end of a reporting period. Financial risk comprises market risk (including currency risk, interest rate risk and other price risk), credit risk and liquidity risk. There was no foreign currency risk as at 30 June 2021 or 30 June 2020 as assets and liabilities are maintained in Sterling.

The Board reviews and agrees policies for managing the Group’s risk exposure including an assessment of the potential impact of Covid-19. These policies are summarised below and have remained unchanged for the year under review. These disclosures include, where appropriate, consideration of the Group’s investment properties which, whilst not constituting financial instruments as defined by IFRS, are considered by the Board to be integral to the Group’s overall risk exposure.

The primary objectives of the financial risk management policies are to establish risk limits, and then ensure that exposure to risks stays within these limits.

Market risk

Market risk is the risk the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices.

Sensitivities to market risks included below are based on change in one factor while holding all other factors constant. In practice, this is unlikely to occur, and changes in some of the factors may be correlated – for example, changes in interest rate and changes in foreign currency rates.

The Group’s strategy for the management of market risk is driven by the investment policy. The management of market risk is part of the investment management process and is typical of commercial property investment. The portfolio is managed with an awareness of the effects of adverse valuation movements through detailed and continuing analysis, with an objective of maximising overall returns to shareholders.

Price Risk

The Group has no significant exposure to price risk as it does not hold any equity securities or commodities. The Group is exposed to price risk other than in respect of financial instruments, such as property price risk including property rentals risk. Investment in property and property-related assets are inherently difficult to value due to the individual nature of each property. As a result, valuations are subject to substantial uncertainty. There is no assurance that the estimates resulting from the valuation process will reflect the actual sales price even where such sales occur shortly after the valuation date. Such risk is minimised through the appointment of external property valuers.

Any changes in market conditions will directly affect the profit/loss reported through the Consolidated Statement of Comprehensive Income. A 10 per cent increase in the value of the investment properties held at 30 June 2021 would have increased net assets available to shareholders and increased the net income for the year by £32.2 million (2020: £30.9 million); an equal change in the opposite direction would have decreased net assets and decreased net income by an equivalent amount.

The calculations above are based on investment property valuations at the respective balance sheet dates and are not representative of the year as a whole, nor reflective of future market conditions.

Interest rate risk

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

The Group’s exposure to interest rate risk relates primarily to the Group’s borrowings. Interest rate risk on the £90 million Canada Life term loan is managed by the loan bearing interest at a fixed rate of 3.36 per cent per annum until maturity on 9 November 2026. 

Credit risk

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

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

The Group has a diversified tenant portfolio. The maximum credit risk from the rent receivables of the Group at 30 June 2021 is £839,000 (2020: £2,264,000). The maximum credit risk is stated after deducting an impairment provision of £583,000 (2020: £421,000). Of this amount £304,000 was subsequently written off in the form of rental concessions and £196,000 has been recovered.

Apart from the rent receivable disclosed above there were no financial assets which were either past due or considered impaired at 30 June 2021 (2020: nil).

Deposits refundable to tenants may be withheld by the Group in part or in whole if receivables due from the tenant are not settled or in case of other breaches of contract.

All of the cash is placed with financial institutions with a credit rating of A or above. Bankruptcy or insolvency of these financial institutions may cause the Group’s ability to access cash placed on deposit to be delayed or limited. Should the credit quality or the financial position of the banks currently employed significantly deteriorate, the Manager would move the cash holdings to another financial institution.

The Group can also spread counterparty risk by placing cash balances with more than one financial institution. The Directors consider the residual credit risk to be minimal.

Liquidity risk

Liquidity risk is the risk that the Group will encounter in realising assets or otherwise raising funds to meet financial commitments. The Group’s investments comprise UK commercial property.

Property in which the Group invests is not traded in an organised public market and may be illiquid. As a result, the Group may not be able to quickly liquidate its investments in these properties at an amount close to their fair value in order to meet its liquidity requirements.

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

In certain circumstances, the terms of the Group’s bank loans entitle the lender to require early repayment, for example, if covenants are breached, and in such circumstances the Group’s ability to maintain dividend levels and the net asset value attributable to the Ordinary Shares could be adversely affected. 

3. The fourth interim dividend of 0.85p was paid on 30 September 2021 to shareholders on the register on 17 September 2021. The ex-dividend date was 16 September 2021.

4. There were 240,705,539 Ordinary Shares in issue at 30 June 2021. The earnings per Ordinary Share are based on the net loss for the year of £20,846,000 and on 240,705,539 Ordinary Shares, being the weighted average number of shares in issue during the year.

5. These are not full statutory accounts. The full audited accounts for the year ended 30 June 2021 will be sent to shareholders in October 2021, and will be available for inspection at Trafalgar Court, Les Banques, St. Peter Port, Guernsey, the registered office of the Company. The full annual report and consolidated accounts will be available on the Company’s website: www.bmorealestateinvestments.com

6. The Annual General Meeting will be held at the offices of BMO Global Asset Management, Quartermile 4, 7a Nightingale Way, Edinburgh, EH3 9EG on 17 November 2021 at 1pm. Given the ongoing Covid-19 situation the Company may, in accordance with its Articles of Incorporation, impose entry restrictions on certain persons wishing to attend the AGM or may be required to adjourn the AGM. Other restrictions may be imposed as the Chairman of the meeting may specify in order to ensure the safety of those attending the AGM.

Alternative Performance Measures

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

Discount or Premium – The share price of an Investment Company is derived from buyers and sellers trading their shares on the stock market. If the share price is lower than the NAV per share, the shares are trading at a discount. This usually indicates that there are more sellers than buyers. Shares trading at a price above the NAV per share, are said to be at a premium.

Dividend Cover – The percentage by which Profits for the year (less gains/losses on investment properties and non-recurring other income) cover the dividend paid.

A reconciliation of dividend cover is shown below:

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

Net Gearing – Borrowings less net current assets divided by value of investment properties.

Ongoing Charges – All operating costs incurred by the Company, expressed as a proportion of its average Net Assets over the reporting year. The costs of buying and selling investments and derivatives are excluded, as are interest costs, taxation, non-recurring costs and the costs of buying back or issuing Ordinary Shares. An additional Ongoing Charge figure is calculated which excludes direct operating property expenses as these are variable in nature and tend to be specific to lease events occurring during the year.

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

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

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

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

All enquiries to:

Peter LoweScott MacraeBMO Investment Business LimitedTel: 0207 628 8000

The Company SecretaryNorthern Trust International Fund Administration Services (Guernsey) LimitedPO BOX 255Trafalgar CourtLes BanquesSt Peter PortGuernsey GY1 3QL

Tel: 01481 745001