BREI.L Regulatory News (BREI)

BMO Real Estate Investments Ltd - Interim Results 31.12.2019

PR Newswire

London, March 25

To: RNS

Date: 26 March 2020

From: BMO Real Estate Investments Limited

LEI: 231801XRCB89W6XTR23

Interim results in respect of the six-month period ended 31 December 2019

· Net asset value total return* of 0.3 per cent

· Portfolio ungeared total return* of 1.3 per cent

· Annualised dividend yield* of 6.0 per cent based on the period end share price

· Dividend cover* reduced to 69.6 per cent for the period, impacted by sales and a one-off accounting adjustment following the sale of a retail warehouse in Rotherham

* See Alternative Performance Measures

The Chairman, Vikram Lall, stated:

The Group’s performance reflects a further period of challenging conditions in the UK commercial property market with capital values decreasing by 1.8 per cent. The net asset value (‘NAV’) total return per share for the period was 0.3 per cent and the NAV per share at the period end was 102.6 pence.

The share price increased by 5.0 per cent over the six months, giving a share price total return of 8.2 per cent, with the discount to NAV narrowing to 18.1 per cent at the period end, compared to a discount of 23.7 per cent as at 30 June 2019.

Property Market

Historical

The UK commercial property market delivered a total return of 0.4 per cent in the six months to 31 December 2019 with capital falls of 1.8 per cent, as measured by the MSCI UK Quarterly Property Index (‘MSCI’). There was a drop off in performance which was primarily attributed to the continued political and economic uncertainty and an investment hiatus linked to the general election, alongside continued weakness in the retail market.

The retail sector saw further deterioration to produce a total return of -4.4 per cent, with both occupier and investor sentiment depressed. In contrast, Industrials delivered a 2.6 per cent total return, with the South-East out-performing, although this represented a deceleration from the previous six-month period. The Office market recorded a 2.3 per cent total return, with provincial offices being the top-performing segment. Total returns for alternatives were 2.6 per cent in the six-month period. Investment activity staged some recovery, especially towards year-end, to move above the long-term average, helped by overseas buying post-election. By the end of the reporting period, the annual income return had edged up marginally to 4.5 per cent.

Current

Post period end, COVID-19 is clearly the dominant risk for the global economy and the UK property market. There has been significant disruption to all sectors worldwide. We do not yet know how significant an impact the outbreak will have on medium-term growth, but it would appear that early predictions of an immediate bounce back by the middle of the year may well prove short-sighted. Certainly, there is potential for a change in consumption patterns and working practices that could have lasting consequences for consumer behaviour.

The UK property market has until recently, outside of parts of the retail market at least, been characterised by historically high levels of occupancy and low levels of new supply. Pricing for prime logistics, offices and alternatives has been robust. While likely impacting on the tenants and therefore occupancy rates we also see potential disruption to construction projects. In the current environment of enforced social distancing it is unreasonable to expect occupiers to engage in leasing decisions and we expect a pause in any transactional activity which could extend for a number of months.

Portfolio

Historical

Turning back to performance for the period, the Group’s property portfolio delivered a total return of 1.3 per cent in the period, compared with 0.4 per cent for MSCI. Both capital and income returns were ahead of the index. Over the twelve months to December 2019 the Group’s property portfolio produced an ungeared total return of 3.3 per cent, 200 basis points of outperformance against MSCI which returned 1.3 per cent.

With valuations under pressure, performance was again income driven. Capital depreciation for the portfolio of 1.2 per cent was offset by an income return of 2.6 per cent. At the period end, the portfolio continued to deliver an above market income yield, with the low void rate of 3.2 per cent. This was almost entirely attributable to the part pre-let office property at County House, Chelmsford which is currently under refurbishment and is due for completion by the end of 2020. Tenant demand for the Company’s assets remains strong, particularly for the large industrial exposure located within the South-East. Average unexpired lease length has remained steady over the period, being in excess of six years.

The portfolio’s Office assets, particularly the regional offices, were the key contributors to Company performance over the period, delivering a 4.4 per cent total return. This was comfortably in excess of the index for the period and was driven by the successful realisation of a number of asset management initiatives, including those at Standard Hill, Nottingham and the continuation of the work at 14 Berkeley Street, London, the Company’s largest asset.

The portfolio’s Industrial assets also delivered positive performance, returning 2.6 per cent for the six months. This is reflective of their core South-East, and predominantly urban locations allowing for active management of the tenant base. The Industrial assets at Eastleigh and the multi-let estate at Colnbrook, Heathrow were amongst the top performers over the period. The portfolio’s exposure to this segment of the market is now over 40 per cent of assets by value.

The Company’s Retail assets remain fully let and despite pressure on total returns, marginally outperformed the wider market, delivering -2.7 per cent versus -4.5 per cent from the MSCI Index. The High Street and the Retail Warehouse assets showed a divergence of fortunes with the Retail Warehouse assets outperforming the MSCI index by some margin. This was on account of the generally low rented nature of the Company properties within this subsector, and the continued demand for well-located assets. The lack of exposure to Shopping Centres, department stores and fashion parks has been to the benefit of relative performance.

Against this challenging backdrop, the Company successfully completed the disposal of two retail assets for £13.65 million in the final quarter of 2019. The first, a multi-let high street block on the Parade and Warwick Street in Leamington Spa with an average lease term of 2.8 years to break, was sold for £6.9 million in November 2019. The second, a retail warehouse in Rotherham, was sold for £6.75 million in December 2019 to an owner occupier. The unit was occupied by Homebase under the terms of their August 2018 CVA. In aggregate these sales were secured at 1 per cent below the Q3 2019 independent market valuation. These sales have enhanced the cash reserves of the Company as referred to below, and this is of great benefit to the Company in the current climate.

The Company’s Retail portfolio remains under continual review and has been the focus of significant management activity. Ten assets have been sold over the past three years in order to position the asset base away from this structurally challenged part of the market. Nevertheless, the Board remains aware of the dangers of liquidating an entire subsector into a relatively thin investment market, particularly given the quality inherent in a number of the portfolio’s assets and the opportunities for repurposing and delivering the value that we are already seeing coming through in leasing activity.

Current

There are specific near-term risks to both revenue from rental income and downward pressure on property valuations. This is compounded by the recent gating of the open-ended property funds, with valuers being expected to declare ‘Material Uncertainty’ around upcoming asset valuations given the lack of comparable transactions and general market uncertainty.

As we continue to monitor ongoing developments regarding the outbreak of COVID-19, both the Board and the Manager are taking every precaution to safeguard the health and wellbeing of staff, occupiers and stakeholders. The Manager has robust business continuity plans to ensure it can maintain operations in these challenging times. These continuity plans have been thoroughly reviewed since the outbreak, and the Board is in close contact with senior management and business continuity teams across the BMO Financial Group to assess the situation and react accordingly. Although a work from home policy has been introduced by the Manager across all geographies, with all non-essential business travel being postponed and all employees following government advice regarding social distancing and personal travel; close asset monitoring is continuing remotely, through established reporting channels.

Borrowings and Cash

The Group currently has borrowings of £90 million from a non-amortising term loan facility agreement with Canada Life Investments which expires in November 2026. There is also a £20 million revolving credit facility agreement with Barclays Bank plc which is currently undrawn. This facility is due to expire in November 2020 and we are close to finalising its extension to March 2025. At the period end the covenants on both facilities were comfortably met and there is currently significant covenant headroom. Net gearing represented 24.2 per cent of the investment properties of the Group as at 31 December 2019. The weighted average interest rate (including amortisation of refinancing costs) on the Group's total current borrowings is 3.1 per cent. The Company continues to maintain a prudent attitude to gearing.

The Group had £16.6 million of cash available at 31 December 2019 with a £20 million revolving credit facility also available if required. While it is too early to give reliable predictions of the potential impact upon revenue for the coming year, given the current uncertainty linked to the outbreak of COVID 19, the Manager is carefully monitoring/analysing the rental income forecasts and liaising with the underlying tenants. Furthermore, the Company has sufficient cash reserves. These are being managed very carefully, with a prudent approach being adopted to preserve cashflow and reduce operational costs, including the suspension of all non-essential capital expenditure projects.

Dividends and Dividend Cover

The first interim dividend for the year ending 30 June 2020 of 1.25 pence per share was paid in December 2019, with a second interim dividend of 1.25 pence per share to be paid on 31 March 2020 to shareholders on the register on 20 March 2020.

The dividend cover for the six months was 69.6 per cent, compared with a dividend cover of 90.3 per cent for the equivalent period last year. This shortfall was primarily as a result of a decrease in rental income of £1.1 million for the six months. £820,000 of the decrease was attributable to the recently sold property in Rotherham and two thirds of that amount was a result of the required accounting treatment of lease incentives following the sale, rather than a drop in the level of cash received. There was also a reduction in rent at the office building at County House, Chelmsford as part of the ongoing refurbishment mentioned above.

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 realised in a number of key industry indicators. A significant increase in the portfolio’s annual Global Real Estate Sustainability Benchmark (GRESB) score is a notable achievement and provides a pleasing independent reflection of the successful attention our property managers have given across a breadth of sustainability related matters.

Replacement of communal lighting with more environmentally friendly modern equivalents at some of our retail and industrial sites, together with collaboration and thoughtful control over heating and cooling of occupier spaces in our multi-occupied office assets, have realised a 4.8 per cent reduction in landlord-procured absolute energy consumption compared with last year.

We continue to give considerable attention to our ESG commitments and to responding to the ever-changing landscape in this space. An update on progress is included in this announcement and we will provide a further summary of progress in our Annual Report later this year, with a more detailed insight of our performance in our 2020 ESG Report.

Outlook

Although sentiment improved at the start of 2020 following a conclusive general election result and Brexit being triggered, this went into sharp reverse soon afterwards in response to the spread of COVID-19 both globally and within the UK. Monetary and fiscal policy have been eased substantially in an effort to combat the disruption caused by the pandemic. With economic growth forecasts being revised lower and concerns about a no deal Brexit re-surfacing, the outlook for property has become much more uncertain with share prices across the real estate sector falling sharply and remaining volatile. The Company's share price at close on 24 March 2020 was 48 pence per ordinary share. The duration and severity of the COVID-19 outbreak is unknown, but it is likely to impact 2020 performance across the property industry, and the changes to working practices and lifestyles may have longer-term implications for the industry.

In such uncertain times the diversification of our asset base, the exposure to a wide range of sectors and occupiers, in particular industrial and offices which make up approximately three quarters of the asset base by value should provide relative resilience. The Company has limited exposure to development, leisure and restaurants and no exposure to the other hospitality and healthcare sectors.

We anticipate that there will be some impact upon revenues for the coming year, but it is too early to quantify the levels. Against this uncertain background the Company has a robust Balance Sheet and the cash position, including undrawn loan facilities remains strong.

Enquiries to:

The Company SecretaryNorthern Trust International Fund Administration Services (Guernsey) LimitedTrafalgar Court,Les Banques,St Peter PortGuernsey GY1 3QLTel: 01481 745001Fax: 01481 745051

P Lowe, S MacraeBMO Investment Business LimitedTel: 0207 628 8000Fax: 0131 225 2375

Environmental, Social and Governance (“ESG”)

Highlights for the half year period to 31 December 2019

The Company has continued to advance the implementation of its ESG Strategy over the period with material progress being made in a number of key areas, most notably a 4.8% reduction in our absolute energy consumption, equating to a 13.5% reduction in carbon emissions. This is broadly in line with our long-term emissions reduction trajectory and has been driven mostly by portfolio movements as well as operational building management improvements.

The distribution profile of our Energy Performance Certificate (EPC) ratings remains broadly unchanged across the portfolio. The number of certificates held has reduced on account of property sales but exposure to lower F & G rated demises remains unchanged at 4% in terms of estimated rental value.

The Company has engaged WSP UK Limited to provide advice and technical expertise on the assessment and evaluation of physical climate risks and opportunities through detailed scenario modelling and analysis. Outputs are anticipated during the next half-year and will serve to inform and support the disclosures the Company will continue to make under the Taskforce for Climate-related Financial Disclosures (TCFD) initiative.

We are also pleased to report that the Company submitted to the 2019 Global Real Estate Sustainability Benchmark (GRESB) survey and achieved a score of 60, representing a 39.5% increase in the previous year’s result. Furthermore, the fund achieved a rating of B in GRESB’s public disclosure analysis indicating a good level of reporting and transparency. These indicators confirm that good progress is being made and that the Company has a solid platform from which to continue making further incremental improvements.

BMO Real Estate Investments LimitedCondensed Consolidated Statement of Comprehensive Income

BMO Real Estate Investments LimitedCondensed Consolidated Balance Sheet

BMO Real Estate Investments LimitedCondensed Consolidated Statement of Changes in Equity

For the period ended 31 December 2019 (unaudited)

For the period ended 31 December 2018 (unaudited)

For the year ended 30 June 2019 (audited)

BMO Real Estate Investments LimitedCondensed Consolidated Statement of Cash Flows

BMO Real Estate Investments LimitedNotes to the Condensed Financial Statementsfor the six months to 31 December 2019

1. General information

The condensed consolidated financial statements have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom Financial Conduct Authority and IAS 34 ‘Interim Financial Reporting’. The condensed consolidated financial statements do not include all of the information required for a complete set of IFRS financial statements and should be read in conjunction with the consolidated financial statements for the Group for the year ended 30 June 2019 which were prepared under full IFRS requirements. The accounting policies used in preparation of the condensed consolidated financial statements are consistent with those of the consolidated financial statements of the Group for the year ended 30 June 2019.

The Group has adopted the following new standard which is effective for annual periods beginning on or after 1 January 2019. The following change is also expected to be reflected in the Group’s consolidated financial statements as at and for the year ended 30 June 2020.

· IFRS 16 ‘Leases’ – For lessees, it will result in almost all leases being recognised on the consolidated statement of financial position, as the distinction between operating and finance leases will be removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low-value leases. The accounting for lessors will not significantly change. The Directors have assessed the requirements of IFRS 16 and determine that there will be no material impact on its current accounting practices.

4. Dividends

A second interim dividend for the year to 30 June 2020, of 1.25 pence per share, will be paid on 31 March 2020 to shareholders on the register at close of business on 20 March 2020.

Earnings for the six months to 31 December 2019 should not be taken as a guide to the results for the year to 30 June 2020.

6. Investment properties

All the Group’s investment properties were valued as at 31 December 2019 by qualified professional valuers working in the company of Cushman & Wakefield. All such valuers are chartered surveyors, being members of the Royal Institution of Chartered Surveyors (‘RICS’). There were no significant changes to the valuation techniques used during the period and these valuation techniques are detailed in the consolidated financial statements as at and for the year ended 30 June 2019. The market value of these investment properties amounted to £325,725,000 (31 December 2018: £347,300,000; 30 June 2019: £343,550,000), however an adjustment has been made for lease incentives of £3,320,000 that are already accounted for as an asset (31 December 2018: £4,207,000; 30 June 2019: £4,197,000).

7. Interest-bearing bank loans

On 9 November 2015, the Group entered into an eleven-year £90 million non-amortising term loan agreement with Canada Life and a five-year £20 million revolving credit facility agreement with Barclays. The interest rate payable on the Canada Life loan is at a fixed rate of 3.36% per annum and the interest payable on the Barclays loan is at a variable rate based on 3-month LIBOR plus a margin of 1.45% per annum. During the period, the Company repaid £7 million of the revolving credit facility to Barclays and no revolving credit facility was drawn at 31 December 2019.

At 31 December 2019 borrowings of £90 million were drawn down. The balance sheet value is stated at an amortised cost of £89,666,000 (31 December 2018: £96,418,000 and 30 June 2019: £96,505,000). Amortised cost is calculated by deducting loan arrangement costs, which are amortised back over the life of the loan. The fair value of the Canada Life loan is shown in note 8.

8. Fair value measurements

The fair value measurements for financial assets and financial liabilities are categorised into different levels in the fair value hierarchy based on the inputs to valuation techniques used. 

The different levels are defined as follows:

· Level 1 – Unadjusted, fully accessible and current quoted prices in active markets for identical assets or liabilities. Examples of such instruments would be investments listed or quoted on any recognised stock exchange.

· Level 2 – Quoted prices for similar assets or liabilities, or other directly or indirectly observable inputs which exist for the duration of the period of investment. Examples of such instruments would be those for which the quoted price has been suspended, forward exchange rate contracts and certain other derivative instruments. 

· Level 3 – External inputs are unobservable. Fair value is the Directors’ best estimate, based on advice from relevant knowledgeable experts, use of recognised valuation techniques and on assumptions as to what inputs other market participants would apply in pricing the same or similar instruments.

All of the Group’s investments in direct property are included in Level 3 as it involves the use of significant inputs. There were no transfers between levels of the fair value hierarchy during the six-month period ended 31 December 2019.

Other than the fair values stated in the table below, the fair value of all other financial assets and liabilities is not materially different from their carrying value in the financial statements.

\* The fair value of the interest-bearing Canada Life Loan is based on the yield on the Treasury 2% 2025 which would be used as the basis for calculating the early repayment of such loan plus the appropriate margin. The Canada Life loan is classified as Level 2 under the hierarchy of fair value measurement.

The Group’s financial risk management objectives and policies are consistent with those disclosed in the consolidated financial statements as at and for the year ended 30 June 2019.

9. Share capital

The Company issued nil Ordinary Shares during the period.

10. Net asset value per share

11. 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 considered the current cash position of the Group, the availability of the loans and compliance with their covenants, forecast rental income and other forecast cash flows.The Group has agreements relating to its borrowing facilities with which it has complied during the period.Based on this information the Directors believe that the Group has the ability to meet its financial obligations as they fall due for a period of at least twelve months from the date of the approval of the accounts.For this reason, they continue to adopt the going concern basis in preparing the accounts.

12. Related party transactions

The Directors of the Company, who are considered to be the Group’s key management personnel, received fees for their services and dividends from their shareholdings in the Company. No fees remained payable at the period end.

13. Operating segments

The Board has considered the requirements of IFRS 8 ‘Operating Segments’. The Board is of the view that the Group is engaged in a single segment of business, being property investment, and in one geographical area, the United Kingdom, and that therefore the Group has only a single operating segment. The Board of Directors, as a whole, has been identified as constituting the chief operating decision maker of the Group. The key measure of performance used by the Board to assess the Group’s performance is the total return of the Group’s net asset value, as calculated under IFRS, and therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the condensed consolidated financial statements.

14. Investment in subsidiary undertakings

The Group results consolidate those of IRP Holdings Limited (‘IRPH’) and IPT Property Holdings Limited (‘IPTH’). IRPH and IPTH are companies incorporated in Guernsey whose principal business is that of a property investment company. These companies are 100 per cent owned by the Group’s ultimate parent company, which is BMO Real Estate Investments Limited.

15. Post balance sheet events

Since the period end the COVID-19 pandemic has had a significant effect on the global economy and by extension the UK property market and stock markets. There has been significant market volatility and the Company's share price at close on 24 March 2020 was 48 pence per ordinary share. Further details in relation to COVID-19 and its impact on the Company are provided in the Chairman’s Statement above.

16.  The report and accounts for the half-year ended 31 December 2019 is available on the website www.bmorealestateinvestments.com

Statement of Principal Risks and Uncertainties

The Group’s assets consist of direct investments in UK commercial property. Its principal risks are therefore related to the UK commercial property market in general but also the particular circumstances of the properties in which it is invested and their tenants. Other risks faced by the Group include market, investment and strategic, regulatory, tax structuring and compliance, financial, reporting, credit, operational and environmental risks. The Group is also exposed to risks in relation to its financial instruments. These risks, and the way in which they are mitigated and managed, are described in more detail under the heading ‘Principal Risks and Future Prospects’ within the Business Model and Strategy in the Group’s Annual Report for the year ended 30 June 2019. The Group’s principal risks and uncertainties have not changed materially since the date of that report other than the current risks posed since the period end in relation to the COVID-19 pandemic which has had a significant effect on the global economy and by extension the UK property market and stock markets. The risk environment is considerably heightened, and the Chairman’s Statement considers the impact on the Company.

Statement of Directors’ Responsibilities in Respect of the Interim Report

We confirm that to the best of our knowledge:

· the condensed set of consolidated financial statements has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’ as adopted by the European Union;

· the Chairman’s Statement constituting the Interim Management Report together with the Statement of Principal Risks and Uncertainties include a fair review of the information required by the Disclosure and Transparency Rules (‘DTR’) 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of consolidated financial statements; and

· the Chairman’s Statement together with the consolidated financial statements include a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Group during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

On behalf of the Board

Vikram Lall

Chairman

25 March 2020

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) cover the dividend paid.

A reconciliation of dividend cover is shown below:

* A one off accounting adjustment for lease incentives, following the sale of the property at Rotherham reduced dividend cover by 8.8% for the six months to 31 December 2019.

Dividend Yield – The annualised dividend divided by the share price at the period end. An analysis of dividends is contained in note 4.

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

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.

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.

Portfolio (Property) Total Return – Combining the Portfolio Capital Return and Portfolio Income Return over the period, calculated on a quarterly time-weighted basis.

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.