BREI.L Regulatory News (BREI)

BMO Real Estate Investments Ltd - Interim Results 31.12.2020

PR Newswire

London, March 19

To: RNS

Date: 22 March 2021

From: BMO Real Estate Investments Limited

LEI: 231801XRCB89W6XTR23

Interim results in respect of the six-month period ended 31 December 2020

* See Alternative Performance Measures

The Chairman, Vikram Lall, stated:

Since we issued our last Annual Report Brexit has happened with Britain leaving the EU, and a vaccination programme is underway to combat the Covid-19 pandemic. However, much uncertainty remains in relation to the longer-term effect of Brexit, and to the time it will take for the UK economy and employment levels to recover from the severe downturn of 2020. Retail and hospitality distress continues. There is also much debate over the effects of working from home on future occupancy levels of UK offices.

The Group’s performance reflects these challenging conditions in the UK commercial property market with capital values decreasing by 1.1 per cent. The net asset value (‘NAV’) total return per share for the period was 3.0 per cent and the NAV per share at the period end was 98.1 pence.

The share price increased by 8.9 per cent over the six months to 61 pence per share, giving a share price total

return of 11.6 per cent, with the discount to NAV narrowing to 37.8 per cent at the period end, compared to a discount of 42.0 per cent as at 30 June 2020. The share price has increased significantly since the period end and at the date of writing is at 70p pence per share.

Rent Collection

It has been a difficult period for rent collection since the Covid-19 outbreak. However, the Group’s rent collection for Quarter’s 2 to 4 of 2020 is currently ahead of expectations at 94.5 per cent. The Group’s collection statistics for the first quarter of 2021 are currently at 90 per cent and the expectation is that the final collection statistics will be at a similar level to those experienced in the previous three quarters.

Property Market

The UK commercial property market delivered a total return of 1.1 per cent in the six months to 31 December 2020 with capital falls of 1.1 per cent, as measured by the MSCI UK Quarterly Property Index (‘MSCI’). The market showed some signs of steadying following the initial shock from the pandemic and related economic lockdowns, but sentiment remained cautious.

The retail sector remained weak and delivered a total return of -4.0 per cent, with both occupier and investor sentiment depressed. Retail warehousing was less affected than town centre retailing. Industrials delivered an 8.6 per cent total return, pulling well ahead of other sectors, with the South-East out-performing, supported by strong occupier take-up and investor demand. The Office market faltered to record a -0.6 total return, as concerns about a reduction in office demand, due to a permanent shift to working from home, gained ground. Total returns for alternatives were 0.7 per cent in the six-month period, led by residential property.

The current cycle has affected rent collection rates, especially in retail and leisure but with offices and industrial more resilient. Investment activity staged some recovery, to move above the long-term average by year-end, helped by overseas buying and with transactions focused on Central London offices and industrials. The annual income return was stable at 4.5 per cent over the period.

Portfolio

The Group’s property portfolio delivered a total return of 3.4 per cent over the six-month period, compared with 1.1 per cent for MSCI. Both capital and income returns were ahead of the Index. Over the twelve months to December 2020 the Group’s property portfolio produced an ungeared total return of 1.4 per cent, 3.4 per cent of outperformance against MSCI which returned -2.0 per cent.

At the All Property level valuations were again under pressure though there was much variance in subsector performance. Favourable portfolio composition led to capital growth of 0.9 per cent for the Company’s assets over the period, alongside an income return of 2.6 per cent. The portfolio continues to deliver an above market income yield and a below market vacancy rate of 5.3 per cent, much of which is attributable to ongoing project work rather than structural void. Rent collection remains the overriding focus in the current environment with recovery over the period in excess of 94 per cent. Average unexpired lease length has remained steady at six years.

The portfolio’s Industrial assets were unsurprisingly the main driver for performance over the period, delivering 7.8 per cent as a consequence of both yield hardening and rental growth. This is reflective of their core South-East, and predominantly urban locations, which continue to experience high levels of occupier demand. The Industrial assets at Hemel Hempstead, Banbury and Bracknell, and the multi-let estate at Colnbrook, Heathrow were amongst the top performers over the period. The investment in this segment of the market is now 45 per cent of assets by value.

Office assets delivered a positive return of 0.6 per cent over the period, albeit with capital falls, and performance led by asset management initiatives in the south east, particularly at County House, Chelmsford.

The Company’s retail assets delivered a marginally negative total return of -0.5 per cent over the six months, outperforming the MSCI Index of -4.0 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. Relative performance was improved further by the absence of shopping centres and department stores and underweight exposure to hospitality and leisure.

The Company has reduced its exposure to retail in recent years with eleven sales since 2015, bringing the weighting to the High Street down to 9 per cent. No purchases or sales were completed over the period, with the focus very much on protection of the balance sheet, given the uncertainty surrounding the outcomes from the pandemic. Notwithstanding this, and despite the fact that the Company’s retail property is fully let, this element of the portfolio remains under continual review, evidenced by the fact that the two high street units at Winchester have recently been sold for £2.9 million. While the Board remains wary of illiquidity in parts of the high street market, we have continued to see interest in the Company’s assets which tend to be in the smaller lot sizes. There is the potential for continued opportunistic disposals from the sector over the coming months. In terms of acquisitions the existing cash balance is healthy with further cash availability in the form of an undrawn credit facility. With some comfort from rent collection trends, the Company is well placed to explore potential acquisitions to add to revenue.

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 5-year revolving credit facility agreement with Barclays Bank plc which is currently undrawn and is available until March 2025. The covenants on both facilities are comfortably met. Net gearing represented 25.8 per cent of the investment properties of the Group as at 31 December 2020. 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 £14.1 million of cash available at 31 December 2020 and the £20 million revolving credit facility also available if required.

Dividends and Dividend Cover

Given the significant economic risks and continuing uncertainty regarding the path of Covid-19, the Board made the decision to cut the quarterly dividend by 50 per cent in June 2020 to 0.625 pence per share. The Board was also mindful that the level of dividend paid in the previous financial year was 84.3 per cent covered by profits.

As mentioned above, rent collection rates have been comparatively strong and the first quarterly interim dividend for the year ended 30 June 2021, paid in December 2020, was increased by 36 per cent to 0.85 pence per share. A second interim dividend of 0.85 pence per share will be paid on 31 March 2021 to shareholders on the register on 12 March 2021. The Board will continue to monitor rental receipts and earnings closely and keep the future level of dividends under review.

Given the reduced level of dividends being paid out in the six months, the dividend cover was at 118.9 per cent, compared with a dividend cover of 69.6 per cent for the equivalent period last year.

Board Changes

As indicated in our last Annual Report, Andrew Gulliford decided to retire as a director, and he did so on 10 March 2021. The board thanks Andrew for the significant contribution he has made to the group since its inception in 2004. We will miss his extensive experience of the UK commercial property market, his detailed knowledge of the group’s portfolio and his sage advice.

On 10 March 2021, Rebecca Gates was appointed to the Board. Rebecca is an experienced property professional who has spent the last 23 years of her career in a variety of roles within the real estate investment

management business and is currently Head of UK Property Asset Management for LaSalle Investment

Management.

Environmental, Social and Governance (‘ESG’)

The unprecedented conditions caused by the coronavirus pandemic has impacted everyone in how we go about our daily lives and collectively in the way we interact with each other.

The Company has strived to make its contribution by engaging with its occupiers, and looking to support and be flexible with them as they strive to keep their businesses intact through the pandemic, to liaising with them in the development of Covid assessments and measures so they can remain operational whilst complying with government guidelines. These events have sharpened our awareness of occupiers as an important stakeholder group.

Whilst the Company’s focus on the social element of ESG has been strong during the period, this has not been at the expense of environmental aspirations. The Company has been actively progressing its approach to environmental risk and opportunity during recent months and has been working hard in preparation for setting and publishing its net zero carbon ambition in 2021

ESG remains a key aspect of the Company’s forward strategy. The unprecedented events of 2020 have given great insight and understanding of both the power of nature and of the human need, and the extent to which our communities are intrinsically woven into our activities. A short update on our progress is provided below 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 2021 ESG Report.

Outlook

In these uncertain times the diversification of the Company’s asset and tenant base should provide relative resilience. This has been demonstrated in the encouraging rent collection and vacancy statistics achieved over the course of the pandemic thus far. We continue to expect disruption to revenues as lockdown and associated support eases, with the impact most meaningful for the retail and leisure markets, although offices will not be entirely immune. Against this background and despite the prolonged uncertainty, the Company has sufficient cash resources and a portfolio of buildings that continue to experience good levels of occupier demand.

Environmental, Social and Governance (“ESG”)

Highlights for the half year period to 31 December 2020

The Company has continued to advance the implementation of its ESG Strategy over the period with progress being made in a number of areas. The coronavirus pandemic has significantly impacted occupational use of some assets and as such made key indicators around absolute energy use and carbon emissions difficult to interpret. However, on a like-for-like basis, comparing landlord procured energy in the first half of the current reporting year with the first half of the previous reporting year, a 15 per cent reduction in energy use can be determined, equating to some 19 per cent in terms of carbon emissions. This can almost certainly be attributed to the lower occupation rates seen in multi-occupied assets on account of covid related restrictions. The impact a new normal return to work might have on these indicators will be interesting to observe.

The distribution profile of Energy Performance Certificate (EPC) ratings remains broadly unchanged across the portfolio. The overall number of certificates held has increased by four on account of demise changes but exposure to lower F & G rated areas remains unchanged at 11 representing 5 per cent in terms of estimated rental value.

The Company 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 from the modelling have now been delivered in the form of detailed property level dashboards for practical incorporation into individual asset business plans and to support disclosures under the Taskforce for Climate-related Financial Disclosures (TCFD) initiative.

We are pleased to report that the Company submitted to the 2020 Global Real Estate Sustainability Benchmark (GRESB) survey and maintained its year on year improvement trajectory by achieving a score of 64, representing a 6.6 per cent increase in the previous year’s result of 60. The Fund also improved its rating in GRESB’s public disclosure analysis, achieving an A grade indicating the highest level of reporting and transparency.

The Company is also delighted to report the achievement of a Gold Award from the European Public Real estate Association (EPRA) for the standard of its disclosures in its 2020 Annual ESG Report.

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 2020 (unaudited)

For the period ended 31 December 2019 (unaudited)

For the year ended 30 June 2020 (audited)

BMO Real Estate Investments LimitedCondensed Consolidated Statement of Cash Flows

BMO Real Estate Investments LimitedNotes to the Condensed Consolidated Financial Statementsfor the six months to 31 December 2020

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 2020 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 2020.

4. Dividends

A second interim dividend for the year to 30 June 2021, of 0.85 pence per share, will be paid on 31 March 2021 to shareholders on the register at close of business on 12 March 2021.

Earnings for the six months to 31 December 2020 should not be taken as a guide to the results for the year to 30 June 2021.

6. Investment properties

All the Group’s investment properties were valued as at 31 December 2020 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 2020. The market value of these investment properties amounted to £317,825,000 (31 December 2019: £325,725,000; 30 June 2020: £312,285,000), however an adjustment has been made for lease incentives of £3,457,000 that are already accounted for as an asset (31 December 2019: £3,320,000; 30 June 2020: £3,551,000).

7. Interest-bearing bank loans

As part of the restructuring of the Group’s long-term financing, IRP Holdings Limited (“IRPH”) entered into a £90 million eleven year non-amortising term loan facility agreement with Canada Life.

Canada Life provided committed funds on 9 November 2015 and IRPH drew down the loan in full on 13 November 2015. Interest is payable on this loan from the first utilisation date, quarterly in arrears, at a fixed rate of 3.36 per cent per annum. The loan is secured by means of a fixed charge over specific properties. The loan has a maturity date of 9 November 2026.

On 27 March 2020, IPT Property Holdings Limited (“IPTH”) entered into a £20 million five year revolving credit facility (“RCF”) agreement with Barclays. The loan facility expires on 27 March 2025 and can be drawn down or repaid at anytime. Interest accrues on the bank loan at a variable rate, based on 3 month LIBOR plus margin and mandatory lending costs, and is payable quarterly. The margin is 1.7 per cent per annum for the duration of the loan. As at 31 December 2020 none of the RCF was drawn down (at 30 June 2020 and 31 December 2019, none of the RCF was drawn down).

 At 31 December 2020 borrowings of £90 million were drawn down. The balance sheet value is stated at an amortised cost of £89,640,000 (31 December 2019: £89,666,000 and 30 June 2020: £89,542,000). 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 2020.

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 2020.

9. Share capital

The Company issued no 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. The report and accounts for the half-year ended 31 December 2020 is available on the website www.bmorealestateinvestments.com

Statement of Principal Risks and Uncertainties

Covid-19 has had a significant effect on the commercial real estate market, and the duration and consequences of the situation are uncertain, which has resulted in a number of the residual risks increasing. The areas of increased risk relate to the potential for tenant defaults, the volatility of the share price and availability of cash resources. These areas are discussed in detail in the Chairman’s Statement. Since the outbreak, the Board have been meeting on a significantly more frequent basis.

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 geopolitical, 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 2020. The Group’s principal risks and uncertainties have not changed materially since the date of that report and are not expected to change for the remainder of the Company’s financial year.

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 BoardVikram LallChairman

19 March 2021 

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:

.

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.

Enquiries to:

The Company SecretaryNorthern Trust International Fund Administration Services (Guernsey) LimitedTrafalgar Court,Les Banques,St Peter PortGuernsey GY1 3QLTel: 01481 745001Fax: 01481 745051P Lowe, S MacraeBMO Investment Business LimitedTel: 0207 628 8000Fax: 0131 225 2375 

The full interim report for the period to 31 December 2020 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: www.bmorealestateinvestments.com