TIDMBCPT
To: RNS
Date: 19 April 2023
From: Balanced Commercial Property Trust Limited (the "Company")
L.E.I. 213800A2B1H4ULF3K397
Results in Respect of the Year Ended 31 December 2022 (audited)
Headlines
* -11.7* per cent share price total return.
* -6.5* per cent portfolio total return.
* 104.8* per cent dividend cover on a cash basis (102.3 per cent on an
accounting basis).
* 5.3* per cent dividend yield on year-end share price.
* 10.6 per cent dividend increase during the year.
* As at 31 December 2022, the void rate was 5.9 per cent, excluding property
being developed or refurbished, which compares to a rate of 2.0 per cent at
the start of the calendar year. The void rate was 1.4 per cent excluding
the asset at Stockley Park, Uxbridge where redevelopment opportunities are
being actively reviewed.
* 26 per cent reduction in absolute carbon emissions since 2021.
* Rent collection has stabilised at pre-pandemic levels with collection of 99
per cent for the year ended 31 December 2022.
*see Alternative Performance Measures
Chairman's Statement
The second half of 2022 saw a marked reversal of the positivity seen in the
early part of the year. As the year progressed, geopolitical challenges and
inflationary pressures resulted in rising interest rates and slowing economic
growth. This had an inevitable impact on consumer confidence and economic
activity.
September's mini budget marked a distinct turning point and proved the catalyst
for one of the worst quarters of capital performance from the UK commercial
real estate market on record. A significant increase in gilt yields compounded
the sustained tightening of monetary policy and precipitated a rapid pricing
correction across the real estate sub-markets. October 2022 saw the largest
monthly decline in capital value on record (as measured by the MSCI Monthly
index), closely followed by November 2022 as the second, as the investment
market was marred by uncertainty and illiquidity that have spilled over into
the beginning of 2023.
The capital value declines were particularly marked in the industrial and
logistics sector and the retail warehousing sector. These sectors had
experienced the highest levels of yield compression in the first half of the
year and had performed strongly in recent years.
Company Performance
Against this challenging economic backdrop, the Company has delivered a net
asset value ('NAV') total return of -9.2 per cent and the NAV per share as at
31 December 2022 was 118.5 pence, down from 135.1 pence per share as at 31
December 2021 (a decrease of 12.3 per cent).
The potential downside risk attached to real estate asset values has been
reflected in share prices and share price volatility within the sector. At the
year-end the discount was 25.3 per cent, compared to 22.3 per cent at 31
December 2021. The share price total return for the year was -11.7 per cent.
The share price discount remains a major frustration and a reflection of the
challenges that the real estate sector has been facing, exacerbated by the
rising interest rate environment. Against this market background, the Board
will continue to consider value-enhancing strategic opportunities, alongside
supporting the Managers in investments and significant asset management
initiatives at portfolio level.
The following table provides an analysis of the movement in the NAV per share
for the year:
Pence per
share *
NAV per share as at 31 December 2021 135.1
Unrealised decrease in valuation of property portfolio (17.9)
Share buybacks 1.1
Movement in fair value of interest rate swap 0.1
Other net revenue 4.8
Dividends paid (4.7)
NAV per share as at 31 December 2022 118.5
*Based on the average number of shares in issue during the year
Portfolio Performance
The Company's portfolio delivered a total return of -6.5 per cent over the
12-month reporting period, outperforming the MSCI UK Quarterly Property Index
('MSCI' or 'Index') return of -8.9 per cent. Outperformance was driven by a
capital return of -10.5 per cent against the Index return of -12.4 per cent and
an income return of 4.5 per cent against the Index at 4.0 per cent.
The balanced nature of the portfolio has proven to be a structural benefit and
the Managers have executed a number of accretive asset management activities to
deliver both capital and income outperformance over the year. More detail on
these activities is provided in the Managers' Review.
The performance of the largest asset within the portfolio, the mixed-use
holding at St Christopher's Place in London, has been particularly notable.
Having endured a challenging period since the on-set of the Covid pandemic, it
has been the top performing asset over the 12 months.
The Company has identified a number of assets as potential disposal targets as
part of a capital recycling strategy, primarily focussing on a down-weighting
of the portfolio's office exposure. However, any future disposals are to be
executed within a supportive market context and the Company will continue to
review its investment strategy as market conditions evolve.
Borrowings and Cash
The Company has maintained a liquid position over the period and as at 31
December 2022, the Company had £54.8 million of available cash.
There is a £260 million term loan in place with L&G which matures in December
2024 and the Board has engaged debt advisors to consider the financing options
available at this early stage. The Company believes that there is lender
appetite for this type of debt based on advice received and we are closely
monitoring the financial markets as we move closer to the refinancing date.
The Company also has a £50 million term loan with Barclays, along with an
additional undrawn £50 million revolving credit facility. The Barclays facility
expires on 31 July 2024, with the Company having taken up the option earlier
this month of a one-year extension. As at 31 December 2022, the Company's loan
to value, net of cash ('LTV'), was 23.4 per cent and the weighted average
interest rate on the Group's total current borrowings was 3.6 per cent.
Continuation Vote
As set out in the Articles of Incorporation, the Directors shall put an
ordinary resolution to shareholders in relation to the continuation of the
Company at a general meeting which has to be held in 2024. We will be
consulting with shareholders later this year as part of this process and will
advise on a date for the meeting in due course.
Share Buybacks
The Company has continued share buybacks during the year, using some of the
proceeds from property sales in 2021. The Company purchased 51.6 million shares
during the year at an average discount at the time of purchase of 19.6 per cent
and a cost of £58.5 million. This has enhanced the NAV by 1.1 pence per share
during the year while providing additional liquidity in the Company's shares.
The buybacks were transacted between January and September 2022 but have
subsequently been put on hold, with the preservation of cash in current markets
taking precedence.
Dividends
The Company paid twelve interim dividends totalling 4.7 pence per share during
the year, a 10.6 per cent increase on the prior year. There were four monthly
dividends of 0.375 pence per share, followed by an increase in May 2022 to 0.4
pence per share. Monthly dividends have remained at this rate, however, with
the dividend fully covered and with further rental growth expected to
materialise, the Board will continue to keep the level of dividend under
review.
Board Composition
Having served on the Company's Board for 9 years, Trudi Clark will retire from
her role as non-executive director and Chairman of the Audit and Risk Committee
with effect from the Annual General Meeting in May 2023. I would like to thank
Trudi for the considerable contribution she has made during her time on the
Board.
I am delighted to confirm that Isobel Sharp, who has been actively involved on
the Board since her appointment as non-executive Director in November 2022,
will assume Trudi's duties as Audit and Risk Committee Chairman when she steps
down. Isobel has extensive accounting, auditing and corporate governance
experience. She was with Deloitte LLP as the firm's Senior Technical Partner
until 2012, has served as President of The Institute of Chartered Accountants
of Scotland and on the UK Accounting Standards Board and the Financial
Reporting Review Panel.
Environmental, Social and Governance ('ESG')
The ESG agenda continues to gather pace and the Board, alongside our Managers,
maintain a commitment to high standards and best practice. The Company has a
Global Real Estate Sustainability Benchmark ("GRESB") rating of 70, giving it a
two-star green rating, as well as a gold standard EPRA award for disclosure.
The Company's 2022 ESG report is due to be published in April 2023, and our
strategy is continually developing along with the swift evolution of the ESG
landscape.
The key focus for the Company in 2023 is the refinement of our Net Zero Carbon
pathway. Independent Net Zero Carbon assessments were completed for all of the
Company's properties, mapping the interventions necessary to meet our
commitment to deliver net zero by 2040 or earlier. Asset-level pathway
modelling is now underway and will underpin a refined portfolio strategy in the
coming months. However, we are making considerable inroads into pathway
delivery with a significant number of interventions already in progress,
particularly relating to the generation of renewable energy through solar panel
installations.
Our Net Zero Carbon pathway offers clear synergies with the futureproofing of
the portfolio to meet the requirements of the Minimum Energy Efficiency
Standards ("MEES"). All portfolio assets have now been assessed to enable us to
develop a portfolio strategy to meet the hardening of thresholds under MEES,
which we will refine alongside our Net Zero Carbon pathway.
Outlook
The Bank of England has continued to raise interest rates in response to
persistent inflationary pressures and economic output has remained muted.
However, the labour market remains tight, inflation is slowing as energy costs
abate and global supply chain pressures are easing. The Bank of England is
still anticipating a fall in GDP throughout the rest of 2023 and into Q1 2024,
although not at the levels previously forecast.
Across the real estate sectors, occupational markets have generally been more
robust than might have been expected, and investment market activity at least
in some sectors has rebounded in the early stages of 2023. A short period of
negative economic growth would limit the impact on the occupational markets and
on this basis, we are hopeful that the UK real estate sector will begin to see
a recovery in the second half of 2023, particularly if there is not sustained
tightening in the credit markets.
In the meantime, income is expected to be the primary driver of total returns
and remains a key focus of Company strategy. Following the disposal of
ex-growth properties in 2021, the portfolio is delivering a steady income
during uncertain markets, with strong reversionary potential. The Managers
believe there to be significant latent value within the portfolio to unlock
through accretive redevelopment, securing key leasing initiatives,
repositioning assets and making ESG-led investment.
Our ability to deliver these initiatives is supported by the quality of our
underlying asset base. The resilience of a balanced, diversified portfolio
provides comfort in less certain markets craving a return of greater stability
and confidence.
Paul Marcuse
Chairman
18 April 2023
Managers' Review
Property Headlines over the Year
· A portfolio total return -6.5* per cent over the 12 months to 31 December
2022 versus the MSCI UK Quarterly Property Index ('MSCI') return of -8.9 per
cent.
· Sector allocations have been critical in delivering relative long-term
outperformance, underlining the value of a balanced portfolio.
· The portfolio's largest holding, St Christopher's Place in Central London
continues its recovery phase and has been a key driver of performance over the
12 months.
· Asset management activity delivered in the period has been accretive to
both income and capital performance, underlining strong asset fundamentals,
attractive sector exposures and significant latent income reversion within the
portfolio.
· As at 31 December 2022, the void rate was 5.9 per cent, significantly
below the MSCI Index at 8.0 per cent. The void rate was 1.4 per cent excluding
the asset at Stockley Park, Uxbridge, where redevelopment opportunities are
being actively reviewed.
· Rent collection has stabilised at pre-pandemic levels with collection of
99 per cent for the year.
· Development fundings totalling £25.7m, enhancing the Company's exposure to
the Industrial sector, which retains strong growth prospects.
*see Alternative Performance Measures
Property Market Review
At the time of the Interim Report in June, inflationary headwinds were mounting
against the UK economy. The second half of 2022 was marked by a period of
illiquidity and pricing discovery amidst a rapid repricing of the UK commercial
real estate market, which saw equivalent yields at the all property level move
out by 84 basis points in the final quarter. This challenged backdrop has
resulted in the MSCI UK Quarterly Property Index generating a total return of
-8.9 per cent over the year, driven by capital decline of -12.4 per cent.
The inflationary environment has resulted in ten consecutive increases to the
base rate, which has risen from 0.25 per cent to 4.25 per cent since the start
of 2022. Wider yield expansion put downward pressure on real estate values and
was compounded by September's mini budget, which saw gilt yields rise rapidly.
Mounting headwinds of higher interest rates, a weaker economic backdrop and
volatility in the financial markets resulted in the rapid repricing of real
estate and marked investor caution. In the month of October, UK real estate
experienced its sharpest monthly value decline on record, amid a subdued
investment market alongside examples of forced selling of real estate spurred
by the need to satisfy redemption and reweighting pressures in the wake of the
LDI crisis. Overall investment volumes in H2 2022 were down 40 per cent against
H1 2022 and down 45 per cent year-on-year[1].
However, the current price correction that continues to unfold in the early
stages of 2023 is not expected to remain entrenched. An increased level of
transactional activity was notable in December 2022 and this cautious optimism
continues into 2023. Tentative investor confidence is predicated on
occupational markets that for the meantime remain highly active and continue to
show resilience despite the wider economic pressures. Over the year, the MSCI
Index reported an income return of 4.0 per cent, slightly below long-term
average. Provided that any potential future period of negative growth is
limited, occupational markets are expected to remain robust, assisted by a
muted development pipeline constrained by rising construction and debt costs
that will keep levels of supply in check.
This supply-demand imbalance has been particularly prevalent in the industrial
and logistics sector, which generated rental growth in excess of 10 per cent[2]
in the 12 months to December 2022. Take up levels for 2022 were the third
strongest on record, despite declining in the second half of the year. Rental
growth is expected to moderate as occupier margins come under pressure,
although remains a key feature of the sector. The sector's vacancy rate remains
at near historic lows of circa 4 per cent[3] and a wide occupier base continues
to support strong levels of demand, principally driven by e-commerce, the push
for supply chain resilience and increasing on- and near-shoring. The sustained
yield compression the sector has experienced in recent years left it exposed to
the inflationary environment. Prime yields moved out by as much as 150 basis
points in the 6 months to December, leaving yields at levels last seen in 2018.
Over the year, the sector saw a total return of -14.4 per cent.
The retail warehousing sector has followed a similar trajectory as the rapid
yield compression witnessed in 2021 and H1 2022 was reversed in the latter
stages of 2022, as prime yields moved out by 100-125 basis points. This
resulted in the sector seeing capital declines of -6.4 per cent over the year,
in turn generating a total return of -1.0 per cent. While the sector has been
subject to a market-led yield correction, strong fundamentals remain in the
form of a robust occupier pool, the critical role of the sector in omni-channel
retailing and the inherent flexibility of the real estate for both owner and
occupier. Over the course of 2022, the sector's vacancy rate fell from 6.1 per
cent to circa 5 per cent[4], driven by the expansion of discount and
convenience led retailers. As we enter a period of more constrained consumer
spending, the sector's tenant base is aligned to continue to drive footfall and
turnover, with the additional benefit of a business rates revaluation that will
see rating liabilities fall, lending further support to retailer profitability.
The occupational market remains in a strong position and has generated an
attractive income return of 5.7 per cent over the year.
The high street retail sector has been less exposed to the pricing correction
seen over the period, as the sector benefitted from a relative yield defence
afforded by higher starting yields. Despite the structural changes to the
sector that have driven this yield expansion, the occupational markets again
remain resilient, helping to support an attractive income return from the
sector. In Central London, we have seen a rebasing of rents to realistic
levels, which in turn has spurred occupier activity and is forming a basis for
a recovery in rental tone, supported by increasing footfall.
[1] Real Capital Analytics
[2] MSCI UK Quarterly Property Index December 2022
[3] Savills, UK Logistics: Big Shed Briefing January 2023
[4] https://pdf.euro.savills.co.uk/uk/commercial-retail-uk/
uk-retail-warehousing-december-2022.pdf
The office sector is the most nuanced and remains highly polarised between
prime and secondary stock. Occupiers are seeking high quality space with strong
amenity provision to serve as an attractive environment for employees within
hybrid working structures. A key tenet of office specification is the ESG
credentials, which are being prioritised by occupiers and investors alike given
the cost implications from both an operational efficiency perspective and the
potential capital expenditure liability of retro-fitting obsolescent office
stock. This has served as the primary driver of the polarisation in the sector,
as core assets are able to generate the rental uplift required to underpin the
financial viability of Grade-A refurbishment, while occupier demand for
secondary space has declined rapidly. Over the period, the sector produced a
total return of -9.5 per cent, driven by capital declines of -12.6 per cent.
However, as an indicator of the divergence within the sector, the West End
office sub-sector generated a total return of -6.0 per cent predicated on
lesser capital declines of -8.6 per cent.
Portfolio performance
The total return from the portfolio was -6.5 per cent over the 12 months,
compared with the MSCI return of -8.9 per cent. The portfolio has outperformed
the wider Index on both capital and income returns over the period. Capital
growth from the portfolio was -10.5 per cent compared with the MSCI return of
-12.4 per cent, while the portfolio generated a 4.5 per cent income return,
against the Index at 4.0 per cent.
Sector Analysis (% of total property portfolio)
2022 2021
(%) (%)
Offices 31.6 32.3
Industrial 28.9 30.6
Retail 17.4 15.6
Retail Warehouses 11.6 10.9
Alternative 10.5 10.6
Source: Columbia Threadneedle REP AM plc
Geographical Analysis (% of total property portfolio)
2022 2021
(%) (%)
London - West End 27.5 25.4
South East 23.4 24.0
Midlands 21.3 21.4
North West 12.2 13.4
Scotland 11.6 11.7
South West 2.3 2.5
Rest of London 1.7 1.6
Source: Columbia Threadneedle REP AM plc
Lease Expiry Profile
At 31 December 2022 the weighted average lease length for the portfolio,
assuming all break options are exercised, was 5.2 years (2021: 5.2 years)
% of leases expiring (weighted by rental 2022 2021
value) (%) (%)
0 - 5 years 40.1 56.0
5 - 10 years 36.7 29.3
10 - 15 years 15.0 9.8
15 - 25 years 8.2 4.9
Source: Columbia Threadneedle REP AM plc
The largest occupiers, based as a percentage of contracted rent, as at 31
December 2022, are summarised as follows:
Income Concentration
Company name % of Total Income
Apache North Sea Limited 4.7
CNOOC Petroleum Europe Limited 4.6
JP Morgan Chase Bank, National 4.3
Association
Marks & Spencer plc 3.6
Kimberley-Clark Limited 3.6
Virgin Atlantic Limited 3.6
University of Winchester 3.5
Transocean Drilling UK Limited 3.3
Nestle Purina UK Commercial Operators 3.3
Limited
DHL Supply Chain Limited 3.2
Total 37.7
Source: Columbia Threadneedle REP AM plc
Valuation and capital performance
In a reversal of recent trends that had seen the portfolio's industrial assets
act as the engine of performance, the portfolio's top performers over the 12
months have come from the wider retail sector. Most notably, the portfolio's
largest asset, the mixed-use Central London holding at St Christopher's Place.
The asset has endured a number of years of yield expansion and is valued
approximately 20 per cent lower than pre-pandemic levels. As activity in London
West End recovers, a number of asset management initiatives to generate rental
growth have been progressed.
The Company's retail warehousing holdings have also delivered strong
outperformance with a positive total return of 1.9 per cent against the Index
at -1.0 per cent. In recent years, we have been repositioning our retail parks
towards grocery, convenience and discount retailers, aligning our assets to
essential retailing at a time of more constrained consumer spending. The
attractive tenant line-ups have driven footfall, in turn generating strong
occupier demand that has resulted in all available units becoming fully
committed in the course of the year. This accretive asset management activity
has insulated the parks from the wider market-led yield decompression,
delivering relative outperformance alongside an attractive income return of 5.3
per cent.
The Company's office assets, which comprise high quality buildings with robust
fundamentals in resilient locations, have delivered a total return of -7.2 per
cent, against the Index return of -9.5 per cent. We have been able to make
accretive investment into our core holdings, driving occupier demand, rental
growth and capital performance.
The industrial sector experienced the most severe capital falls in the second
half of the year following a reversal of the significant and sustained yield
compression of recent years. Consequently, the portfolio's industrial holdings
generated a total return of -15.8 per cent, against the Index return of -14.4
per cent, predicated on capital declines. Despite this, we remain confident
with our industrial holdings as the sector retains strong occupational
fundamentals and growth prospects, with portfolio assets offering reversionary
income potential in excess of 40 per cent.
The Company's exposure to the alternatives sector is dominated by Burma Road
Student Village in Winchester. While the asset benefits from an attractive
long-term inflation-linked lease, the leasing structure is closely correlated
with the financial markets and therefore saw yield expansion over the period,
resulting in a capital decline of -10.8 per cent. However, the student housing
sector itself retains strong fundamentals supported by a variety of economic
and demographic drivers.
Income Analysis and Voids
As we enter a lower growth environment the ability to generate a yield
advantage will be a key driver of relative performance. Over the 12-month
period, the Company's portfolio has delivered an income return of 4.5 per cent,
against the Index at 4.0 per cent.
The portfolio vacancy rate increased from 2.0 per cent by ERV to 5.9 per cent.
The increase in vacancy can be attributed to a 92,000 sq ft office at Stockley
Park, Uxbridge following the tenant vacating at lease expiry in March 2022.
Given the strategic location of the holding, the asset carries significant
alternative use value, and we are working alongside prospective occupiers and
the planning authorities to progress a value-accretive redevelopment strategy.
Excluding the holding at Stockley Park, the vacancy rate stands at 1.4 per
cent. This is testament to the continued resilience of the occupational markets
across the sub-sectors.
At 31 December 2022 the weighted average unexpired lease term (WAULT) for the
portfolio, assuming all break options are exercised, was 5.2 years. The
portfolio WAULT offers an attractive balance between income security and the
availability of lease events as opportunities to convert rental growth into
income. This is particularly relevant within the Company's industrial
portfolio. The average period to lease events including rent reviews on the
industrial holdings is 4.1 years, an attractive characteristic within a sector
that continues to be characterised by an in-built reversion and rental growth.
Rent collection has been an area of keen focus in recent years following the
impact of the Coronavirus pandemic. Rent collection has now normalised at
pre-pandemic levels, with collection for 2022 standing at 99 per cent.
Approximately 27 per cent of the portfolio's income profile is supported
through the presence of fixed-uplifts and inflation-linked rent review
mechanisms within occupational leases.
Asset Management
Industrial and Logistics
As mentioned above, the Company's industrial portfolio offers an in-built
income reversion in excess of 40 per cent. The conversion of this potential
into tangible growth will therefore be central to maintaining and growing the
portfolio income return. During the course of the year, we have completed a
number of successful asset management initiatives, which demonstrate the
continued rental growth in the sector.
The Cowdray Centre, Colchester
This multi-let industrial estate has seen significant leasing activity. Unit 2
Mason Road was let to UK Plumbing Supplies on a new 15-year lease at a rent
that underlines a steady improvement in the estate's rental tone. The letting
was delivered following the completion of fabric upgrade works which enhanced
the unit's ESG credentials, including a B-rated EPC. Following this letting,
the adjacent unit has been placed under offer to a major UK occupier, at a rent
again showing further growth.
Refurbishment works are being rolled out across the estate and investment of
this nature has proven a driver of occupational demand and value appreciation,
while also protecting the asset's long-term liquidity. During the course of the
year, Units 12 and 13 were also refurbished and relet, achieving record rents
for the estate.
The estate is also subject to a wider capital project for the development of a
multi-let trade counter scheme, which is now in the planning phase. Viability
is under close review given the wider market impact on construction costs and
capitalisation rates, although strong occupier demand and sustained rental
growth lend support to the scheme.
Units 1 & 2 Strategic Park, Southampton
The tenants of this two-unit scheme had signalled an intention to vacate at
their lease expiries in August 2022, enabling us to progress a significant
refurbishment strategy to modernise the assets, enhance ESG credentials and
drive the rental value. Significant dilapidations settlements were agreed and
we have received planning permission for the enhanced scheme which is due to
complete in June 2023. Marketing of the units is underway, and we anticipate
strong demand for the highly specified and strategically located accommodation.
Hams Hall Industrial Estate, Birmingham
This 226,000 sq ft prime distribution facility was subject to outstanding rent
review as at July 2021. The review has now been settled at a rent representing
a 9 per cent uplift against the previous passing rent.
Quintus Business Park, Burton-upon-Trent and Hurricane 52, Estuary Business
Park, Liverpool.
The development fundings of these two industrial assets have now completed,
enhancing portfolio exposure to this strategically important sector.
Unit 4, Quintus Business Park in Burton-upon-Trent was committed under a
forward-funding arrangement in December 2021 for a price of £21.5m. The highly
specified logistics unit of 170,000 sq ft, which carries an A-rated EPC and a
BREEAM Excellent certification, reached practical completion in September 2022.
A new 15-year lease to Werner UK completed and the already reversionary rent is
subject to inflation-linked increases.
The speculative development of the 52,000 sq ft Hurricane 52 in Speke,
Liverpool also reached practical completion at a cost of circa £4.2m. This
mid-box logistics was developed on land already owned and adjoins an existing
ownership. Since completion, the unit has received a good level of occupier
interest, aided by its specification which includes solar photovoltaic panels.
Across the industrial portfolio, we are looking at a number of solar
installations to boost our renewable energy generation capacity. We are
actively engaged with occupiers on assets in Burton-upon-Trent, Markham Vale,
Liverpool and Daventry.
Retail Warehouses
Our prime retail parks have been a key driver of relative outperformance,
following significant asset management activity. All units across both parks
have become fully committed to multi-national occupiers that compliment an
attractive and resilient tenant mix, while competitive tension has seen both
rent and rental values grow by 3 per cent across the parks. Across both schemes
footfall remains very strong, with both car parks operating at near-full
capacity.
Newbury Retail Park, Pinchington Lane, Newbury
During the year units have been leased to Pets at Home, JD Sports, Cancer
Research and Tim Hortons, resulting in all landlord available space on Newbury
Retail Park being fully committed. We have also seen existing occupiers
committing to the scheme, with Currys PC World taking a new 10-year lease on
renewal at a rent in advance of ERV. The leasing successes underline not only
the resilience of the occupational market, but also the dominance of Newbury
Retail Park within this affluent and growing catchment.
Sears Retail Park, Solihull
Following the 2021 development of a flagship Marks & Spencer's anchor store, we
have built on the momentum generated to secure the full occupation of the park.
The lettings completed not only maximise the scheme's income stream but also
widen the range of uses to appeal to a growing customer base.
Pure Gym have taken a new 15-year lease of Unit 2 and Mountain Warehouse have
completed a new 5-year lease of Unit 3, with both deals being executed in line
with ERV. Similarly to Newbury Retail Park, the lettings facilitate the upgrade
of the units' facades as part of a phased upgrade programme.
Retail
St. Christopher's Place ('Estate') (retail/office/alternatives)
The Company's flagship asset is a unique property; a prime Central London
estate comprising 172 lettable units and 40 buildings, diversified across the
retail, leisure, residential and office sectors. The Covid pandemic had a
significant impact on the asset and its valuation remains at 21 per cent
discount to its pre-pandemic level. However, the asset is now in a recovery
phase and has been the Company's strongest performer over the 12 months.
The year has seen a marked stabilisation and recovery in the Central London
retail market. As hybrid working models have taken hold and domestic and
international travel recovered to pre-pandemic levels, footfall statistics
within London's West End continue to improve. This has been assisted by the
opening of the Elizabeth Line at Bond Street, which has seen footfall through
the station increase by circa 25 per cent.
Occupational demand has also rebounded as prime rents have been rebased and the
revaluation of business rates will see an approximate 40 per cent reduction in
the rates payable on Oxford Street. In December 2022 there were 10 retail units
on the prime stretches of Oxford Street under offer, with a consistent rental
tone emerging. Within this improving context, St Christopher's Place has
returned to capital growth for the first time since 2018 and the portfolio's
top performing asset over the year.
Market-led recovery has been supplemented by a strategic repositioning of the
asset towards the Food & Beverage ('F&B') sector. From an asset perspective the
strategy has been conceived to drive footfall, consumer spend and dwell time,
while from a fund perspective the F&B markets offer longer leases alongside a
higher rental tone. The strategy has begun to yield tangible results; the
Estate is outperforming the wider West End in terms of footfall recovery with
footfall over the festive period showing a 15 per cent increase from 2019.
Strong tenant retention has maintained the income profile while occupier demand
across the holding's sub-markets has seen the Estate's rental value grow during
the course of the year.
Key initiatives delivered over the period include:
· The enhancement of the Estate's F&B offering, with lease renewals
concluding with the Lamb & Flag pub and restaurants Olivelli and Sofra.
Restaurant concept Bao (part of the JKS group) has been added to the occupier
line-up, while terms are agreed with a new anchor restaurant tenant alongside a
wine bar.
[DEL:· :DEL] Lease renewals and regears have been concluded with retailers
Whistles, L'Occitane and Castle Fine Art.
· Numerous pop-up retail lettings completed to maintain net operating income
and vibrancy of the shopping environment.
[DEL:· :DEL] Refurbishment works have completed across a number of office
suites, while seven new office leases have completed.
· The residential portfolio of 66 apartments represents 21.1 per cent of the
capital value of the estate and has completed its recovery in both income and
occupancy levels and is now ahead of pre-pandemic levels.
· Plans for the ongoing enhancement of the public realm continues in stages,
with new feature lighting due to be installed and productive discussions
ongoing with key stakeholders concerning long term improvement proposals for
James Street and Barrett Street.
· Strategic ancillary holdings placed under offer to boost the wider asset's
liquidity.
Offices
Our office portfolio is characterised by prime assets which are occupied by a
high-quality tenant base. This has allowed us to make accretive investment into
our offices, in turn spurring tenant demand and rental growth which has
underpinned income outperformance. In a nuanced market context, the portfolio's
assets are well positioned given their strong fundamentals derived from a
strategic focus on high-quality holdings in core locations.
Alhambra House, Glasgow
This office holding in central Glasgow is subject to an ongoing repositioning
and refurbishment strategy, leveraging the asset's strong residual value. In
the interim, the existing tenant JP Morgan has extended their lease by a
further year to March 2024, generating an additional £1.9m in rent alongside a
significant contractual dilapidation settlement. This lease extension allows us
to progress the planning process in the background, helping us to minimise
interruption to the development programme on expiry.
2-4 King Street, London
All office suites at this prime multi-let holding are occupied and a number of
tenants have committed to new leases at increased rents, driving a 7 per cent
uplift in rental value over the course of the year. The art gallery tenant of
the ground and basement levels has committed to a 10-year reversionary lease at
a rent showing a 16 per cent uplift to the previous passing rent. Similarly,
the tenant of the 4th floor office suite has entered into a 5-year reversionary
lease at a rent representing a 22 per cent premium to the previous passing
rent.
17A Curzon Street, London
This prime multi-let asset in London's West End is subject to a phased
refurbishment, repositioning the asset and boosting ESG credentials. The year
has seen two lease regears complete, delivered at a combined uplift to the
passing rents. The lease of the sixth floor was surrendered, releasing the
suite for repositioning which will enable us to push the rental tone to in
excess of £100 psf for this terraced top floor suite, with collateral benefit
to the wider building.
82 King Street, Manchester
This substantial 82,000 sq ft multi-let office holding in Manchester's office
core has seen significant leasing activity as existing tenants continue to
commit to the building. Most notably, NM Rothschild entered into a 10-year
reversionary lease of their 7th floor suite at a rent showing a 12 per cent
uplift to the passing level. Post-period, Lloyds Bank have completed a new
5-year lease on their 10th floor suite.
Alternatives
The portfolio's alternatives holdings include the purpose-built student
accommodation in Winchester, residential properties at St. Christopher's Place
and the leisure units at Wimbledon Broadway.
Burma Road Student Village in Winchester holds benefits from a long lease to
the university, with the benefit of annual RPI linked rent reviews. During the
course of the year, the University has made significant investment into the
holding, installing solar panels and air source heat pumps throughout the
estate, which materially enhances the asset's ESG credentials.
The long-let residential holdings at St Christopher's Place are fully occupied,
while the occupancy levels and rental values of the serviced apartments are now
ahead of 2019 levels. The residential element of St Christopher's Place is
significant and accounts for 4.7 per cent of the value of the portfolio.
Investment Activity
Following asset disposals totalling some £200m in 2021, there were no further
sales during 2022. The key driver for these sales was a strategy to recycle
capital and adjust sector weightings towards our favoured sectors of industrial
/logistics, retail warehousing and alternatives (primarily student housing and
hotels).
While this strategy carried through to the early stages of 2022, pricing for
assets within our favoured sectors had become extremely competitive. While a
number of bids were made, primarily in the alternative sectors, we did not
consider the investment market to offer long-term fair value and therefore
withdrew from bidding in Q2 2022.
The first half of 2023 is likely to be characterised by continued pricing
pressure and in this market context, there may be the opportunity to acquire
high quality assets at attractive long-term pricing. We continue to closely
appraise the investment market, seeking exceptional value for assets that
accord with our investment strategy. As liquidity in the wider investment
market improves in the latter part of 2023, we anticipate further disposals
from the portfolio to advance our capital recycling strategy. We have
identified potential asset sales, principally focussing on down-weighting
exposure to offices as we continue to align the portfolio towards targeted
growth sectors. The timing of any such disposals will be instigated to take
advantage of both asset and market cycles to deliver optimal value to the
Company.
Outlook
The challenges that impacted the real estate market in 2022 remain as we enter
2023 and investors have maintained a risk averse approach to the sector,
awaiting greater clarity on pricing in the first quarter of the year. The
investment market remains relatively muted as value protection is at the
forefront of investor thinking, with a prevailing disconnect in expectations
between buyers and sellers.
Inflationary pressures and the cost of debt are easing, gilt and swap markets
have settled, and the Bank of England has signalled that their forecast for
growth for 2023 is less negative than previously feared. There is therefore an
expectation that the real estate market will move to a recovery phase in the
second half of 2023 although the impact of credit tightening from the recent
banking market volatility has created further uncertainty.
As capital growth returns, the diversification of the Company's portfolio
offers both a steady footing alongside growth potential. We expect continued
recovery at St Christopher's Place to be a bedrock of returns. The industrial
and retail warehousing sectors - which account for over 40 per cent of the
portfolio - have been oversold but retain a strong performance outlook founded
on their critical role in UK business and consumer infrastructure. Much has
been made of the uncertain outlook for the offices sector, but the portfolio is
aligned towards prime assets that continue to deliver occupier demand. The
portfolio is therefore aligned to continue to deliver capital outperformance,
founded on the portfolio's prime nature that will benefit from a flight to
quality.
Income is the driver of real estate returns in the long run. Across the
sectors, the occupational markets have been relatively resilient. The Company's
portfolio is generating an attractive yield premium at a time when income will
dominate totals returns. The portfolio offers strong reversionary rental
potential alongside ample opportunity for delivery of this income upside, with
priority projects for the year ahead including the repositioning of Stockley
Park, Uxbridge, the redevelopment and reletting of Strategic Park, Southampton
and the delivery of continued incremental growth at St Christopher's Place.
Maintaining a low vacancy and exploiting lease events to crystallise rental
uplifts will be of paramount importance in generating a stable and growing
income stream, alongside capital appreciation.
Richard Kirby and Daniel Walsgrove
Fund Managers
Columbia Threadneedle REP AM plc
Please note that past performance is not necessarily a guide to the future and
that the value of investments and the income from them may fall as well as
rise. Investors may not get back the amount they originally invested.
Balanced Commercial Property Trust Limited
Consolidated Statement of Comprehensive Income (audited)
Year ended Year ended
31 December 31 December
2022 2021
£'000 £'000
Revenue
Rental income 58,676 55,843
Other income 42 3,008
--------- ---------
Total revenue 58,718 58,851
(Losses)/gains on investment properties
Unrealised (losses)/gains on revaluation of (129,096) 86,976
investment properties
(Losses)/gains on sale of investment properties (5) 34,397
realised
---------- ----------
Total (loss)/income (70,383) 180,224
---------- ----------
Expenditure
Investment management fee (6,861) (7,195)
Other expenses (6,479) (4,540)
---------- ----------
Total expenditure (13,340) (11,735)
----------- -----------
Operating (loss)/profit before finance costs and (83,723) 168,489
taxation
----------- -----------
Net finance costs
Interest income 807 1
Finance costs (11,116) (11,140)
----------- -----------
(10,309) (11,139)
----------- -----------
(Loss)/profit before taxation (94,032) 157,350
Taxation (345) (1,327)
---------- ----------
(Loss)/profit for the year (94,377) 156,023
---------- ----------
Other comprehensive income
Items that are or may be reclassified
subsequently to profit or loss
Movement in fair value of effective interest 723 544
rate swap
---------- ----------
Total comprehensive (loss)/income for the year (93,654) 156,567
---------- ----------
Basic and diluted earnings per share (13.1)p 19.8p
All of the profit and total comprehensive income or losses for the year is
attributable to the owners of the Group.
All items in the above statement derive from continuing operations.
Balanced Commercial Property Trust Limited
Consolidated Balance Sheet (audited)
As at As at
31 December 31 December
2022 2021
£'000 £'000
Non-current assets
Investment properties 1,075,082 1,180,486
Trade and other receivables 20,372 19,319
Interest rate swap asset - 466
------------ ------------
1,095,454 1,200,271
------------ ------------
Current assets
Trade and other receivables 12,811 8,832
Interest rate swap asset 1,030 -
Cash and cash equivalents 54,837 138,081
------------ ------------
68,678 146,913
------------ ------------
Total assets 1,164,132 1,347,184
------------ ------------
Current liabilities
Trade and other payables (21,140) (18,448)
Interest rate swap liability - (159)
Interest bearing loan (49,889) -
------------ ------------
(71,029) (18,607)
Non-current liabilities
Trade and other payables (2,250) (2,416)
Interest-bearing loans (259,388) (308,641)
------------ ------------
(261,638) (311,057)
------------ ------------
Total liabilities (332,667) (329,664)
------------ ------------
Net assets 831,465 1,017,520
------------ ------------
Represented by:
Share capital 7,994 7,531
Special reserve 485,840 544,813
Capital reserve - investments sold 75,005 75,010
Capital reserve - investments held 146,160 275,256
Hedging reserve 1,030 307
Revenue reserve 115,436 114,603
------------ ------------
Equity shareholders' funds 831,465 1,017,520
------------ ------------
Net asset value per share 118.5p 135.1p
Balanced Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2022 (audited)
Capital Capital
Reserve - Reserve -
Share Special Investments Investments Hedging Revenue
Capital Reserve Sold Held Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 1 January 2022 7,531 544,813 75,010 275,256 307 114,603 1,017,520
Total
comprehensive
income for the
year
Loss for the year - - - - - (94,377) (94,377)
Movement in fair
value of interest - - - - 723 - 723
rate swap
Transfer in
respect of -
unrealised losses - - - (129,096) - 129,096 -
on investment
properties
Losses on sale of
investment - - - - 5 -
properties (5)
realised
Total
comprehensive - - (5) (129,096) 723 34,724 (93,654)
income for the
year
Transactions with
owners of the
Company recognised
directly in equity
Transfer from 463 (463) - - - - -
share capital to
special reserve
Buyback to - (58,510) - - - - (58,510)
Treasury
Dividends paid - - - - - (33,891) (33,891)
At 31 December 7,994 485,840 75,005 146,160 1,030 115,436 831,465
2022
Consolidated Statement of Changes in Equity
for the year ended 31 December 2021 (audited)
Capital Capital
Reserve - Reserve -
Share Special Investments Investments Hedging Revenue
Capital Reserve Sold Held Reserve Reserve Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000
At 1 January 2021 7,994 589,593 (16,720) 245,613 (237) 113,401 939,644
Total
comprehensive
income for the
year
Profit for the - - - - - 156,023 156,023
year
Movement in fair
value of interest - - - - 544 - 544
rate swaps
Transfer in
respect of
unrealised gains - - - 86,976 - (86,976) -
on investment
properties
Gains on sale of
investment - - 34,397 - - (34,397) -
properties
realised
Transfer of prior
years' revaluation
to realised - - 57,333 (57,333) - - -
reserve
Total
comprehensive - - 91,730 29,643 544 34,650 156,567
income for the
year
Transactions with
owners of the
Company recognised
directly in equity
Buyback to (463) (44,780) - - - - (45,243)
Treasury
Dividends paid - - - - - (33,448) (33,448)
At 31 December 7,531 544,813 75,010 275,256 307 114,603 1,017,520
2021
Balanced Commercial Property Trust Limited
Consolidated Statement of Cash Flows (audited)
Year ended Year ended
31 December 31 December
2022 2021
£'000 £'000
Cash flows from operating activities
(Loss)/profit for the year before taxation (94,032) 157,350
Adjustments for:
Finance costs 11,116 11,140
Interest income (807) (1)
Unrealised losses/(gains) on revaluation of 129,096 (86,976)
investment properties
Losses/(gains) on sale of investment 5 (34,397)
properties realised
(Increase)/decrease in operating trade and
other receivables (5,032) 4,165
Increase/(decrease) in operating trade and 3,412 (4,761)
other payables
----------- -----------
Cash generated from operations 43,758 46,520
----------- -----------
Interest received 807 1
Interest and bank fees paid (10,987) (10,063)
Taxation paid (345) (1,327)
----------- -----------
(10,525) (11,389)
----------- -----------
Net cash inflow from operating activities 33,233 35,131
----------- -----------
Cash flows from investing activities
Purchase of investment properties (812) (50,821)
Sale of investment properties - 201,920
Capital expenditure on investment properties (23,258) (4,050)
----------- -----------
Net cash (outflow)/inflow from investing activities (24,070) 147,049
----------- -----------
Cash flows from financing activities
Dividends paid (33,891) (33,448)
Issue costs for Barclays £100m loan facility (6) (304)
extension
Buybacks to Treasury (58,510) (45,243)
----------- -----------
Net cash outflow from financing activities (92,407) (78,995)
----------- -----------
Net (decrease)/increase in cash and cash (83,244) 103,185
equivalents
Cash and cash equivalents at the beginning of the 138,081 34,896
year
----------- -----------
Cash and cash equivalents at the end of the year 54,837 138,081
----------- -----------
Balanced Commercial Property Trust Limited
Principal Risks and Future Prospects
The Board applies the principles detailed in the internal control guidance
issued by the Financial Reporting Council and has established an ongoing
process designed to meet the particular needs of the Company in managing the
risks and uncertainties to which it is exposed.
It has been a turbulent year, the catalyst for which was the war in Ukraine
which led to a global energy and cost of living crisis and rising inflation in
excess of 10 per cent in the UK. The Bank of England has raised interest rates
a number of times and at the time of writing they are 4.25 per cent. This
volatile economic environment has had an ongoing effect on many of our
principal risks during the year and the Board met regularly with the Managers
to assess these risks and how they could be managed. More detail is included in
the Chairman's Statement and the Managers' Review.
The principal risks and uncertainties are set out in the table below. The Board
seeks to mitigate and manage these risks and uncertainties through continual
review, policy-setting and enforcement of contractual obligations, as well as a
review by the Audit and Risk Committee of the Internal Control reports prepared
in accordance with AAF(01/20).
To mitigate investment and strategic risks the Board regularly monitors the
investment environment and the management of the Company's property portfolio.
The Managers seek to mitigate the portfolio risks through active asset
management initiatives and carrying out due diligence work on potential tenants
before entering into any new lease agreements. All of the properties in the
portfolio are insured.
As well as considering current risks quarterly, the Board and the Investment
Managers carry out a separate assessment of emerging risks when reviewing
strategy and evaluate how these could be managed or mitigated. However, the
Board considers that the line between current and emerging risks is often
blurred and many of the emerging risks identified are already being managed to
some degree where their effects are beginning to impact.
The principal emerging risks identified are outlined below:
· Economic and geopolitical uncertainties leading to inflation and interest
rate increases. This has been compounded by the military invasion of Ukraine by
Russia which is clearly a humanitarian tragedy and is having widespread
economic consequences. From a macro-economic perspective, higher medium-term
oil, gas and food prices alongside financial market disruption and sanctions on
Russia has put upward pressure on inflation and is supressing economic growth.
There remains a risk of further interest rate increases. Against this
background, real estate valuations experienced a significant pricing correction
in the second half of 2022 as the risk premium for investing in property
adjusted to reflect a higher interest rate environment.
· Interest rates have increased from 0.25 per cent to 4.25 per cent in just
over a year. The Company is currently looking at refinancing its debt with
both facilities due to mature in 2024. The likelihood is that any new debt
arrangements will be more expensive than the current debt and the terms of any
future debt arrangement are under active review, alongside the appropriate
level of gearing.
· The ESG agenda is a very prominent one and will continue to grow in its
importance to shareholders, future investors, our customers and the wider
community. We have already made significant strides in this area and we intend
to continue to do so. The increasing market attention being paid to climate
risk, to net zero carbon ambition and to social impact have been notable
features of the evolving agenda over recent years and those need to be
considered more explicitly in property investment and management activity than
has been the case previously. Failure to respond to the evolving regulatory
requirements and public expectations would be reputationally damaging and could
have a negative effect on property valuations leaving some properties difficult
to let.
· The structural change in the office market continues to evolve following
Covid-19. Appetite for offices appears to be finding some equilibrium with a
clear focus on higher quality space in central locations, as companies look to
offer a more structured hybrid model of operation where strong ESG and
wellbeing credentials will be essential. This will be at the expense of lower
quality stock and the emergence of a two-tier market is already in evidence
with the rebasing of both capital values and rents. This is still evolving and
continues to be monitored.
· There continues to be an increasing emerging risk from cyber threats. As
an externally managed investment company we are dependant on the controls and
systems of our Managers and other third party providers. The Board reviews on
an annual basis, the systems and procedures that they have in place to control
these threats.
The highest risks encountered during the year, how they are mitigated, and
actions taken to address these are set out in the table below:
Highest Risks Mitigation Actions taken in the year
Investment Performance Risk The investment performance, The Board reviews the
Unfavourable markets, poor gearing and income Managers' performance at
stock selection, including forecasts are reviewed with quarterly Board meetings
inappropriate asset the Investment Managers at against key performance
allocation and each Board Meeting. The indicators.
underperformance against Managers provide regular Significant lettings
the benchmark. This risk information on the expected achieved, particularly in
may be exacerbated by level of rental income that the industrial portfolio and
gearing levels. will be generated from the retail parks, at
Economic backdrop of underlying properties. increased rents helping
inflationary pressures and The portfolio is well performance during a period
increasing interest rates. diversified by geography of falling valuations.
An illiquid investment and sector and the exposure The practical completion of
market with a significant to individual tenants is development fundings on two
negative pricing adjustment monitored and managed to industrial assets with high
in the second half of 2022. ensure there is no over ESG specifications has
ESG risk attached to the exposure. removed a substantial
developing regulatory The Managers in-house ESG element of development risk
backdrop and capital team continually monitor from the portfolio.
expenditure required to regulatory background and All portfolio assets have
maintain compliance. best practice standards, been subject to net zero
while the overall quality carbon assessments and MEES
of the portfolio provides building reports to enable
some protection against the modelling of a pathway
this. to compliance. A number of
ESG initiatives have been
Risk increased in the year progressed over the year,
under review most notably the progression
of solar PV schemes across
the industrial portfolio.
Discount/Premium Risk The discount is reported to Investors have access to the
Share price of the and reviewed by the Board Managers and the underlying
investment company is lower at least quarterly. Share team who will respond to any
/higher than the NAV. As a buybacks as a means of queries they have on the
result of such imbalances, narrowing the discount or discount. The level of
the attractiveness of the as an attractive investment discount is kept under
Company to investors is for the Company are constant review and the
diminished. considered and weighed up Company conducted share
against the risks. The buybacks during the year to
The discount has widened position is monitored by help manage this.
during the year as interest the Managers and Broker on The Broker and the Managers'
rates increased and a daily basis and any sales team liaise with
sentiment reduced. material changes are current and prospective
investigated and investors to try and
Risk increased in the year communicated to the Board. generate demand for the
under review Company's shares.
Financial Risk Management The level of cash is The Company paused share
Risk of financial or continually monitored by buybacks since September
reputational damage due to the Managers. A financial 2022, with the preservation
a failure to appropriately model is maintained, which of cash taking precedence in
manage financial risk. includes a 5-year cash flow current markets.
This includes management of forecast and is reviewed at The Company elected to use a
cash resources and debt. quarterly Board meetings. one-year extension option of
The Company's principal £ The cash position is also its £100 million facility
260 million debt facility reviewed by the Board on a with Barclays, which was due
expires on 31 December 2024 monthly basis as part of to expire in July 2023.
and the £100 million the dividend approval This has been extended to
facility with Barclays process. July 2024.
expires in July 2024. New Loan covenants are The Company has been
finance will have to be put monitored carefully by the reviewing its options on
in place against a backdrop Managers and reviewed at longer term debt and
of higher interest rates. least quarterly at Board believes that, based on
meetings. advice received and current
The strategy for the market conditions there is
refinancing of debt is lender appetite for
under active consideration. refinancing the Company's
debt. Since the year-end
the Board has engaged debt
advisors to consider the
Risk increased in the year financing options available
under review in order to formulate a
long-term debt strategy in
terms of cost and the
appropriate level of
gearing.
Product Strategy Risk The underlying investment The strategy of having a
Risk that the Product strategy is kept under balanced portfolio has aided
Strategy (including constant appraisal and the performance in a declining
investment guidelines and Board will have a strategy market with the significant
policies) lacks session annually, in retail investment at St
sustainability or is not conjunction with the Christopher's Place
relevant. Managers. outperforming the wider real
Risk that the strategy is estate market.
not clearly defined/ The strategy is communicated
articulated or directed to to interested parties on a
the correct target regular basis via stock
audience. exchange announcements, the
ESG related initiatives are interim and annual report
a core part of the and investor/consultant
long-term strategy. calls and visits.
Significant ongoing work on
the Company's ESG strategy
including the collection of
relevant ESG data and the
formation on individual
Risk unchanged in the year asset plans.
under review ESG enhancements performed
on some of the Company's
assets where opportunities
have arisen.
Viability Assessment and Statement
The Board conducted this review over a five-year time horizon, a period thought
to be appropriate for a Group investing in commercial property with a long-term
investment outlook and with an average unexpired lease length of 5.2 years. The
Group has its principal borrowings with L&G secured until 31 December 2024 and
is also subject to a continuation vote which will take place by the end of
2024.
Preparations with regards to the continuation vote will commence this year.
The Viability Statement has been prepared on the assumption that the Board
recommends continuation and that shareholders approve the Board's
recommendation. The assessment also takes into account the principal risks and
uncertainties faced by the Group which could threaten its objective, strategy,
future performance, liquidity and solvency.
The major risks identified as relevant to the viability assessment were those
relating to a downturn in the UK commercial property market and its resultant
effect on the valuation of the investment property portfolio, the level of
rental income being received and the effect that this would have on cash
resources and financial covenants. The UK commercial real estate market has
experienced a downturn in the second half of 2022, driven by geopolitical
challenges, high levels of inflation, rising interest rates and a slowdown of
economic growth. There has been a dramatic repricing of property valuations
with the sector experiencing capital falls of 17.2 per cent over the six months
to 31 December 2022, as measured by the MSCI UK Quarterly Property Index
('MSCI').
A stress test was conducted over the five-year period to April 2028. Taken into
account that the portfolio has already experienced a significant valuation
adjustment in the last two quarters, the modelling used a foreseeable severe
but plausible scenario which took into account the illiquid nature of the
Group's property portfolio, further significant future falls in the investment
property values, the continuation of the long-term borrowing facility and
substantial falls in property income receipts.
The viability assessment modelling used the following assumptions:
· We have modelled using the most negative of all property capital returns
as measured by MSCI over one to five years using historic data that goes back
to 1985, with capital values falling by as much as 36.5 per cent. This takes
into account that the property market has already experienced capital falls of
17.2 per cent since June 2022.
· Debt refinanced at 1 per cent above the current long-term debt forecasts.
· Loan covenant tests remain the same as those currently in place following
a refinancing of debt.
· Tenant defaults of 10 per cent for the first year, followed by 5 per cent
for the following year before returning to normal levels thereafter.
· Tenant lease breaks are exercised at the earliest opportunity, followed by
a substantial void period.
· Dividends are maintained at current levels.
· £2 million per annum on ESG related capital expenditure.
The results of this modelling were as follows:
NAV Dividend Cover LTV (Net)
2024 89.5p 79.0% 30.0%
2025 79.8p 62.7% 33.7%
2026 81.2p 79.0% 34.0%
2027 86.3p 75.4% 33.5%
2028 87.6p 102.9% 33.1%
Even under this extreme scenario the Group remains viable with loan covenant
tests passed and the current dividend rate maintained. The level of the NAV
remains positive under this extreme scenario. The Group continues to have
sufficient assets to ensure that it could pay down its debt in an orderly
fashion through sales should it choose to do so and would also have an option
of reducing the level of dividend to preserve cash.
In the ordinary course of business, the Board reviews a detailed financial
model on a quarterly basis, incorporating forecast returns for the portfolio,
projected out for five years. This model uses realistic assumptions and factors
in any potential capital commitments.
The Group's £260 million long-term debt with L&G does not need to be refinanced
until December 2024. We calculate that the market value of the properties
secured under this loan would have to drop by a further 25 per cent from 31
December 2022 valuations before breaching the Loan to Value ('LTV') test on the
facility. The loan interest cover test would only be breached by a fall in net
rental income of 65 per cent. We are comfortable that these covenants will
continue to be met.
The Group's Barclays £50 million loan facility and £50 million revolving credit
facility is due to expire in July 2024. We calculate that the market value of
the properties secured under this loan would have to drop by 66 per cent before
breaching the LTV test on the facility. The loan interest cover test would only
be breached by a fall in rental income of 48 per cent. We are comfortable that
these covenants will continue to be met.
The Group has a further £95 million of properties which are not secured against
any lender and could be transferred to L&G or Barclays to support covenant
tests if required.
The Company believes that based on advice received and current market
conditions there is lender appetite for refinancing the Company's debt and that
it will be able to satisfactorily refinance existing debt well in advance of
the repayment dates.
Based on this assessment, and in the context of the Group's business model,
strategy and operational arrangements set out above, the Directors have a
reasonable expectation that the Group will be able to continue in operation and
meet its liabilities as they fall due over the five-year period to April 2028.
For this reason, the Board also considers it appropriate to continue adopting
the going concern basis in preparing the Annual Report and Consolidated
Financial Statements.
Balanced Commercial Property Trust Limited
Going Concern
In assessing the going concern basis of accounting the Directors have had
regard to the guidance issued by the Financial Reporting Council. They have
reviewed detailed cash flow, income and expense projections in order to assess
the Group's ability to pay its operational expenses, bank interest and
dividends. The Directors have examined significant areas of possible financial
risk including cash and cash requirements and the debt covenants, in particular
those relating to loan to value and interest cover. They have not identified
any material uncertainties which cast significant doubt on the ability to
continue as a going concern for the foreseeable future, which is considered to
be for a period of not less than 12 months from the date of approval of the
financial statements. The Board believes it is appropriate to adopt the going
concern basis in preparing the financial statements.
Statement of Directors' Responsibilities in Respect of the Annual Report and
Accounts
In accordance with Chapter 4 of the Disclosures Guidance and Transparency Rule
4.1.12, each of the Directors confirm that to the best of their knowledge:
· The financial statements contained within the Annual Report and Accounts
for the year ended 31 December 2022, of which this statement of results is an
extract, prepared in accordance with International Financial Reporting
Standards as adopted by the EU, and give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Group and the
undertakings included in the consolidation taken as a whole and comply with The
Companies (Guernsey) Law, 2008; and
· the Strategic Report (comprising the Chairman's Statement; Business
Model and Strategy; Promoting the Success of the Company; Key Performance
Indicators, Principal Risks and Future Prospects; Managers' Review; Property
Portfolio; Environmental, Social and Governance and Spotlight: big strides,
small steps) and the Directors' Report includes a fair review of the
development and performance of the business and the position of the Group and
the undertakings included in the consolidation taken as a whole together with a
description of the principal risks and uncertainties that they face; and
· The consolidated financial statements and Directors' Report within the
Annual Report and Accounts for the year ended 31 December 2022 include details
of related party transactions; and
· The Annual Report and consolidated financial statements, taken as a
whole, are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Group's position and performance,
business model and strategy.
On behalf of the Board
Paul Marcuse
Director
Balanced Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year ended 31 December 2022
1. Financial Risk Management
The Group's investment objective is to provide ordinary shareholders with an
attractive level of income together with the potential for capital and income
growth from investing in a diversified UK commercial property portfolio.
Consistent with that objective, the Group holds UK commercial property
investments. In addition, the Group's financial instruments during the year
comprised interest-bearing loans, cash, trade receivables and payables that
arise directly from its operations. The Group does not have exposure to any
derivative instruments other than the interest rate swap entered into to hedge
the interest paid on the Barclays interest-bearing bank loan.
The Group is exposed to various types of risk that are associated with
financial instruments. The most important types are credit risk, liquidity
risk, interest rate risk and market price risk. There is no foreign currency
risk as all assets and liabilities of the Group are maintained in pounds
sterling.
The Board reviews and agrees policies for managing the Group's risk. These
policies are summarised below and have remained unchanged for the year under
review. These disclosures include, where appropriate, consideration of the
Group's investment properties which, whilst not constituting financial
instruments as defined by IFRS, are considered by the Board to be integral to
the Group's overall risk exposure.
Credit risk
Credit risk is the risk that a counterparty will default on its contractual
obligation and will cause a financial loss for the other party by failing to
discharge an obligation, and principally arises from the Group's receivables
from customers. The Group has no significant concentrations of credit risk as
the Group has a diverse tenant portfolio. The largest single tenant at the year
end accounted for 4.7 per cent (2021: 4.8 per cent) of the current annual
rental income.
The Managers have a credit department which has set out policies and procedures
for managing exposure to credit. Some of the processes and policies include:
· an assessment of the credit worthiness of the lessee and its ability to
pay is performed before lease is granted;
· where appropriate, guarantees and collateral is held against such
receivables;
· after granting the credit, the credit department assesses the age analysis
on a monthly basis and follows up on all outstanding payments;
· management of the credit department determine the appropriate provision,
receivables which should be handed over for collection and which amounts should
be written off.
In the event of default by an occupational tenant, the Group will suffer a
rental shortfall and incur additional costs, including legal expenses, in
maintaining, insuring and re-letting the property.
Deposits refundable to tenants may be withheld by the Group in part or in whole
if receivables due from the tenant are not settled or in case of other breaches
of contract. The fair value of cash and cash equivalents as at 31 December
2022 and 31 December 2021 approximates the carrying value.
Cash balances are held and derivatives are agreed only with financial
institutions with a credit rating of A or better. Bankruptcy or insolvency of
such financial institutions may cause the Group's ability to access cash placed
on deposit to be delayed or limited. Should the credit quality or the financial
position of the banks currently employed significantly deteriorate, cash
holdings would be moved to another bank. The utilisation of credit limits is
regularly monitored. As at 31 December 2022, the Group's cash balances are held
with Barclays Bank PLC.
Liquidity risk
Liquidity risk is the risk that the Group will encounter in realising assets or
otherwise raising funds to meet financial commitments. The Group's investments
comprise UK commercial property. Property and property-related assets in which
the Group invests are not traded in an organised public market and may be
illiquid. As a result, the Group may not be able to liquidate quickly its
investments in these properties at an amount close to their fair value in order
to meet its liquidity requirements.
The Group's liquidity risk is managed on an ongoing basis by the Managers and
monitored on a quarterly basis by the Board. In order to mitigate liquidity
risk, the Group aims to have sufficient cash balances (including the expected
proceeds of any property sales) to meet its obligations for a period of at
least twelve months.
Interest rate risk
Some of the Group's financial instruments are interest bearing. They are a mix
of both fixed and variable rate instruments with differing maturities. As a
consequence, the Group is exposed to interest rate risk due to fluctuations in
the prevailing market rate.
The Group's exposure to interest rate risk relates primarily to its long-term
debt obligations. Interest rate risk on long-term debt obligations is managed
by fixing the interest rate on such borrowings, either directly or through
interest rate swaps for the same notional value and duration. Long-term debt
obligations and the interest rate risk they confer to the Group is considered
by the Board on a quarterly basis. Long-term debt obligations consist of a £260
million L&G loan on which the rate has been fixed at 3.32 per cent until the
maturity date of 31 December 2024. The Group also has a £50 million Barclays
term loan on which the rate has been fixed through an interest rate swap at
2.367 per cent per annum until 31 July 2023. Since the year-end, the Company
has signed up to extending the Barclays loan for one-year to 31 July 2024. The
obligation to maintain an interest rate swap does not need to be extended to 31
July 2024 and therefore the rate of interest does not need to be hedged from 1
August 2023. The Group has agreed an additional revolving credit facility of £
50 million with Barclays over the same period, which has not been drawn down as
at 31 December 2022. The revolving credit facility pays an undrawn commitment
fee of 0.74 per cent per annum.
When the Group retains cash balances, they are ordinarily held on
interest-bearing deposit accounts. The benchmark which determines the interest
income received on interest bearing cash balances is the bank base rate of the
Bank of England which was 3.5 per cent as at 31 December 2022 (2021: 0.25 per
cent). The Company's policy is to hold cash in variable rate or short-term
fixed rate bank accounts and not usually in fixed rate securities with a term
greater than three months.
Market price risk
The Group's strategy for the management of market price risk is driven by the
investment policy. The management of market price risk is part of the
investment management process and is typical of commercial property investment.
The portfolio is managed with an awareness of the effects of adverse valuation
movements through detailed and continuing analysis, with an objective of
maximising overall returns to shareholders. Investments in property and
property-related assets are inherently difficult to value due to the individual
nature of each property. As a result, valuations are subject to substantial
uncertainty. There is no assurance that the estimates resulting from the
valuation process will reflect the actual sales price even where such sales
occur shortly after the valuation date. Such risk is minimised through the
appointment of external property valuers.
2. Share Capital
There were 701,550,187 Ordinary Shares in issue at 31 December 2022 (2021:
753,105,830).
At 31 December 2022, the Company held 97,815,921 Ordinary Shares in treasury
(2021: 46,260,278).
3. Basic and diluted earnings per share
The basic and diluted earnings per Ordinary Share are based on the loss for the
year of £94,377,000 (2021: profit £156,023,000) and on 720,956,458 (2021:
786,825,807) Ordinary Shares, being the weighted average number of shares in
issue during the year.
4. List of Subsidiaries
The Company owns 100 per cent of the issued ordinary share capital of FCPT
Holdings Limited, a company registered in Guernsey. The principal activity of
FCPT Holdings Limited is to act as a holding company and it owns 100 per cent
of the ordinary share capital of F&C Commercial Property Holdings Limited, a
company registered in Guernsey whose principal business is that of an
investment and property company, and 100 per cent of the ordinary share capital
of Winchester Burma Limited, a company registered in Guernsey whose principal
business is that of an investment and property company.
The Company owns 100 per cent of the issued ordinary share capital of SCP
Estate Holdings Limited, a company registered in Guernsey. The principal
activity of SCP Estate Holdings Limited is to act as a holding company and it
owns 100 per cent of the ordinary share capital of SCP Estate Limited, a
company registered in Guernsey whose principal business is that of an
investment and property company, and 100 per cent of the ordinary share capital
of Prime Four Limited, a company registered in Guernsey whose principal
business is that of an investment and property company.
The Company owns 100 per cent of the issued ordinary share capital of Leonardo
Crawley Limited, a company registered in Guernsey whose principal business is
that of an investment and property company.
The results of the above entities are consolidated within the Group financial
statements.
5. These are not full statutory accounts. The full audited accounts for
the year to 31 December 2022 will be sent to shareholders and will be available
for inspection at Trafalgar Court, Les Banques, St Peter Port, Guernsey GY1
3QL, the registered office of the Company, and from the Company's website:
balancedcommercialproperty.co.uk
Alternative Performance Measures
The Company uses the following Alternative Performance Measures ('APMs'). APMs
do not have a standard meaning prescribed by GAAP and therefore may not be
comparable to similar measures presented by other entities.
Discount or Premium - the share price of an Investment Company is derived from
buyers and sellers trading their shares on the stock market. This price is not
identical to the NAV. If the share price is lower than the NAV per share, the
shares are trading at a discount. This could indicate that there are more
sellers than buyers. Shares trading at a price above the NAV per share, are
said to be at a premium.
2022 2021
pence pence
Net Asset Value per share (a) 118.5 135.1
Share price per share (b) 88.5 105.0
Discount (c = (b-a)/a) (c) (25.3)% (22.3)%
Dividend Cover on a cash basis - The percentage by which Profits for the year
(less gains/losses on investment properties) adjusted by capital and rental
lease incentives amortisation and interest bearing loans amortisation of set-up
costs cover the dividends paid.
2022 2021
£'000 £'000
(Loss)/profit for (94,377) 156,023
the year
Add back: Unrealised losses/(gains) on
revaluation of investment 129,096 (86,976)
properties
Losses/(gains) on sales of
investment properties 5 (34,397)
realised
Capital and rental lease
incentives amortisation 155 5,575
Interest bearing loans
amortisation of set-up costs 642 642
Profit before investment gains and losses and (a) 35,521 40,867
amortisation
Dividends (b) 33,891 33,448
Dividend Cover on a cash basis percentage (c= a/b) (c) 104.8% 122.2%
Accounting Dividend Cover - The percentage by which profits for the year (less
gains/losses on investment properties and non-recurring other income) cover the
dividend paid.
2022 2021
£'000 £'000
(Loss)/profit for (94,377) 156,023
the year
Add back: Unrealised losses/(gains) on
revaluation of investment 129,096 (86,976)
properties
Losses/(gains) on sales of
investment properties 5 (34,397)
realised
Other income (42) (3,008)
Profit before investment gains and losses (a) 34,682 31,642
Dividends (b) 33,891 33,448
Accounting Dividend Cover percentage (c= a/b) (c) 102.3% 94.6%
Dividend Yield - The dividends paid during the year divided by the share price
at the year end.
Net Gearing - Borrowings less cash divided by total assets (less current
liabilities and cash excluding current Barclays loan).
2022 2021
£'000 £'000
Interest bearing loans 310,000 310,000
Less cash and cash equivalents (54,837) (138,081)
Total (a) 255,163 171,919
Total assets less current liabilities and cash (b) 1,088,155 1,190,496
excluding current Barclays loan
Net Gearing (c=a/b) (c) 23.4% 14.4%
Ongoing Charges - All operating costs incurred by the Group, expressed as a
proportion of its average Net Assets over the reporting year. The costs of
buying and selling investments and derivatives are excluded, as are interest
costs, taxation, non-recurring costs and the costs of buying back or issuing
Ordinary Shares. An additional Ongoing Charge figure is calculated which
excludes direct operating property costs as these are variable in nature and
tend to be specific to lease events occurring during the year.
2022 2021
£'000 £'000
Investment management fee 6,861 7,195
Other expenses 6,479 4,540
Less non-recurring costs - 478 1,103
impairment provision
Less other non-recurring costs (30) -
Total (a) 13,788 12,838
Average net assets (b) 991,293 982,789
Ongoing charges (c=a/b) (c) 1.39% 1.31%
2022 2021
£'000 £'000
Investment management fee 6,861 7,195
Other expenses 6,479 4,540
Less direct operating property costs (5,255) (3,996)
Less non-recurring costs - 478 1,103
impairment provision
Less other non-recurring costs (30) -
Total (a) 8,533 8,842
Average net assets (b) 991,293 982,789
Ongoing charges excluding direct operating (c) 0.86% 0.90%
property costs (c=a/b)
Portfolio (Property) Capital Return - The change in property value during the
year after taking account of property purchases and sales and capital
expenditure, calculated on a quarterly time-weighted basis. The calculation is
carried out by MSCI Inc.
Portfolio (Property) Income Return - The income derived from a property during
the year as a percentage of the property value, taking account of direct
property expenditure, calculated on a quarterly time-weighted basis. The
calculation is carried out by MSCI Inc.
Portfolio (Property) Total Return - Combining the Portfolio Capital Return and
Portfolio Income Return over the year, calculated on a quarterly time-weighted
basis. The calculation is carried out by MSCI Inc.
Total Return - The theoretical return to shareholders calculated on a per share
basis by adding dividends paid in the year to the increase or decrease in the
Share Price or NAV. The dividends are assumed to have been reinvested in the
form of Ordinary Shares or Net Assets, respectively, on the date on which they
were quoted ex-dividend.
2022 2021
NAV per share at start of year - pence 135.1 117.5
NAV per share at end of year - pence 118.5 135.1
Change in the year -12.3% +15.0%
Impact of dividend reinvestments +3.1% +3.9%
NAV total return for the year -9.2% +18.9%
2022 2021
Share price per share at start of year - 105.0 80.0
pence
Share price per share at end of year - pence 88.5 105.0
Change in the year -15.7% +31.3%
Impact of dividend reinvestments +4.0% +6.5%
Share price total return for the year -11.7% +37.8%
All enquiries to:
The Company Secretary
Northern Trust International Fund Administration (Guernsey) Limited
Trafalgar Court
Les Banques
St. Peter Port
Guernsey GY1 3QL
Tel: 01481 745436
Fax: 01481 745186
Richard Kirby
Columbia Threadneedle REP AM plc
Tel: 0207 016 3577
Innes Urquhart
Winterflood Securities Limited
Tel: 0203 100 0265
END
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