REG-Balanced Commercial Property Trust Ltd: Results in Respect of the Year Ended 31 December 2023 (audited)
26/04/2024 15:45
To: RNS
Date: 26 April 2024
From: Balanced Commercial Property Trust Limited (the “Company”)
L.E.I. 213800A2B1H4ULF3K397
Results in Respect of the Year Ended 31 December 2023 (audited)
The full Annual Report for the year ended 31 December 2023 will be available
to view on the Company’s website: balancedcommercialproperty.co.uk
Headlines
* Earnings per Ordinary Share were -3.7 pence per share for the year ended 31
December 2023 (2022: -13.1 pence per share).
* Net asset value per Ordinary Share was 109.8 pence as at 31 December 2023
(2022: 118.5 pence).
* Rental income was £59.2 million for the year ended 31 December 2023 (2022:
£58.7 million).
* Net asset value total return of -3.3* per cent for the year ended 31
December 2023 (2022: -9.2 per cent).
* Share price total return of -12.5* per cent for the year ended 31 December
2023 (2022: -11.7 per cent).
* From October 2023, the rate of monthly interim dividends was increased to
0.44 pence per share. This represented an increase of 10.0 per cent compared
to the previous monthly dividends.
* Dividend cover on a cash basis was 104.7* per cent for the year ended 31
December 2023 (2022: 104.8 per cent).
* The Company signed up to a new £320 million Debt Facility provided by
incumbent lender Barclays and a new lender HSBC.
* Disposed of two office holdings at an aggregate sales price of £14.3
million for the year ended 31 December 2023. A further two office disposals
were completed post year-end with an aggregate sales price of £54.6
million. These disposals are part of the strategic repositioning of the
portfolio.
* Major development scheme at Strategic Park, Southampton completed,
delivering a rent roll in excess of £1.4 million per annum and a 12 month
total return of 13.4 per cent.
* 4 per cent increase in Scope 1 and 2 absolute emissions (-26 per cent in
2022). Emissions intensity reduced by 16 per cent (-13 per cent in 2022).
*see Alternative Performance Measures
Chairman’s Statement
The macro-economic risk factors that were prevalent in 2022 began to ease
during 2023. While the UK slipped into a shallow technical recession in the
second half of the year, this is forecast to be short and inflation, which has
weighed heavily on financial markets, fell towards the end of the year.
Uncertainties linger as interest rates remain at a 15-year high, the rate of
inflation is still above target, and we are in an environment of significant
geo-political risk. The last eighteen months have been challenging for real
estate as investment performance suffered due to rising interest rates leading
to yield increases and a repricing of the asset class. Investors faced the
impact of higher borrowing costs and reduced capital flows as the
attractiveness of real estate deteriorated. As a consequence, UK investment
volumes were low by recent measures with some properties proving to be highly
illiquid. On a positive note, the occupational markets have proven to be more
resilient than many expected.
Company Performance
Against this challenging economic and property market backdrop, the Company
has delivered a net asset value (‘NAV’) total return of -3.3 per cent for
the year. The NAV per share as at 31 December 2023 was 109.8 pence, down 7.3
per cent from 118.5 pence per share as at 31 December 2022.
The share price total return for the year was -12.5 per cent with the discount
to NAV standing at 34.0 per cent at the year end, as the negative sentiment
towards the commercial real estate sector continued to affect the rating of
the shares. The Board has continued its focus on rebalancing the portfolio
with the disposal of two office holdings in December 2023 and a further two
office sales since the year end, and there has been positive movement in the
share price in 2024. At the time of writing the share price is 78.7 pence per
share, a discount of 28.3 per cent to the NAV.
The following table provides an analysis of the movement in the NAV per share
during the year.
Pence per share *
NAV per share as at 31 December 2022 118.5
Unrealised decrease in valuation of property portfolio (8.1)
Realised loss on sale of properties (0.6)
Movement in interest rate swap (0.1)
Net revenue 5.0
Dividends paid (4.9)
NAV per share as at 31 December 2023 109.8
*Based on the average number of shares in issue during the
year.
Portfolio Performance
The Company’s portfolio delivered a total return of -0.7 per cent over the
year, outperforming the MSCI UK Quarterly Property Index to December 2023
(‘MSCI’) return of -1.5 per cent. Relative outperformance was driven by an
income return of 5.4 per cent against the Index return of 4.7 per cent, with
capital returns in line against the Index at -5.9 per cent.
We are at a stage of the cycle where income is driving returns and as such it
was pleasing to see the portfolio’s net operating income grow by 5.3 per
cent with all sub-sectors delivering rental growth and the completion of 76
leasing initiatives across the portfolio.
Despite the relative outperformance against the Index, the portfolio was
negatively impacted by the Company’s exposure to the office sector. This is
being addressed with momentum in our sales programme, which as mentioned above
has seen the disposal of two office holdings in December 2023 and a further
two sales since the year end, raising total proceeds of £68.9 million. The
portfolio’s exposure to the office sector has fallen to 22.2 per cent at the
time of writing, which is less than the Index weighting (24.2 per cent). We
anticipate further sales activity within the capital markets as we continue to
recycle capital to improve performance.
Dividends
The Company paid twelve interim dividends totalling 4.92 pence per share
during the year, being nine monthly dividends of 0.4 pence per share, followed
by a 10 per cent increase and three further monthly dividends at a rate of
0.44 pence per share. The level of dividend cover for the period was 104.7 per
cent on a cash basis and the Board will continue to keep the level of dividend
under review.
Borrowings
The Company has a £260 million term loan in place with L&G which matures on
31 December 2024. As previously announced, the Company signed up to a new debt
facility in September 2023 provided by incumbent lender, Barclays Bank plc,
and a new lender, HSBC UK Bank Plc. This facility is in two tranches and
includes a committed £260 million Term Loan, which can only be drawn to
refinance the existing £260 million L&G Loan. There is also a £60 million
Revolving credit facility, £30 million of which was drawn down at the
year-end and has subsequently ben repaid.
The new debt facility enables the Company to retain the competitively priced
L&G Loan which is fixed at 3.32 per cent up to maturity, whilst also ensuring
the future liquidity needs of the Company are fully funded at an acceptable
commitment fee.
As at 31 December 2023, the Company’s loan to value, net of cash (‘LTV’)
was 24.4 per cent and the weighted average interest rate on the Group’s
total current borrowings was 3.8 per cent.
Continuation Vote
In accordance with the Articles of Incorporation, the Directors are required
to put an ordinary resolution to shareholders in relation to the continuation
of the Company in 2024 (the "Continuation Vote"). If at that meeting such
resolution is not passed, the Board shall, within twelve months of such
meeting, convene an extraordinary general meeting of the Company at which a
special resolution shall be proposed to the members of the Company for the
winding up of the Company and/or a special resolution shall be proposed to the
members of the Company for the reconstruction of the Company, provided that
such resolution for the reconstruction of the Company shall, if passed,
provide an option to Shareholders to elect to realise their investment in the
Company in full. The Board’s assessment of going concern can be found below.
On 15 April 2024, the Board announced that it has been carefully considering
for some time, with its advisers, its strategic options to enhance value for
its shareholders, and that it has formalised these deliberations into a
strategic review process (the "Strategic Review") (further details of which
are set out below).
Once the Strategic Review has been completed, the Board will convene a general
meeting of the Company at which the Continuation Vote will be proposed.
Strategic Review
Despite the Company's successful and ongoing strategic disposal programme,
which has reduced the portfolio's exposure to the underperforming office
sector, and recent improvements in the Company's share rating, its share price
remains at a material discount to the Company's net asset value. The Board,
together with its advisers, has therefore been carefully considering the
Company’s strategic options for some time.
As part of the Strategic Review, the Board will consider all options
including, but not limited to, continuing the Company with further actions to
narrow the share price discount to NAV; selling the Company's portfolio or
subsidiaries (or portion thereof); returning capital to shareholders; changing
the Company's investment strategy and/or management arrangements; commencing a
managed wind down; selling the entire issued share capital of the Company or
undertaking some other form of consolidation, combination, merger or
comparable corporate action.
Shareholders are welcome to send their comments to chairmanBCPT@georgeson.com,
in particular on their priorities for their investment in the Company and the
options described above.
We have commenced this Strategic Review to determine the best way to enhance
value for shareholders, after which the independent Board will determine the
best way forward for the Company as a whole. The outcome of the Strategic
Review is expected to be announced in Q3 2024, and thereafter the Continuation
Vote will also be held. The Board looks forward to updating shareholders on
the progress of the Strategic Review and will make further announcements in
due course, noting that there is currently no certainty as to the outcome of
the Strategic Review.
Board Composition
Karima Fahmy was appointed as an independent non-executive Director of the
Company with effect from 19 January 2024. Karima is a corporate lawyer with
extensive experience of the UK property sector.
Following a significant increase in other time commitments, Hugh Scott-Barrett
retired from his role as non-executive Senior Independent Director in February
2024. I would like to thank Hugh for his considerable contribution to the
Company and wise counsel over recent years. I am pleased to confirm that
Isobel Sharp, who is Audit and Risk Committee Chair, has also assumed the role
of Senior Independent Director.
Environmental, Social and Governance (‘ESG’)
Every Board director is a member of the ESG Committee which is established to
ensure that the Managers are driving year-on-year improvements in portfolio
performance, process and governance. The Board was pleased to note the
Company’s return to the top of its Global Real Estate Sustainability
Benchmark peer group in 2023, achieving a score of 79/100, conferring a three
green star rating.
As work has continued to future-proof the portfolio in line with our Net Zero
Carbon target and the Minimum Energy Efficiency Standards, the Company is also
focused on the ESG fields of social, biodiversity and transitional risk where
we expect to make meaningful progress during the upcoming year. Given the
composition and quality of the portfolio, the Board and Managers remain of the
view that the Company’s asset base is well-positioned in relation to the
evolving ESG landscape.
Outlook
Market participants across real estate and the wider financial sectors have
been keenly monitoring the outlook for UK interest rates, with the potential
for a cut in the base rate in the second half of 2024. There are also upcoming
general elections, most notably in the UK and US, which add an extra layer of
complexity to the outlook.
The year ahead will most likely see continued divergence in performance across
property sectors, sub-sectors and markets. Asset fundamentals rather than
market yield compression should provide a platform for value creation, and we
believe that this is an opportune time for a diversified strategy.
Paul Marcuse
Chairman
26 April 2024
This announcement may contain forward-looking statements with respect to the
financial condition, results of operations and business of the Company. Such
statements involve risk and uncertainty because they relate to future events
and circumstances that could cause actual results to differ materially from
those expressed or implied by forward-looking statements. The forward-looking
statements are based on the Directors’ current view and on information known
to them at the date of this document. Nothing should be construed as a profit
forecast.
Managers’ Review
Property Headlines over the Year
* A portfolio total return -0.7* per cent over the 12 months to 31 December
2023 versus the MSCI UK Quarterly Property Index ('MSCI') return of -1.5 per
cent.
* Relative outperformance delivered through income generation and proactive
asset management, driving 5.3 per cent increase in portfolio net operating
income.
* Accretive asset management activity delivered underlines strong asset
fundamentals, attractive sector exposures and significant latent income growth
potential within the portfolio.
* Portfolio offers potential day one income reversion of 16.0 per cent with a
further 31.0 per cent of income subject to contractual uplifts guaranteeing
additional rental growth.
* The disposal of four office assets completed (two post year-end) as part of
the strategic repositioning of the portfolio, raising proceeds of £68.9
million delivered at an aggregate discount to NAV of 2.6 per cent and reducing
portfolio exposure to the office sector to 22.2 per cent.
* Major development scheme at Strategic Park, Southampton completed,
delivering a rent roll in excess of £1.4 million per annum and a 12-month
total return of 13.4 per cent.
*see Alternative Performance Measures
Property Market Review
2023 was a challenging year for UK real estate due to the macro-economic
environment and a 15 year high in interest rates. Volatility in financial
markets, uncertainty as to the interest rate outlook and persistently high
inflation dampened investor appetite and the relative attractiveness of real
estate.
UK real estate investment volumes totalled circa £40 billion in 2023, a fall
of 40 per cent year on year. Despite the negative headlines around offices,
they were the second most traded sector in 2023, accounting for approximately
24 per cent of deal volume. The tentative emergence of counter-cyclical and
opportunistic strategies has been supported by an occupational market that
continues to display resilience and even growth, albeit this is increasingly
nuanced by micro-location and asset fundamentals.
As income has driven returns, we have seen an increasing divergence in
performance across the sub-sectors due to differing rental growth prospects.
As a result, weaker office segments have lost market share to ‘beds, sheds,
and meds’, being the sectors delivering rental growth founded on structural
undersupply and positive thematic support. Industrials generated the highest
rental growth over the year at 7.1 per cent and were unsurprisingly the most
traded sector. Retail warehousing, underpinned by low vacancy and a negligible
development pipeline, supported positive rental growth over the year of 1.8
per cent and is expected to gain further momentum in 2024.
All this is to say that delivering relative outperformance has become a more
nuanced pursuit founded on disciplined management of both portfolio
composition and the standing asset base. The notable absence of the distressed
(or even motivated) selling of real estate assets has put the onus on returns
being generated through proactive asset management and diversification of
income streams. Crystallising rental growth through leasing initiatives,
driving capital growth through refurbishments, enhancing occupational and
investment prospects through asset repositioning relies heavily on expertise
to leverage strong underlying asset and portfolio fundamentals.
Portfolio performance
The total return from the portfolio was -0.7 per cent over the twelve months,
compared with the MSCI return of -1.5 per cent, a 74-basis point performance
premium.
At a time when returns are driven by income, the Company’s portfolio is
generating a yield advantage and the portfolio delivered an income return of
5.4 per cent over the year, a 75-basis point premium over the MSCI. The
portfolio’s capital growth was in line with MSCI at -5.9 per cent over the
year.
Capital Growth
Over the period, portfolio yields have moved as follows:
Net initial yield (%) Equivalent yield (%) Reversionary yield (%)
Dec 23 Dec 22 Dec 23 Dec 22 Dec 23 Dec 22
Industrial 4.5 4.5 6.0 5.9 6.3 6.2
Offices 7.4 5.8 8.2 6.9 8.4 7.0
Retail* 4.7 4.4 5.1 4.9 4.8 4.7
Retail Warehousing 6.3 5.7 6.2 6.1 6.1 6.0
Alternatives 4.8 4.5 4.7 4.5 4.6 4.5
Portfolio 5.5 5.0 6.5 6.1 6.2 5.8
*including St Christopher’s Place
At the sector level, the Company’s industrial, retail (including retail
warehousing) and alternatives holdings all generated material relative capital
outperformance over the index.
Performance at the portfolio level was impacted by offices, which delivered
relative capital underperformance against the index of 503 basis points. The
largest driver behind this was the regional office assets, a sub-sector that
faces investment illiquidity, constrained transaction volumes and a muted
performance outlook.
Balanced Commercial Property Trust MSCI UK Quarterly Index
Sector Income Return (%) Capital Return (%) Total Return (%) Total Return (%)
All Retail 4.9 -4.1 0.7 -0.3
Offices 7.1 -18.2 -12.2 -10.4
Industrial 4.7 3.0 7.9 3.9
Alternatives 4.9 -2.8 2.0 -0.1
All Property 5.4 -5.9 -0.7 -1.5
Income Return
Over the year the portfolio saw net operating income growth of 5.3 per cent
and generated ERV growth of 1.9 per cent. The key driver of the increase in
passing rent was active asset management across the portfolio, as a total of
76 leasing initiatives completed over the 12 months.
The portfolio vacancy rate rose slightly from 5.9 per cent by Estimated Rental
Value (ERV) to 6.7 per cent. 1.0 per cent of the vacant space is now
contractually committed and 4.3 per cent relates to Stockley Park in Uxbridge,
which is a repositioning opportunity. The uplift in the void rate is primarily
linked to two restaurant units at St Christopher’s Place where leases have
been forfeited due to the tenants breaching lease obligations, although there
is a good level of new tenant interest in these units.
The portfolio has historically sustained a low long-term vacancy, with the
average over the last 5 years standing at 5.1 per cent.
The portfolio offers a potential income reversion of 16.0 per cent. It also
offers an attractive mix of income duration from its higher yielding assets
and the opportunity to realise performance from its growth assets. The
portfolio’s WAULT (weighted average unexpired lease term) stands at 4.7
years (to lease breaks). The industrial assets offer the highest income
reversion of over 40 per cent, an equivalent yield of 6.0 per cent and a short
WAULT of 2.5 years (including rent reviews as lease events), enabling the
reversion to be delivered at lease events in the near term.
Approximately 31 per cent of the Company’s income profile is subject to
contractual uplifts offering guaranteed income growth. Index-linked rent
reviews support 8.8 per cent of the income, while 22.2 per cent is subject to
fixed uplifts.
The table below sets out an analysis of the portfolio’s income reversion.
Investment Activity
Despite a challenging investment market, we have successfully completed the
sale of four office holdings. Two of these completed in December 2023, with
further sales post year end in January and March 2024. Three of the four sales
have been in the structurally challenged out-of-town business park sub-sector,
with the fourth being a low-yielding, multi-let office in London’s West End.
Following the completion of these four disposals (two of these are post
year-end), the portfolio’s exposure to the office sector has fallen to 22.2
per cent.
The assets sold are:
* Nevis & Ness House, Edinburgh Park – a 42,000 sq ft headquarters office
occupied by Diageo Scotland Limited.
* Building 4, Prime Four Business Park, Aberdeen – a 25,000 sq ft training
centre occupied by Maersk Training UK Limited.
* 2-4 King Street, London SW1 – a multi-let holding of 14,600 sq ft in
London’s West End sold in January 2024.
* The Leonardo Building, Crawley – a 110,000 sq ft headquarters office
occupied by Virgin Atlantic Limited sold in March 2024.
The sales have been completed at an aggregate price of £68.9 million,
representing a 2.6 per cent discount to the valuation preceding the sales
contracting.
The pricing achieved on these disposals underlines the value in the
Company’s investment ethos of focussing on high quality real estate with
strong fundamentals, which lends relative resilience and liquidity. We are
actively reviewing a pipeline of further disposals from both the office sector
and wider portfolio, targeting assets where value can be crystallised
following the successful delivery of asset business plans.
Asset Management
Active asset management is the key determinant of relative outperformance,
enabling rental growth to be converted into income while also generating
capital growth through the enhancement of asset leasing profiles.
Industrial and logistics
The Company’s industrial and logistics assets offer an attractive day one
income reversion and have generated rental growth of 2.6 per cent over the
twelve months. A number of highly accretive asset management initiatives have
been executed over the year, underpinning a 2.8 per cent uplift in passing
rent and supporting relative income and capital outperformance.
Notable successes included:
Hurricane 52, Estuary Business Park, Liverpool
The development of a highly specified 52,500 sq ft logistics unit reached
practical completion in August 2022. Following a competitive best-bids
process, the unit was let in July 2023 to clothing manufacturer Montirex on a
10-year lease (break at year 5) at a rent showing a 7.2 per cent premium to
the ERV. The asset recorded a total return of 28.3 per cent over the year.
The Cowdray Centre, Colchester
This multi-let estate continues to see buoyant levels of occupier activity,
supported by a phased programme of refurbishments which has driven renewed
occupier demand, rental growth and value appreciation.
The asset offers a day one income reversion of 44 per cent and the staggered
nature of the leasing profile is crystalising this into performance. Rent
reviews with Rexel UK and Jump Street have seen rents increase by 66 per cent
and generated additional income totalling £69,500 per annum. Lease renewals
completed with The Range (CDS Superstores), Jayar Components and Cowdray
Carpet Centre have secured an income stream totalling £425,000 per annum. In
February 2024, MKM Building Supplies entered into a new 20-year lease (break
year 15) on a new refurbished unit, whilst lease renewal negotiations continue
with Pickfords Move Management and Hermes Parcelnet, which will serve to
further increase and strengthen the asset’s income profile.
The estate also comprises a development site where planning consent has been
secured for a trade-centre scheme and the construction package is currently
out to tender.
8 Hams Hall Distribution Park, Birmingham
A bespoke logistics facility of 264,000 sq ft occupied by Nestle Purina until
March 2025. In August, Nestle completed a 10-year (break at year 5)
reversionary lease from March 2025 in exchange for a 3.5 month rent free
period.
Units 1 & 2 Strategic Park, Southampton
The major refurbishment of this two-unit industrial scheme completed in
October 2023 and both units have now been let at rents ahead of pro-forma
ERV’s. The initiative has delivered:
* Income performance, boosting the Company’s income by in excess of £1.4m
per annum and generating an uplift to the previous combined passing rent of
27.5 per cent and bettering the ERV underwritten in the asset business plan by
2.4 per cent.
* Capital performance, as capital growth of 15.7 per cent underpins a total
return of 13.4 per cent over a 12-month period, and
* ESG enhancements with A-rated EPCs, a BREEAM Very Good certification and a
full solar photovoltaic system installed on the roof. Both tenants have
committed to acquire the electricity generated on-site and the solar
installation is forecast to produce an additional operational income return of
circa 7.5 per cent per annum.
Over the course of 2024, industrial units with an ERV in excess of £5.2m are
subject to an upcoming or outstanding lease event (including new leases
completed post-period at Colchester and Southampton as referenced above),
offering a meaningful opportunity to crystallise further income growth.
Retail Warehousing
A highly successful leasing strategy completed in 2022, securing full
occupation of both retail warehouse parks and solidifying a robust grocery,
discount and convenience-led tenant roster. This has afforded the holdings an
attractive, stable, and growing income profile which has seen the passing rent
from the Newbury and Solihull retail parks increase by 9.4 per cent over the
year.
We are working to enhance the operational income further through the addition
of solar photovoltaic installations across various retail units.
Offices
The Company’s office holdings continue to see robust levels of occupational
activity, with six new leases concluded, representing a rent roll of £868,000
per annum, delivered within 1.4 per cent of ERV. There have also been 3 rent
reviews settled at a 0.8 per cent premium to the previous passing rents.
7 Birchin Lane, London EC3
The portfolio’s sole City of London holding has been subject to a phased
programme of refurbishment, delivering Category A ‘Plug & Play’ space
along with upgraded ESG credentials including B-rated EPCs. During the year,
four suites have been refurbished, three of which have been let at rents at a
10 per cent premium to the ERV and the most recent letting on the 1st floor
concluding at a rent showing a 17.6 per cent uplift to the previous ERV.
King Street, Manchester
This multi-let office remains fully occupied, underlining the continued appeal
of this prestigious office building. Over the course of the year, three
existing tenants – Foresight Group, Lloyds Bank and Markel Insurance – all
committed to new leases, securing a rent roll of £314,000 per annum, at a 0.7
per cent premium to ERV. Markel Insurance also settled the September 2021 rent
review on their second suite on the 11th floor at a 1.3 per cent uplift.
Stockley Park, Uxbridge
This is the portfolio’s largest void with an ERV in excess of £3.0m per
annum. This former HQ office building is subject to a repositioning strategy
to convert the building to a post-operative healthcare use. The local planning
authority has been engaged, offering in-principle support to the initiative
and a planning application has recently been submitted. During 2024 we expect
to achieve a number of milestones allowing for incremental crystallisation of
value throughout the process, such as the receipt of planning consent, the
contractual commitment of the occupier and the commencement of the development
phase.
Retail
St Christopher’s Place (mixed-use Food & Beverage (‘F&B’), retail,
residential and offices)
This 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 as follows:
Sector Exposure (% of asset capital value)
Retail 31.2
Food & beverage 33.5
Offices 14.8
Residential 20.5
The estate is valued at a 23.7 per cent discount to its pre-pandemic level and
therefore represents a key growth asset as it moves through its recovery
phase.
The West End retail market is enjoying a notable recovery, with 2023 footfall
up 5 per cent year-on-year, while Oxford Street outperformed and recorded a 12
per cent uplift in footfall year-on-year. The 12 months saw growth in
international travel (+31 per cent) and hotel occupancy rates (+6 per cent),
all of which served to increase overall spend in the West End by 4 per cent.
As a result of an improving market backdrop, Oxford Street saw a record year
for new letting activity with some 250,000 sq ft of deals completing, with the
candy and tourist shops that have blighted the street in recent years having
retrenched and the vast majority of all vacant space to the west of Oxford
Circus is either under offer or subject to redevelopment.
The St Christopher’s Place Estate is starting to see the benefits of this
wider recovery and over the twelve months we delivered 54 leasing initiatives
across the estate, including 43 new leases and tenancy agreements that account
for an income stream in excess of £2.3m. As a result of this the annual net
operating income increased by 5.1 per cent year-on-year and there are a
further 9 occupational deals under offer with legals progressing.
Disappointingly, the tenants of the Estate’s Oxford Street units, Aldo and
The Body Shop, have both entered administration and ceased trading from their
premises in recent weeks. As a result, both Oxford Street units became empty
post-period, albeit remain subject to leases. The units are being actively
marketed and have received encouraging levels of occupational interest at this
early stage.
In order to drive continued income and capital growth a number of key
strategic initiatives are being progressed:
* Enhancing the F&B offering.
The conversion of traditional retail to F&B drives investment fundamentals
through superior rents, longer leases and sharper capitalisation rates, while
also enhancing the consumer experience and occupier dynamics of the estate.
Over the course of the year, F&B has become the dominant use at the estate,
increasing from 26.8 per cent to 33.5 per cent as 5 F&B occupational deals
completed.
* SCP as a West End office hub.
Occupier demand for smaller floorplates is predominantly centred on fully
fitted ‘Plug & Play’ space. Fitted space increases the optionality for
occupier demand and materially reduces void periods, rent free periods and
achieves higher rents. We are proactively repositioning suites to meet this
key source of demand and since the start of 2024, 11 new office tenancies have
completed.
* Leveraging improving occupational market dynamics to enhance occupancy and
income.
The rebasing of occupational costs on Oxford Street has spurred an increase
in retailer demand. The Estate is benefitting from this recovery and over half
of the vacant space at SCP is under offer at the time of writing. We are
seeking to leverage this momentum to continue to build critical mass across
the Estate’s retail, F&B and office elements, with demand tension a key
determinant of rental growth.
Alternatives
The portfolio’s alternatives holdings include the purpose-built student
accommodation in Winchester (which is subject to a long-term, index-linked
lease to the university), residential properties at St Christopher’s Place
and the leisure units at Wimbledon Broadway (a gym and cinema).
The residential element of St Christopher’s Place is substantial, accounting
for 4.7 per cent of the value of the Company’s portfolio and saw its net
operating income increase by 6.6 per cent as occupancy and rental levels
recovered.
Strategic Portfolio Initiatives
We believe the future drivers of relative outperformance will become
increasingly nuanced. Allocation towards structurally supported growth sectors
remains critical, however, the supply-demand dynamics within sub-sectors (such
as big-box vs mid-box industrial or discount vs fashion-led retail),
micro-locations (availability of workforce and areas of meaningful undersupply
such as along key arterial routes or in last mile locations) and at the asset
level (the long-term functional relevance of the building) will all dictate
the consistent delivery of long-term outperformance.
To that end, we will continue to leverage the portfolio’s strong underlying
fundamentals, with its attractive reversionary potential and latent
opportunities to deliver consistent income growth as the key driver of total
returns. Key strategic initiatives include:
* Income compounding – the portfolio offers an attractive income reversion
alongside attributes supporting the conversion of potential into growth. This
includes a consistently low void rate, high quality tenant base, exposure to
index-linked lease structures, a WAULT facilitating the execution of asset
management strategies and a portfolio composition delivering continued rental
growth.
* Active asset management – a high quality portfolio offers investment and
occupational fundamentals that support the delivery of value-add strategies,
which are key drivers of income and capital growth as well as relative
outperformance.
* Opportunistic recycling of capital – selective disposals will continue to
reduce the portfolio’s exposure to the more challenging sub-markets,
increasing the portfolio’s alignment to growth sectors and assets.
Outlook
The macro-economic outlook improved materially towards the end of 2023 driven
by a significant fall in the rate of inflation which raised expectations that
the Bank of England would cut the interest rate sooner than was expected just
a few months previously. However, while inflation has continued to moderate it
is still higher than the Bank of England’s 2 per cent target. As a
consequence, the Bank may not begin to cut rates until inflation is closer to
target and wage growth has cooled further. Financial analysts are expecting to
see a cut in the base rate later this year.
Barring not insubstantial geo-political risk, possible interest rate cuts
during the year will bode well for property pricing and allow the real estate
market to look beyond this period of relative stabilisation to a prospective
recovery.
As for whether pricing has now bottomed out, the UK has seen the strongest
rebasing of valuations of all major European real estate markets. While there
may be some further softening at the market level, we do not expect a
substantial valuation correction in 2024. Quality stock will most likely be
less affected than secondary assets where any repricing is expected to be more
aggressive. Downside risks remain, primarily the potential for refinancing
pressures to precipitate distressed selling. However, we have not seen the
levels of distress in real estate markets that many had anticipated, and a
more stable economic outlook may result in a more manageable financial
environment.
Against this background and in a context where outperformance is nuanced, the
portfolio’s growth characteristics and high quality, liquid asset base will
continue to offer opportunities as we aim to deliver attractive risk-adjusted
returns.
Sector Analysis (% of total property portfolio)
2023 (%) 2022 (%)
Industrial 32.3 28.9
Offices 26.5 31.6
Retail 18.4 17.4
Retail Warehouses 12.3 11.6
Alternative 10.5 10.5
Source: Columbia Threadneedle REP AM plc
Geographical Analysis (% of total property portfolio)
2023 (%) 2022 (%)
London – West End 28.7 27.5
South East 24.2 23.4
Midlands 23.3 21.3
North West 12.5 12.2
Scotland 7.3 11.6
South West 2.2 2.3
Rest of London 1.8 1.7
Source: Columbia Threadneedle REP AM plc
Lease Expiry Profile
At 31 December 2023 the weighted average lease length for the portfolio, assuming all break options are exercised, was 4.7 years (2022: 5.2 years)
% of leases expiring (weighted by rental value) 2023 (%) 2022 (%)
0 – 5 years 64.9 40.1
5 – 10 years 24.0 36.7
10 – 15 years 9.6 15.0
15 – 25 years 1.5 8.2
Source: Columbia Threadneedle REP AM plc
The largest occupiers, based as a percentage of contracted rent, as at 31
December 2023, are summarised as follows:
Income Concentration
Company name % of Total Income
Apache North Sea Limited 4.6
CNOOC Petroleum Europe Limited 4.5
JP Morgan Chase Bank, National Association 4.5
Kimberley-Clark Limited 3.6
University of Winchester 3.6
Marks and Spencer plc 3.6
Virgin Atlantic Limited 3.5
Nestle Purina UK Commercial Operators Limited 3.2
Transocean Drilling UK Limited 3.2
DHL Supply Chain Limited 3.2
Total 37.5
Source: Columbia Threadneedle REP AM plc
Richard Kirby and Daniel Walsgrove
Columbia Threadneedle REP AM plc
26 April 2024
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.
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 499 2244
Innes Urquhart
Winterflood Securities Limited
Tel: 0203 100 0265
Dion Di Miceli / Tom MacDonald / Stuart Muress / James Atkinson
Barclays Bank PLC
Tel: 0207 623 2323
BarclaysInvestmentCompanies@barclays.com
Balanced Commercial Property Trust Limited
Consolidated Statement of Comprehensive Income (audited)
Year ended 31 December 2023 Year ended 31 December 2022
£’000 £’000
Revenue
Rental income 59,228 58,676
Other income 119 42
--------- ---------
Total revenue 59,347 58,718
Losses on investment properties
Unrealised losses on revaluation of investment properties (56,940) (129,096)
Losses on sale of investment properties realised (4,533) (5)
---------- ----------
Total loss (2,126) (70,383)
---------- ----------
Expenditure
Investment management fee (5,968) (6,861)
Other expenses (7,336) (6,479)
---------- ----------
Total expenditure (13,304) (13,340)
----------- -----------
Operating loss before finance costs and taxation (15,430) (83,723)
----------- -----------
Net finance costs
Interest income 2,051 807
Finance costs (12,617) (11,116)
----------- -----------
(10,566) (10,309)
----------- -----------
Loss before taxation (25,996) (94,032)
Taxation (71) (345)
---------- ----------
Loss for the year (26,067) (94,377)
---------- ----------
Other comprehensive income
Items that are or may be reclassified subsequently to profit or loss
Movement in fair value of effective interest rate swap (843) 723
---------- ----------
Total comprehensive loss for the year (26,910) (93,654)
---------- ----------
Basic and diluted earnings per share (3.7)p (13.1)p
EPRA earnings per share 5.1p 4.8p
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 31 December 2023 £’000 As at 31 December 2022 £’000
Non-current assets
Investment properties 936,993 1,075,082
Trade and other receivables 14,354 20,372
------------ ------------
951,347 1,095,454
------------ ------------
Current assets
Investment properties held for sale 71,277 -
Trade and other receivables 12,005 12,811
Interest rate swap asset - 1,030
Cash and cash equivalents 41,717 54,837
------------ ------------
124,999 68,678
------------ ------------
Total assets 1,076,346 1,164,132
------------ ------------
Current liabilities
Trade and other payables (17,067) (21,140)
Interest-bearing loan (259,689) (49,889)
------------ ------------
(276,756) (71,029)
Non-current liabilities
Trade and other payables (2,774) (2,250)
Interest-bearing loans (26,777) (259,388)
------------ ------------
(29,551) (261,638)
------------ ------------
Total liabilities (306,307) (332,667)
------------ ------------
Net assets 770,039 831,465
------------ ------------
Represented by:
Share capital 7,994 7,994
Special reserve 485,840 485,840
Capital reserve – investments sold 62,109 75,005
Capital reserve – investments held 97,583 146,160
Hedging reserve - 1,030
Revenue reserve 116,513 115,436
------------ ------------
Equity shareholders’ funds 770,039 831,465
------------ ------------
Net asset value per share 109.8p 118.5p
EPRA net tangible assets per share 109.8p 118.4p
Balanced Commercial Property Trust Limited
Consolidated Statement of Changes in Equity
for the year ended 31 December 2023 (audited)
Share Capital £’000 Special Reserve £’000 Capital Reserve - Investments Sold £’000 Capital Reserve – Investments Held £’000 Hedging Reserve £’000 Revenue Reserve £’000 Total £’000
At 1 January 2023 7,994 485,840 75,005 146,160 1,030 115,436 831,465
Total comprehensive income for the year
Loss for the year - - - - - (26,067) (26,067)
Transfer of prior years’ revaluation to realised reserve - - (8,363) 8,363 - - -
Transfer in respect of unrealised losses on investment properties - - - (56,940) - 56,940 - -
Losses on sale of investment properties realised - - (4,533) - - 4,533 - -
Movement in fair value of interest rate swap - - - - (843) - (843)
Transfer of loss on maturity of interest rate swap - - - - (187) 187 -
Total comprehensive income for the year - - (12,896) (48,577) (1,030) 35,593 (26,910)
Transactions with owners of the Company recognised directly in equity
Dividends paid - - - - - (34,516) (34,516)
At 31 December 2023 7,994 485,840 62,109 97,583 - 116,513 770,039
Consolidated Statement of Changes in Equity
for the year ended 31 December 2022 (audited)
Share Capital £’000 Special Reserve £’000 Capital Reserve - Investments Sold £’000 Capital Reserve – Investments Held £’000 Hedging Reserve £’000 Revenue Reserve £’000 Total £’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 rate swap - - - - 723 - 723
Transfer in respect of unrealised losses on investment properties - - - (129,096) - 129,096 - -
Losses on sale of investment properties realised - - (5) - - 5 -
Total comprehensive income for the year - - (5) (129,096) 723 34,724 (93,654)
Transactions with owners of the Company recognised directly in equity
Transfer from share capital to special reserve 463 (463) - - - - -
Buyback to Treasury - (58,510) - - - - (58,510)
Dividends paid - - - - - (33,891) (33,891)
At 31 December 2022 7,994 485,840 75,005 146,160 1,030 115,436 831,465
Balanced Commercial Property Trust Limited
Consolidated Statement of Cash Flows (audited)
Year ended 31 December 2023 Year ended 31 December 2022
£’000 £’000
Cash flows from operating activities
Loss before taxation (25,996) (94,032)
Adjustments for:
Finance costs 12,617 11,116
Interest income (2,051) (807)
Unrealised losses on revaluation of investment properties 56,940 129,096
Losses on sale of investment properties realised 4,533 5
Decrease/(increase) in operating trade and other receivables 6,840 (5,032)
(Decrease)/increase in operating trade and other payables (4,013) 3,412
----------- -----------
Cash generated from operations 48,870 43,758
----------- -----------
Interest received 2,035 807
Interest and bank fees paid (10,902) (10,987)
Taxation paid (71) (345)
----------- -----------
(8,938) (10,525)
----------- -----------
Net cash inflow from operating activities 39,932 33,233
----------- -----------
Cash flows from investing activities
Purchase of investment properties (884) (812)
Sale of investment properties 14,300 -
Capital expenditure on investment properties (8,021) (23,258)
----------- -----------
Net cash inflow/(outflow) from investing activities 5,395 (24,070)
----------- -----------
Cash flows from financing activities
Dividends paid (34,516) (33,891)
Issue costs for loan facility extension and Barclays/HSBC agreement (3,931) (6)
Repayment of Barclays loan (50,000) -
Drawdown of Barclays/HSBC loan 30,000 -
Buybacks to Treasury - (58,510)
----------- -----------
Net cash outflow from financing activities (58,447) (92,407)
----------- -----------
Net decrease in cash and cash equivalents (13,120) (83,244)
Cash and cash equivalents at the beginning of the year 54,837 138,081
----------- -----------
Cash and cash equivalents at the end of the year 41,717 54,837
----------- -----------
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 another challenging year, which continues to be marked by an
elevated cost-of-living and geopolitical events such as the war in Ukraine and
the escalation of tensions in the Middle East. Against this background, we
have continued to see higher levels of inflation in the UK, albeit the rate
has slowed sharply as monetary policy continues to work through the economy,
and it is far from 11.1 per cent peak in October 2022. In response, the Bank
of England continued to raise interest rates which at the time of writing have
stabilised at 5.25 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.
The principal risks and uncertainties faced by the Company are set out in the
table below.
The Audit and Risk Committee seeks to mitigate and manage these risks and
uncertainties through continual review, policy-setting and enforcement of
contractual obligations, as well as a review of the Internal Control reports
prepared in accordance with ISAE 3402 and 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 alleviate the portfolio risks through active
asset management, monitoring key risk metrics and carrying out due diligence
on prospective tenants and asset acquisitions. All of the properties in the
portfolio are insured.
As well as considering current risks, the Audit and Risk Committee, 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. 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 events have been a catalyst for higher levels of
inflation and consecutive interest rate rises, which have slowed economic
growth. Interest rates have increased from 0.25 per cent to 5.25 per cent in
the last two and a half years. The Bank of England held the rate at 5.25 per
cent at its September 2023 meeting, breaking the run of 14 consecutive hikes
and consensus estimates are currently forecasting a gradual cut in the base
rate from the second half of 2024. Against this background, sentiment for
real estate as an asset class has been poor, given the high income returns
available from cash and fixed income. Property valuations have been marked
down to reflect the risk of premium for investing in property (as an illiquid
asset) in a higher interest rate environment. In addition, the increased
cost of debt has led to weak liquidity in the real estate capital markets.
The ESG agenda is a very prominent one and continues to grow in its importance
to shareholders, future investors, our customers and the wider community. We
have made significant progress 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. 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. There is 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 are essential. This has
been at the expense of lower quality stock and a two-tier market has emerged
with the rebasing of both capital values and rents. This is still developing
and continues to be monitored but investor sentiment to offices is poor with
few active buyers in the market, and this is impacting on pricing.
There continues to be an increasing emerging risk from cyber threats. As an
externally managed investment company we are dependent on the controls and
systems of the 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 principal risks and uncertainties faced by the Company, and the Board’s
mitigation approach, are described in the table below.
Highest Risks Mitigation
Investment Performance Risk Unfavourable markets, poor stock selection, including inappropriate asset allocation and underperformance against the benchmark. This risk may be exacerbated by gearing levels. The outlook for the office sector capital markets is challenging. Economic backdrop of inflationary pressures, higher interest rates and the risk of an economic recession. A relatively illiquid investment market. ESG risk attached to the developing regulatory backdrop and capital expenditure required to maintain compliance. The investment performance, gearing and income forecasts are reviewed with the Investment Managers at each Board Meeting. The Managers provide regular information on the expected level of rental income that will be generated from underlying properties. The
portfolio is well diversified by geography and sector and the exposure to individual tenants is monitored and managed to ensure there is no over exposure. The Company sold £14.3 million of offices d uring the year and exposure at the year-end was 26.5 per
cent. Post year-end, the Company sold a further £54.6 million of offices with the current exposure at 22.2 per cent. The Managers in-house ESG team continually monitor regulatory background and best practice standards, while the overall quality of the
portfolio provides some protection against this . All portfolio assets have been subject to Net Zero Carbon assessments alongside modelling of the interventions required to meet hardening Minimum Energy Efficiency Standards thresholds. All actions
scheduled for implementation in the 2023 financial year have been delivered or progressed as detailed in the ESG Report. There has been significant leasing activity and a number of lease renewals completed during the year particularly in the industrial
portfolio and St Christopher’s Place, which has helped performance during a period of falling valuations. The portfolio offers significant in-built income growth, as evidenced by the reversionary yield of 6.2 per cent.
Risk increased in the year under review
Discount/Premium Risk Share price of the investment company is lower/higher than the NAV. As a result of such imbalances, the attractiveness of the Company to investors is diminished. The discount continues to be wide (34 per cent at the year-end but narrowing to 28.3 per cent on 25 April 2024) in an environment of higher interest rates where high income returns can be achieved through cash and income products. Investor sentiment towards real estate as an asset class is relatively weak, and the office sector in particular. . The discount is reported to and reviewed by the Board on an ongoing basis. Share buybacks as a means of narrowing the discount or as an attractive investment for the Company are considered and weighed up against the risks as alternatives. The position is
monitored by the Managers and Brokers on a daily basis and any material changes are investigated and communicated to the Board. The Company has paused share buybacks since September 2022, with the preservation of cash and maintaining lower gearing levels
taking precedence in current markets. Investors have access to the Managers and the underlying team who will respond to any queries they have on the discount. The Managers engage with the shareholder base on a quarterly basis to update on Net Asset Value
performance. The Managers also attend ad hoc meetings with shareholders as required, as well as various industry events to promote the Company to current and prospective investors. The Brokers and the Managers’ sales team liaise with current and
prospective investors to try to generate demand for the Company’s shares.
Risk unchanged in the year under review
Financial Risk Management Risk of financial or reputational damage due to a failure to manage appropriately financial risk. This includes management of cash resources and debt. The company’s principal £260 million debt facility expires on 31 December 2024 and a £100 million facility with Barclays was due to expire in July 2024. Early action on this was required. The level of cash is continually monitored by the Managers. A financial model is maintained, which includes a five-year cash flow forecast and is reviewed at quarterly Board meetings. The cash position is also reviewed by the Board on a monthly basis as
part of the dividend approval process. Loan covenants are monitored carefully by the Managers and reviewed at least quarterly at Board meetings. The Company entered into a two-year £320 million loan agreement in September 2023, with the option of two one
-year extensions. This is a two-tiered facility with Barclays and HBSC which includes a £60 million revolving credit facility and a term loan which takes the form of a commitment to provide up to £260 million to repay the existing loan with L&G, which is
due to mature in 2024. As part of this process, the £100 million facility with Barclays was paid down and cancelled. In the current interest rate environment, drawing down the new term loan in full will be more expensive than the current debt and the
interest would have to be fixed using an interest rate swap. The Company is therefore looking to reduce its gearing exposure through property sales, and the new loan provides optionality on the gearing levels post 2024.
Risk decreased in the year under review
Product Strategy Risk Risk that the Product Strategy (including investment guidelines and policies) lacks sustainability or is no longer appealing to the market. Risk that the strategy is not clearly defined/ articulated or directed to the correct target audience. The Company has a Continuation vote in 2024. ESG related initiatives are a core part of the long-term strategy. This was recognised as a significant area of risk for the Company in 2022 and the rating therefore remains unchanged during the year. The underlying investment strategy is kept under constant appraisal and the Board has a strategy session annually, in conjunction with the Manager. The strategy is communicated to interested parties on a regular basis via stock exchange announcements, the
interim and annual report and investor/consultant calls and visits. The portfolio has a material exposure to the office sector which has underperformed. The Manager has therefore commenced a rebalancing exercise and has sold £68.9 million of office
property to date (£54.6 million of which was post year-end), with further sales in this sector anticipated. The Continuation Vote and the Strategic Review, announced following the year end, are covered in the Chairman’s Statement. The Board looks forward
to updating shareholders on the progress of the Strategic Review and the arrangements for the Continuation Vote in due course, noting that there is currently no certainty as to the outcome of the Strategic Review There is significant ongoing work on the
Company’s ESG strategy. A peer-group leading GRESB (Global Real Estate Sustainability Benchmark) score in 2023 underlines the efforts made in ensuring ESG is fully integrated into the investment and management process. ESG enhancements form a key element
of asset-level strategies including the degasification of buildings, the installation of solar photovoltaic systems and incremental improvements to energy efficiency through cyclical refurbishment of holdings.
Risk unchanged in the year under review
Viability Assessment and Statement
The Board conducted this review over a five-year time horizon, a period
thought to be appropriate for a Company investing in commercial property with
a long-term investment outlook and with an average unexpired lease length of
4.7 years. The Company has its principal borrowings with L&G secured until 31
December 2024 and entered into a new agreement with Barclays and HSBC in
September 2023 for a term loan of up to £260 million which can only be used
to repay the L&G loan. This new loan is currently available until September
2025 with the option of two one-year extensions.
The Company is also subject to a Continuation Vote in 2024, which will be held
after the completion of the Board's Strategic Review (expected to be in Q3
2024). The date of the vote is therefore yet to be determined. If the
Continuation Vote is not passed, the Directors are required to put forward
proposals for the reconstruction, reorganisation or winding-up of the Company
to the shareholders for their approval within twelve months following the date
of the Continuation Vote. These proposals may or may not involve winding-up
the Company or liquidating all or part of the Company’s then existing
portfolio of investments and, accordingly, failure to pass a Continuation Vote
in 2024 will not necessarily result in the winding-up of the Company or
liquidation of all or some of its investments. There is currently no certainty
as to the outcome of the Strategic Review.
The Viability Statement has been prepared on the assumption that the Board
recommends continuation of the Company in its current form and that
shareholders approve the Board’s recommendation. The assessment also takes
into account the principal risks and uncertainties faced by the Company 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 further 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 since 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 significant repricing of
property valuations with the sector experiencing capital falls of 21.7 per
cent over the eighteen months to 31 December 2023, as measured by the MSCI UK
Quarterly Property Index (‘MSCI’).
A stress test was conducted over the five-year period to April 2029, on very
prudent assumptions. Taken into account that the portfolio has already
experienced a significant valuation adjustment in the last 18 months, the
modelling uses a severe but plausible downside scenario which takes into
account the illiquid nature of the Company’s property portfolio, further
significant future falls in the investment property values, the availability
of borrowings and substantial falls in property income receipts.
The viability assessment modelling used the following assumptions:
* The most negative of all property capital returns as measured by MSCI over
one to seven years using historic data that goes back to 1985, with capital
values falling by as much as 36.6 per cent. This takes into account that the
property market has already experienced capital falls of 21.7 per cent in the
last 18 months and therefore the most significant fall from the year end is a
further 14.9 per cent. Under this approach, there will also be years where a
modest recovery is forecast.
* The full £260 million term loan with Barclays and HSBC is drawn down to
repay the L&G loan at the end of 2024.
* Debt refinanced at 1 per cent above the current long-term debt forecasts and
assumed to be available for the full assessment period.
* 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. From between 9 and 37 months (depending on the
property).
* Dividends are maintained at current levels.
* Capital expenditure of c.£50 million over the five-year period, £4.5
million per annum relating to ESG related expenditure.
The results of this modelling were as follows:
NAV Dividend Cover LTV (Net)
2024 90.4p 67.8% 26.3%
2025 89.8p 47.6% 29.1%
2026 93.9p 56.9% 30.5%
2027 92.2p 82.8% 31.7%
2028 93.2p 93.4% 32.0%
Even under this negative scenario the Company remains viable with loan
covenant tests forecast to be passed and the current dividend rate maintained.
The level of the NAV remains positive under this negative scenario. The
Company 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 the option of reducing the level of dividends 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 Company's £260 million loan with L&G is available until December 2024.
The market value of the properties secured under this loan would have to drop
by a further 20 per cent from 31 December 2023 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 67 per cent. We are
comfortable that these covenants will continue to be met.
The Company’s £60 million revolving credit facility with Barclays and HSBC
(£30 million of which was drawn down at the year end and has subsequently
been repaid) is forecast to meet covenant tests during 2024. The market value
of the properties secured under this loan would have to drop by 36 per cent
from 31 December 2023 valuations before breaching the LTV test on the
facility. The loan interest cover test would only be breached by a fall in net
rental income of 30 per cent. The Board is comfortable that these covenants
can continue to be met.
The Company has a further £68 million of properties which are not secured
against any lender and could be transferred to the lenders to support covenant
tests if required.
Based on this assessment, and in the context of the Company’s business
model, strategy and operational arrangements set out above, the Directors have
a reasonable expectation that the Company will be able to continue in
operation and meet its liabilities as they fall due over the five-year period
to April 2029.
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 Company’s ability to pay its operational expenses, loan interest and
dividends. The Directors have examined significant areas of possible financial
risk including cash and cash requirements, refinancing of loans and review of
debt covenants, in particular those relating to loan to value and interest
cover. At 31 December 2023, the Company was in a net current liability
position because the current L&G term loan is due for repayment in December
2024. In September 2023, the Company signed up to a new £260 million term
loan with Barclays/HSBC which can only be drawn to repay the current L&G
loan. This term loan agreement expires in September 2025 and has the option
of two one-year extensions. Furthermore, the Directors note that section 9
of the Association of Investment Companies’ Statement of Recommended
Practice states it is usually more appropriate to prepare the financial
statements on a going concern basis unless a Continuation Vote has been held
and shareholders have voted against continuation. On this basis, the Board
believes it is appropriate to adopt the going concern basis in preparing the
financial statements.
Although the Board is confident that the Company will have sufficient
financial resources to meet its obligations due within twelve months from the
date of approval of the financial statements, the Continuation Vote is due to
take place in 2024. If the Continuation Vote is not passed by shareholders,
then the Board will be required to bring proposals to shareholders that may
include a restructuring or wind down of the Company in its current form. The
Directors’ note that the ultimate decision on the future state of the
Company is outside the control of the Directors’ and will be known only
after the Continuation Vote. The uncertain future outcome of the Continuation
Vote and the impact this has on the Company’s future state indicates the
existence of a material uncertainty that may cast significant doubt on the
Company's ability to continue as a going concern. The Company’s longer-term
viability is considered in the Viability Assessment and Statement above.
The auditors PwC have drawn attention to the note in the consolidated
financial statements discussing the material uncertainty regarding going
concern, but their opinion is not modified in respect of this matter.
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 Financial
Statements for the year ended 31 December 2023, of which this statement of
results is an extract, prepared in accordance with International Financial
Reporting Standards as adopted by the EU, 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
* Within the Annual Report and Financial Statements for the year ended 31
December 2023, 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 and Environmental, Social and Governance) 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 2023 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
26 April 2024
Balanced Commercial Property Trust Limited
Notes to the audited Consolidated Financial Statements
for the year ended 31 December 2023
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 at 31 December 2023. The interest rate swap entered
into to hedge the interest paid on the £50 million Barclays term loan expired
in July 2023.
The Group is exposed to various types of risk that are associated with
financial instruments. The most important types are credit risk, liquidity
risk, interest rate risk and market price risk. There is no foreign currency
risk as all assets and liabilities of the Group are maintained in pounds
sterling.
The Board reviews and agrees policies for managing the Group’s risk
exposure. These policies are summarised below and have remained unchanged for
the year under review. These disclosures include, where appropriate,
consideration of the Group’s investment properties which, whilst not
constituting financial instruments as defined by IFRS, are considered by the
Board to be integral to the Group’s overall risk exposure.
Credit risk
Credit risk is the risk that 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 4.6 per cent (2022: 4.7 per cent) of the current annual
rental income.
The Managers have a credit team 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; and
* management of the credit department determine the appropriate provision 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 2023 and 31 December 2022 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 2023, 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 debt
obligations. Debt obligations and the interest rate risk they confer to the
Group is considered by the Board on a quarterly basis. 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. Up until 14 September
2023, the Group also had a £50 million Barclays term loan on which the rate
was fixed through an interest rate swap at 2.367 per cent per annum (the swap
expired on 31 July 2023). This loan was repaid and cancelled on 14 September
2023. The Group entered into a new £60 million revolving credit facility
(RCF) with Barclays/HSBC in September 2023 and £30 million of this facility
was drawn at 31 December 2023. Interest payable on this new RCF is variable
and based on SONIA plus 1.80 per cent per annum. The RCF pays an undrawn
commitment fee of 0.63 per cent per annum. The Group also entered into a £260
million term loan commitment with Barclays/HSBC which is currently undrawn.
This term loan paid an undrawn commitment fee of 0.45 per cent per annum for
the period to 31 December 2023.
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 5.25 per cent as at 31 December 2023 (2022: 3.5 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.
1. Share Capital
There were 701,550,187 Ordinary Shares in issue at 31 December 2023 (2022:
701,550,187).
At 31 December 2023, the Company held 97,815,921 Ordinary Shares in treasury
(2022: 97,815,921).
1. Basic and diluted earnings per share
The basic and diluted earnings per Ordinary Share are based on the loss for
the year of £26,067,000 (2022: loss £94,377,000) and on 701,550,187 (2022:
720,956,458) Ordinary Shares, being the weighted average number of shares in
issue during the year.
1. 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.
1. These are not full statutory accounts. The full audited accounts for the
year to 31 December 2023 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
1. The Annual General Meeting will be held in the building of the Company's UK
legal advisers, Dickson Minto WS, at Dashwood House, 69 Old Broad Street,
London EC2M 1QS on Thursday 20 June 2024 at 12:30pm.
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.
2023 pence 2022 pence
Net Asset Value per share (a) 109.8 118.5
Share price per share (b) 72.5 88.5
Discount (c = (b-a)/a) (c) (34.0)% (25.3)%
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.
2023 2022
£’000 £’000
Loss for the year (26,067) (94,377)
Add back: Unrealised losses on revaluation of investment properties 56,940 129,096
Losses on sales of investment properties realised 4,533 5
Loss on maturity of interest rate swap 187 -
Capital and rental lease incentives amortisation 3,346 155
Interest bearing loans amortisation of set-up costs 953 642
Set up costs written-off on £100m Barclays loan 167 -
Set-up costs of loan extension and £320m Barclays/HSBC loan (3,931) -
Profit before investment losses and amortisation (a) 36,128 35,521
Dividends (b) 34,516 33,891
Dividend Cover on a cash basis (c= a/b) (c) 104.7% 104.8%
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.
2023 2022
£’000 £’000
Loss for the year (26,067) (94,377)
Add back: Unrealised losses on revaluation of investment properties 56,940 129,096
Losses on sales of investment properties realised 4,533 5
Loss on maturity of interest rate swap Other income 187 (119) - (42)
Profit before investment losses and other income (a) 35,474 34,682
Dividends (b) 34,516 33,891
Accounting Dividend Cover (c= a/b) (c) 102.8% 102.3%
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).
2023 2022
£’000 £’000
Interest bearing loans 290,000 310,000
Less cash and cash equivalents (41,717) (54,837)
Total (a) 248,283 255,163
Total assets less current liabilities and cash (excluding current interest-bearing loan) (b) 1,017,562 1,088,155
Net Gearing (c=a/b) (c) 24.4% 23.4%
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.
2023 2022
£’000 £’000
Investment management fee 5,968 6,861
Other expenses 7,336 6,479
Less non-recurring costs – impairment provision (538) 478
Less other non-recurring costs (239) (30)
Total (a) 12,527 13,788
Average net assets (b) 811,005 991,293
Ongoing charges (c=a/b) (c) 1.54% 1.39%
2023 2022
£’000 £’000
Investment management fee 5,968 6,861
Other expenses 7,336 6,479
Less direct operating property costs (4,728) (5,255)
Less non-recurring costs – impairment provision (538) 478
Less other non-recurring costs (239) (30)
Total (a) 7,799 8,533
Average net assets (b) 811,005 991,293
Ongoing charges excluding direct operating (c) property costs (c=a/b) 0.96% 0.86%
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.
2023 2022
NAV per share at start of year - pence 118.5 135.1
NAV per share at end of year - pence 109.8 118.5
Change in the year -7.3% -12.3%
Impact of dividend reinvestments +4.0% +3.1%
NAV total return for the year -3.3% -9.2%
2023 2022
Share price per share at start of year - pence 88.5 105.0
Share price per share at end of year - pence 72.5 88.5
Change in the year -18.1% -15.7%
Impact of dividend reinvestments +5.6% +4.0%
Share price total return for the year -12.5% -11.7%
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