BMO Commercial Property (BCPT) has promised to start buying back its shares if their wide discount to net asset value (NAV) persists in the recovery from Covid-19. Shares in the GBP624m diversified UK real estate investment trust (Reit) languish at a 32% discount below their estimated current NAV, its retail properties having been hit hard in last year's lockdowns while working from home and social distancing overshadowed its offices. Annual results this week showed the NAV total return fell 8.1% last year as the suspension and cut in the trust's monthly dividend in response to rent reductions from distressed leisure and retail tenants took their toll.
Shareholders suffered a 'disappointing' 28.3% decline as the shares de-rated amid the profound uncertainty for commercial property. Although the company sought to reassure investors that its core, high quality assets were well placed as the UK economy re-opened, chairman Martin Moore said the Reit would prioritise share buybacks as it re-postioned the portfolio. 'Following a thorough review of strategy during 2020 a higher level of transacting can be anticipated in the coming year as we move to recycle capital and adjust sector weightings.
'Particular priority will be given to using sales proceeds to buy back the company's shares if the high level of discount persists and if the board believes that this course of action is in the best interests of all shareholders,' Moore said.
Empty Oxford Street
Broken down, BCPT's capital return tumbled 9% compared with a 6.2% decline in the MSCI UK Property index, while the portfolio's total return (excluding the effect of gearing, or borrowing) was down 4.8% against a 2% fall in the benchmark. The Reit was tripped up by its largest holding: St Christopher's Place, a hub of retail stores and restaurants located off London's main shopping destination Oxford Street (pictured above). The value of the estate fell 17% last year as the government shut down shops, restaurants and bars in a bid to halt the spread of coronavirus.
Even though the UK is now in the second stage of reopening, fund manager Richard Kirby said the shutdown has had a more permanent impact on rent on Oxford Street. 'Rental values along the street have rebased, falling from a peak of GBP990 per square foot to GBP750 per square foot,' he said. There were also some 'tenant casualties' over the year, including Italian eatery Carluccio's, which entered into a 'company voluntary arrangement' (CVA) and is looking to secure a buyer for the business.
Shoe store Aldo went into administration but had paid rent to the end of January, and restaurant chain Pizza Express also has a CVA but remains open with no impact on rent. Despite the problems of falling rents and vacancies, Kirby was confident the property will benefit from an extension of the temporary road closure that entices people to sit outside, a kickstart in the form of a GBP150m Oxford Street improvement plan, and the opening of the Queen Elizabeth tube line next year. 'We believe Central London will recover and prime West End real estate with strong hospitality linkages such as St Christopher's Place will benefit from both an initial bounce back when restrictions are lifted and from a longer-term recovery,' he said.
'A substantial number of properties in the portfolio have significant asset management opportunities which need to be worked through over the next couple of years.'
Temporary vs permanent change
With retail property already out of favour before the pandemic hit, Kirby (pictured) warned 'the adjustment in retail may have further to go' but said investors must distinguish between 'coronavirus-related change and permanent structural change'. In order to stay on the right side of the changes, he is repositioning the retail spaces to 'grocery and convenience-led retail propositions'.
The largest sector weighting in the fund is to offices, which make up 42% of the portfolio, and this has been equally challenging as the government advised those who can to work from home, while companies downsized their offices in anticipation that full-time office work will be a thing of the past for many. Central London has seen office availability increase two-fold with the vacancy rate now above 7% but Kirby's biggest office headache has been outside London: the Leonardo Building in Crawley in Sussex, which is rented to Virgin Atlantic. 'Much of lockdown 1.0 was spent negotiating with Virgin as part of their corporate financial restructuring,' said Kirby.
'We contracted a legal agreement granting them a 12-month rent-free period, spread over five years by rebasing the rent from GBP23 to GBP18 a square foot.' As the country opens back up, Kirby is seeing an increasing need for 'flexibility in the lease structure, whether manifested as shorter lease lengths or turnover rents, or indeed as re-purposing' which will mean 'forensic attention' to the management of properties will become paramount.
Numis analyst Priyesh Parmar said investors were waiting for clarity on the monthly dividends. These were uncovered by rental income before the pandemic, but following a four-month suspension and 30% cut, with rent collection steadily improving, the shareholder payments were now 163% covered by earnings.
Nevertheless, for the 'forseeable future' the board has decided to maintain the monthly dividend at the 0.35p it has paid since December.
This puts the shares, at today's 79.5p, on an attractive forward yield of 5.3%.
'Given the rebasing of rents and the fact that the pre-Covid-19 dividend rate was uncovered by earnings, we believe a sustained re-rating will rely on clarity on the dividend that the portfolio can comfortably support over the longer-term,' the analyst said.