BMO Real Estate Investments (BREI) owns a portfolio of UK commercial property with strong biases to the industrials sector and the South East of England. The former has been the most resilient sector in the current crisis, while the latter is the economic engine of the country.
The manager, Peter Lowe, considers his approach a quality strategy, and he aims to find properties which should be in demand over the course of a cycle thanks to their strong locations, flexibility of use and ESG credentials.
BREI has fallen onto one of the widest discounts in the sector of c.39%. This is despite its strong performance prior to the pandemic (as discussed in the Performance section) and 43% of the portfolio in the outperforming industrials sector. Since taking over in 2016, Peter has increasingly favoured this area at the expense of retail, and he made two disposals as recently as December which helped the trust build up cash prior to the emergence of the pandemic.
Commercial property rents are under pressure thanks to the impact of the pandemic, particularly in the retail and office sectors. BREI has cut its dividend for Q1 2020 (calendar year) by 50%. After the cut, the quarterly dividend amounts to a 4% yield on an annualised basis.
The gearing of 25% on an LTV basis (33% on an NAV basis) is in line with most sector peers. As discussed in the Gearing section, the loan is secured against a portfolio rather than individual properties with large falls in NAV necessary for the covenants to become an issue.
This is a troubled time for commercial property, with retail and offices in particular likely to report poor newsflow in Q2 and perhaps Q3. BREI’s 50% dividend cut may seem drastic, but it should hopefully mean the pain has been taken early, with the 4% yield reasonably attractive given the possibility for rental collection to improve at the end of 2020 should the economic recovery from the pandemic accelerate.
In our view BREI stands out in the sector as a potentially interesting value play. Compared to peers the retail exposure is not excessive, the gearing is moderate and the portfolio biased to prime locations, yet it trades on a c. 39% discount. As a smaller trust it is less liquid, which may have affected the discount, and we think investors may not have recognized how much the trust has reduced its retail exposure by over the past few years.
In our view, a more reasonable discount in the current environment would be the c. 25% average of the generalist peers. Even at this level, given the tilt to industrials and prime locations, we think that could prove to be an attractive entry point over a medium to long term view.
|Wide discount provides significant protection against NAV falls||The outlook for the retail and office commercial property sub-sectors is poor and visibility low|
|Portfolio biases to logistics and prime locations could do well in troubled economy||Rent collection for the quarter ending in June is likely to be down, and the prospects for Q3 depend on the pace of unlocking|
|Conservative gearing levels and cash on the balance sheet give room for manoeurve||The small size of the trust could increase discount volatility relative to peers|