Balanced Commercial Property 12 June 2023

Balanced Commercial Property Trust (LON:BCPT) is a diversified UK commercial property portfolio but has a strong streak of active management in the way the portfolio is constructed, with the manager’s strategic views expressed very clearly. If this was an equity investment trust we might say that the ‘active share’ was quite high. Notably, the trust has a strategic holding in St Christopher’s Place, a Central London mixed-use development very close to Oxford Street, as well as holdings in prime offices currently seeing accretive asset management. It has also developed a long-term bias towards retail warehouses within its retail exposure, one of the bright spots in a sector which has had a challenging few years due to the pandemic and secular changes in consumer behaviour.

In 2021 and 2022 BCPT successfully rebalanced its portfolio, selling a number of office and retail assets at good valuations in order to increase its exposure to the industrial sector, in particular logistics warehouses, which form an increasingly important segment of the industrial sector and which have very strong tenant demand. BCPT also retains a strong bias toward retail warehouses, which is another segment of the property market with strong tenant demand.

BCPT’s relatively conservative balance sheet has allowed it to utilise share buybacks at wide discounts in 2022 to successfully enhance NAV and earnings per share, with the current discount to the net asset value of c.31% very much in line with its peer group.

BCPT pays dividends monthly. The current yield is 6.0% .

BCPT has never tried to be a facsimile of the overall UK property market, with strong strategic views playing a big part in how its portfolio is constructed, and of course that unique Central London St Christopher’s Place asset. During Covid, owning a retail-dominated Central London asset probably caused a few sleepless nights, but assets in locations such as this can form part of a very long game in property and interestingly the valuation of this asset is 20% below its pre-covid level and is performing well, suggesting there is value in the portfolio as well as in the discount.

Although we know investors like investment trusts with an income to use reserves to smooth dividend payments, we think BCPT’s conservative approach during the pandemic was the right response to an unpredictable situation, and certainly appropriate for a core diversified fund that utilises leverage.

In the not-too-distant future BCPT will need to refinance its current debt facilities, with its interest rate swap expiring this year, and its main long-term loan reaching maturity at the end of 2024. Although this is likely to result in higher interest costs, BCPT is conservatively geared and the board has taken a balanced approach to using cash, buying some shares back in 2021 and 2022 at very large discounts, but more recently recognising that retaining cash is important when credit conditions tighten. With property valuations, in our view, perhaps close to their nadir, and with a portfolio mix of strategic assets and high-demand sectors, we think BCPT’s current discount and yield make for an interesting entry point for long-term investors.