BMO Commercial Property 26 April 2021

BMO Commercial Property Trust (BCPT) owns a concentrated portfolio of commercial property located in areas of strong economic fundamentals. The dividend was suspended during the first lockdown but, due to rent collection remaining stronger than expected, has now been restored to c. 70% of its pre-crisis levels. With the shares trading on a 34.5% discount, the annualised dividend yield is now c. 5.5%.

BCPT’s shares have traded on one of the widest discounts in the AIC UK commercial property sector throughout this crisis. It has a relatively low weighting to industrials, with the highest weightings being to offices and retail, which has been unhelpful during the pandemic. The trust has a highly concentrated, high conviction portfolio, with the largest holding being St Christopher’s Place, a mixed-use retail, restaurant and office space, off Oxford Street near Selfridges, which accounts for roughly 21% of the portfolio by value.

While 2020 was a tough period for the trust, with its portfolio seeing a fall of c. 9% in its capital values, the first quarter of 2021 has seen some stabilisation and, in fact, the portfolio’s valuation rose by 1.1% (see performance section). The manager reports that the tenants of their retail properties have seen strong trading since the lockdown lifted, while 17 May should see a number of new restaurants open in the St Christopher’s development.

BCPT has structural debt worth 33% of NAV. However, it currently has net gearing of 29% thanks to holding cash. As we discuss in the gearing section, a loan backed by St Christopher’s Place was extended from 2021 to 2022 in October.

Although BCPT’s discount has come in since the end of March, it remains the widest in the AIC UK Commercial Property sector at 32%, and we believe it could offer interesting catch-up potential if the reopening of the UK economy goes to plan. In fact, we suspect the two successful steps in the release from lockdown being completed may have contributed to the recent narrowing of the discount, as well as positive news on Q1 2021 revenue collection reported in the 2020 annual report.

BCPT’s shares have hitherto lagged as UK assets have generally enjoyed a re-rating thanks to the vaccination programme and the relatively smooth conclusion to the Brexit process. In our view the remaining wide discount reflects the low weighting to the industrials sector and higher weighting to retail than the peer group average. In this light, the positive NAV update reported on 23 April is encouraging. While retail remains weak, the sharp falls seen last year have slowed. Meanwhile the quick return of heavy footfall to the shops and restaurants that can open augurs well for 17 May when restrictions on indoor dining are lifted – and for the summer, when hopefully a full recovery will occur.

Over the longer term, the trend away from bricks and mortar retailing may limit NAV recovery potential in that sector, and the board has stated that some shift in sectoral positioning should be expected. However, the discount remains very wide and the board notes the improving outlook for the dividend.