BMO Commercial Property 23 February 2022

BMO Commercial Property Trust (BCPT) owns a diversified portfolio of commercial property, which has experienced a sharp rebound in capital values following the disruption of the pandemic (see Performance).

Manager Richard Kirby is engaged in a strategic rebalancing of BCPT’S portfolio with recent acquisitions boosting the exposure to the industrials sector. Industrial and retail warehouse exposure is expected to rise further as Richard reinvests cash from successful disposals - the sectors with the strongest momentum behind them in the post-pandemic economy. Richard currently has c. £111m cash to invest, plus unused Gearing facilities, putting him in a strong position to grow the trust’s income.

The pandemic saw commercial property trusts slash their dividends. BCPT’s was suspended for four months but has been steadily built back to 75% of its pre-pandemic levels, with the board stating the opportunity for a further increase will be assessed as the trust reinvests the surplus cash from recent sales. Annualising the dividend at its higher level gives a prospective yield of 4.1% - higher than the number displayed by some data sources, which sum payments over the past year. Unusually, BCPT pays a monthly dividend.

Despite the recent rebound in NAV performance, and despite a strong rally in the shares from the pandemic lows, the discount remains wide at 13.8%.

BCPT’s disposals mean its net gearing has dropped dramatically to c. 18%. This reduces the sensitivity of the NAV in the short term if capital values do fall.

We think the lingering discount could make BCPT, along with other generalist commercial property trusts, one of the last chances to get in on a COVID-19 recovery play. A huge amount of capital is being invested in real assets across infrastructure, renewables and similar sectors, with the shares of these trusts trading on significant premiums. However, commercial property offers many of the same attractive characteristics, and yet the trusts are largely on discounts. Notable is the good inflation protection offered in property, where many leases have explicit RPI linkage or offer the ability for inflation-busting increases when released – unlike high yielding fixed income. We think as lingering concerns about the pandemic fade (even if it takes a quarter or two) and dividends are restored even further, discounts like BCPT’s are likely to be seen as anomalies.

BCPT’s portfolio has experienced three solid quarters of NAV growth already, albeit recovering from a torrid 2020. While the flagship holding St Christopher’s Place has been weak in recent quarters, strong footfall and strong trading before the omicron wave give reasons for optimism, and the opening of Crossrail later this year could boost the area further. Richard is in a strong position to refashion BCPT for the future and boost the income with further investments. With the dividend at 75% of pre-pandemic levels, there will be income coming online from the forward funded development at Burton-upon-Trent later this year (see Portfolio), and Richard has a significant cash pile to make further investments too. Should the board raise the dividend further in the coming months, we think this could lead to the discount narrowing.