Balanced Commercial Property Trust has posted annual results for 2022 and, in line with the property sector, saw the valuation of its portfolio hit in the second half of the year due to higher interest rates.
Highlights include:
- A net asset value (NAV) total return of -9.2%
- NAV per share as at 31 December 2022 of 118.5 pence, down 12.3% from 135.1 pence per share as at 31 December 2021
- Portfolio value down 10.5%
- Share price total return of -11.7%
- Dividend paid of 4.7 pence (up 10.6% on 2021)
- 104.8% dividend cover on a cash basis (102.3% on an accounting basis)
- Loan to value (LTV) was 23.4%
- Weighted average interest rate was 3.6%.
Chairman’s statement:
Paul Marcuse said: “The second half of 2022 saw a marked reversal of the positivity seen in the early part of the year. As the year progressed, geopolitical challenges and inflationary pressures resulted in rising interest rates and slowing economic growth. This had an inevitable impact on consumer confidence and economic activity.
“September’s mini budget marked a distinct turning point and proved the catalyst for one of the worst quarters of capital performance from the UK commercial real estate market on record. A significant increase in gilt yields compounded the sustained tightening of monetary policy and precipitated a rapid pricing correction across the real estate sub-markets. October 2022 saw the largest monthly decline in capital value on record (as measured by the MSCI Monthly index), closely followed by November 2022 as the second, as the investment market was marred by uncertainty and illiquidity that have spilled over into the beginning of 2023.
“The capital value declines were particularly marked in the industrial and logistics sector and the retail warehousing sector. These sectors had experienced the highest levels of yield compression in the first half of the year and had performed strongly in recent years.
“Against this challenging economic backdrop, the company has delivered a NAV total return of -9.2 per cent and the NAV per share as at 31 December 2022 was 118.5 pence, down from 135.1 pence per share as at 31 December 2021 (a decrease of 12.3%).
“The potential downside risk attached to real estate asset values has been reflected in share prices and share price volatility within the sector. At the year-end the discount was 25.3%, compared to 22.3% at 31 December 2021. The share price total return for the year was -11.7%. The share price discount remains a major frustration and a reflection of the challenges that the real estate sector has been facing, exacerbated by the rising interest rate environment. Against this market background, the Board will continue to consider value-enhancing strategic opportunities, alongside supporting the Managers in investments and significant asset management initiatives at portfolio level.”
Portfolio performance
“The company’s portfolio delivered a total return of -6.5% over the 12-month reporting period, outperforming the MSCI UK Quarterly Property Index return of -8.9%. Outperformance was driven by a capital return of -10.5% against the Index return of -12.4% and an income return of 4.5% against the Index at 4.0%.
“The balanced nature of the portfolio has proven to be a structural benefit and the Managers have executed a number of accretive asset management activities to deliver both capital and income outperformance over the year.
“The performance of the largest asset within the portfolio, the mixed-use holding at St Christopher’s Place in London, has been particularly notable. Having endured a challenging period since the on-set of the Covid pandemic, it has been the top performing asset over the 12 months.
“The Company has identified a number of assets as potential disposal targets as part of a capital recycling strategy, primarily focussing on a down-weighting of the portfolio’s office exposure. However, any future disposals are to be executed within a supportive market context and the Company will continue to review its investment strategy as market conditions evolve.”
Borrowings and Cash
The Company has a £260m term loan in place with L&G which matures in December 2024 and the Board has engaged debt advisors to consider the financing options available at this early stage. The Company believes that there is lender appetite for this type of debt based on advice received and is monitoring the financial markets as the refinancing date moves closer.
The Company also has a £50m term loan with Barclays, along with an additional undrawn £50m revolving credit facility. The Barclays facility expires on 31 July 2024, with the Company having taken up the option earlier this month of a one-year extension. As at 31 December 2022, the Company’s LTV was 23.4% and the weighted average interest rate on the Group’s total current borrowings was 3.6%.
At 31 December 2022, the Company had £54.8m of available cash.
Outlook
Marcuse said: “The Bank of England has continued to raise interest rates in response to persistent inflationary pressures and economic output has remained muted. However, the labour market remains tight, inflation is slowing as energy costs abate and global supply chain pressures are easing. The Bank of England is still anticipating a fall in GDP throughout the rest of 2023 and into Q1 2024, although not at the levels previously forecast.
“Across the real estate sectors, occupational markets have generally been more robust than might have been expected, and investment market activity at least in some sectors has rebounded in the early stages of 2023. A short period of negative economic growth would limit the impact on the occupational markets and on this basis, we are hopeful that the UK real estate sector will begin to see a recovery in the second half of 2023, particularly if there is not sustained tightening in the credit markets.
“In the meantime, income is expected to be the primary driver of total returns and remains a key focus of Company strategy. Following the disposal of ex-growth properties in 2021, the portfolio is delivering a steady income during uncertain markets, with strong reversionary potential. The Managers believe there to be significant latent value within the portfolio to unlock through accretive redevelopment, securing key leasing initiatives, repositioning assets and making ESG-led investment.
“Our ability to deliver these initiatives is supported by the quality of our underlying asset base. The resilience of a balanced, diversified portfolio provides comfort in less certain markets craving a return of greater stability and confidence.”
BCPT : Balanced Commercial Property Trust results reflect difficult period for real estate