BMO Commercial Property Trust (BCPT) owns a high-conviction portfolio of actively managed, core commercial property assets. Following the suspension of the dividend at the start of the pandemic, it has now been restored at the level of 3p annualised, which amounts to a 4.6% yield on the current share price. The dividend is paid monthly.
BCPT has fallen onto one of the widest discounts in the commercial property sector, currently 46%. This may be due to its relatively high retail exposure and limited industrials exposure, respectively the most and the least affected sectors by the lockdowns and aftermath. However, managers Richard Kirby and Matt Howard have built a portfolio focussed on high-quality assets in prime locations, which would ordinarily be expected to be defensive during a recession. The main exposures are to the West End, largely through the largest holding in St Christopher’s Place off Oxford Street, and to the South East.
A recent trading update for the second quarter reported valuation falls of 3% on the portfolio, with the retail and leisure sectors worst hit and the offices and industrials sectors relatively resilient. However, more than 80% of the rent for the lockdown months was collected, with collection for Q3 proceeding at the same rate as in Q2. We give more detail in the Dividend section.
BCPT has 22.9% net gearing on an LTV basis, which translates to 29.7% on an NAV basis. All covenants have been met, and the shorter-term facilities have been extended, with the lender being sympathetic regarding the current economic situation and the potential impact in the coming months.
BCPT’s discount of in excess of 45% seems to us to be pricing in an Armageddon-like scenario. While the exposure to retail and limited exposure to industrials is not helpful, we think the prime nature of the portfolio means it should come through the other side of the recession in better shape than the sector breakdown would suggest. Although there is gearing in place, valuations would still have to fall by around 34% for the NAV to decrease to the current level of the share price. To our mind there could be value in the price at these levels, although clearly the coming months are likely to be difficult as the full impact of the recession becomes clear and we discover whether a second wave will cause further restrictions on trading and travelling.
Richard describes this recession as a crisis of income, not of capital values. We note that rental collection has beaten the manager’s expectations at the start of the crisis, allowing the reinstatement of the dividend and illustrating that there is income-generating potential in the portfolio even in a crisis. Clearly there are still challenges ahead, but we would hope that the prime nature of the properties would see income generation improve as the economy recovers.
|Exposure to economically strong regions could provide defensive qualities
||Commercial property likely to see further write-downs during the recession
|Good development potential in the trust’s largest holdings
||Structural gearing could be a headwind in a falling market
|The trust’s size provides a larger opportunity set and greater liquidity
||Concentration magnifies the risks to the portfolio from individual properties