BMO Commercial Property Trust (BCPT) owns a high conviction portfolio of actively managed, core commercial property assets. The dividend has been maintained at 6p per annum since its launch in 2005, which amounts to a yield of 5.1% on the current share price. Dividends are paid monthly.
Manager Richard Kirby, who is a director of property funds at BMO Real Estate Partners, has been at the helm of the portfolio ever since it launched, and has maintained a concentrated portfolio of assets spread across the traditional property sectors but focused on central London, as well as the regions with the greatest growth potential in their local economies.
The portfolio’s biggest exposure (at approximately 20% of the portfolio) is St Christopher’s Place in London’s West End – a unique mix of retail and restaurant space just off Oxford Street. This contributes to an overall exposure of 59% of the portfolio invested in London and the South East. Richard believes this geographical concentration should translate into resilience in an economic downturn. The highest sector exposure is to offices and then to retail. We provide more details on the spread of the assets in the Portfolio section.
Richard believes the outlook for returns in the commercial property market is moderate in the near future, and has been focusing on asset management initiatives to generate returns from existing holdings rather than making new purchases. The trust has sold non-core assets over the past year and built up cash levels, reflecting the manager’s cautious stance and belief that we are in the latter stages of the economic and property cycle.
Over the summer of 2019 the discount widened significantly, from 11% at the start of the year to over 20%, although it has now come back down to 12%. As such, it remains significantly wider than the average of the AIC Property – UK Commercial sector (for more details, see the Discount section).
The trust has made significant moves to integrate ESG within its investment process in recent years, with BMO Real Estate Partners implementing a responsible property investment (RPI) strategy in 2017. We give full details in the ESG section.
BCPT offers core exposure to the UK commercial property market, with a portfolio tilted towards the more economically successful regions of the UK and with a balanced portfolio across all the core sectors. As such, it could be expected to be more defensive in its behaviour in an economic downturn, such as the manager believes we may be facing. The current discount incorporates a ‘Brexit premium’ which we believe may prove to be an interesting long-term entry point for discount players. Recent political sentiment has led to concerns about a hard Brexit receding, which for BCPT has meant that the discount has closed quite significantly from its widest point.
|Exposure to economically strong regions could provide defensive qualities||Retail exposure could cause further write-downs|
|Good development potential in the trust's largest holdings||Substantial 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|