Balanced Commercial Property Trust Ltd - Results in Respect of the Year Ended 31 December 2023 (audited)

Headlines

• Earnings per Ordinary Share were -3.7 pence per share for the year ended 31 December 2023 (2022: -13.1 pence per share).
• Net asset value per Ordinary Share was 109.8 pence as at 31 December 2023 (2022: 118.5 pence).
• Rental income was £59.2 million for the year ended 31 December 2023 (2022: £58.7 million).
• Net asset value total return of -3.3* per cent for the year ended 31 December 2023 (2022: -9.2 per cent).
• Share price total return of -12.5* per cent for the year ended 31 December 2023 (2022: -11.7 per cent).
• From October 2023, the rate of monthly interim dividends was increased to 0.44 pence per share.  This represented an increase of 10.0 per cent compared to the previous monthly dividends.
• Dividend cover on a cash basis was 104.7* per cent for the year ended 31 December 2023 (2022: 104.8 per cent).
• The Company signed up to a new £320 million Debt Facility provided by incumbent lender Barclays and a new lender HSBC.
• Disposed of two office holdings at an aggregate sales price of £14.3 million for the year ended 31 December 2023.  A further two office disposals were completed post year-end with an aggregate sales price of £54.6 million.  These disposals are part of the strategic repositioning of the portfolio.
• Major development scheme at Strategic Park, Southampton completed, delivering a rent roll in excess of £1.4 million per annum and a 12 month total return of 13.4 per cent.
• 4 per cent increase in Scope 1 and 2 absolute emissions (-26 per cent in 2022).  Emissions intensity reduced by 16 per cent (-13 per cent in 2022).

*see Alternative Performance Measures

Chairman’s Statement

The macro-economic risk factors that were prevalent in 2022 began to ease during 2023. While the UK slipped into a shallow technical recession in the second half of the year, this is forecast to be short and inflation, which has weighed heavily on financial markets, fell towards the end of the year.

Uncertainties linger as interest rates remain at a 15-year high, the rate of inflation is still above target, and we are in an environment of significant geo-political risk. The last eighteen months have been challenging for real estate as investment performance suffered due to rising interest rates leading to yield increases and a repricing of the asset class. Investors faced the impact of higher borrowing costs and reduced capital flows as the attractiveness of real estate deteriorated. As a consequence, UK investment volumes were low by recent measures with some properties proving to be highly illiquid. On a positive note, the occupational markets have proven to be more resilient than many expected.

Company Performance

Against this challenging economic and property market backdrop, the Company has delivered a net asset value (‘NAV’) total return of -3.3 per cent for the year. The NAV per share as at 31 December 2023 was 109.8 pence, down 7.3 per cent from 118.5 pence per share as at 31 December 2022.

The share price total return for the year was -12.5 per cent with the discount to NAV standing at 34.0 per cent at the year end, as the negative sentiment towards the commercial real estate sector continued to affect the rating of the shares. The Board has continued its focus on rebalancing the portfolio with the disposal of two office holdings in December 2023 and a further two office sales since the year end, and there has been positive movement in the share price in 2024. At the time of writing the share price is 78.7 pence per share, a discount of 28.3 per cent to the NAV.

The following table provides an analysis of the movement in the NAV per share during the year.

*Based on the average number of shares in issue during the year.                                                          

Portfolio Performance

The Company’s portfolio delivered a total return of -0.7 per cent over the year, outperforming the MSCI UK Quarterly Property Index to December 2023 (‘MSCI’) return of -1.5 per cent. Relative outperformance was driven by an income return of 5.4 per cent against the Index return of 4.7 per cent, with capital returns in line against the Index at   -5.9 per cent.

We are at a stage of the cycle where income is driving returns and as such it was pleasing to see the portfolio’s net operating income grow by 5.3 per cent with all sub-sectors delivering rental growth and the completion of 76 leasing initiatives across the portfolio.

Despite the relative outperformance against the Index, the portfolio was negatively impacted by the Company’s exposure to the office sector. This is being addressed with momentum in our sales programme, which as mentioned above has seen the disposal of two office holdings in December 2023 and a further two sales since the year end, raising total proceeds of £68.9 million. The portfolio’s exposure to the office sector has fallen to 22.2 per cent at the time of writing, which is less than the Index weighting (24.2 per cent). We anticipate further sales activity within the capital markets as we continue to recycle capital to improve performance.

Dividends

The Company paid twelve interim dividends totalling 4.92 pence per share during the year, being nine monthly dividends of 0.4 pence per share, followed by a 10 per cent increase and three further monthly dividends at a rate of 0.44 pence per share. The level of dividend cover for the period was 104.7 per cent on a cash basis and the Board will continue to keep the level of dividend under review.

Borrowings

The Company has a £260 million term loan in place with L&G which matures on 31 December 2024. As previously announced, the Company signed up to a new debt facility in September 2023 provided by incumbent lender, Barclays Bank plc, and a new lender, HSBC UK Bank Plc. This facility is in two tranches and includes a committed £260 million Term Loan, which can only be drawn to refinance the existing £260 million L&G Loan.  There is also a £60 million Revolving credit facility, £30 million of which was drawn down at the year-end and has subsequently ben repaid.

The new debt facility enables the Company to retain the competitively priced L&G Loan which is fixed at 3.32 per cent up to maturity, whilst also ensuring the future liquidity needs of the Company are fully funded at an acceptable commitment fee.

As at 31 December 2023, the Company’s loan to value, net of cash (‘LTV’) was 24.4 per cent and the weighted average interest rate on the Group’s total current borrowings was 3.8 per cent.

Continuation Vote

In accordance with the Articles of Incorporation, the Directors are required to put an ordinary resolution to shareholders in relation to the continuation of the Company in 2024 (the "Continuation Vote"). If at that meeting such resolution is not passed, the Board shall, within twelve months of such meeting, convene an extraordinary general meeting of the Company at which a special resolution shall be proposed to the members of the Company for the winding up of the Company and/or a special resolution shall be proposed to the members of the Company for the reconstruction of the Company, provided that such resolution for the reconstruction of the Company shall, if passed, provide an option to Shareholders to elect to realise their investment in the Company in full. The Board’s assessment of going concern can be found below.

On 15 April 2024, the Board announced that it has been carefully considering for some time, with its advisers, its strategic options to enhance value for its shareholders, and that it has formalised these deliberations into a strategic review process (the "Strategic Review") (further details of which are set out below).

Once the Strategic Review has been completed, the Board will convene a general meeting of the Company at which the Continuation Vote will be proposed.

Strategic Review

Despite the Company's successful and ongoing strategic disposal programme, which has reduced the portfolio's exposure to the underperforming office sector, and recent improvements in the Company's share rating, its share price remains at a material discount to the Company's net asset value. The Board, together with its advisers, has therefore been carefully considering the Company’s strategic options for some time.

As part of the Strategic Review, the Board will consider all options including, but not limited to, continuing the Company with further actions to narrow the share price discount to NAV; selling the Company's portfolio or subsidiaries (or portion thereof); returning capital to shareholders; changing the Company's investment strategy and/or management arrangements; commencing a managed wind down; selling the entire issued share capital of the Company or undertaking some other form of consolidation, combination, merger or comparable corporate action.

Shareholders are welcome to send their comments to chairmanBCPT@georgeson.com, in particular on their priorities for their investment in the Company and the options described above.

We have commenced this Strategic Review to determine the best way to enhance value for shareholders, after which the independent Board will determine the best way forward for the Company as a whole. The outcome of the Strategic Review is expected to be announced in Q3 2024, and thereafter the Continuation Vote will also be held. The Board looks forward to updating shareholders on the progress of the Strategic Review and will make further announcements in due course, noting that there is currently no certainty as to the outcome of the Strategic Review.

Board Composition

Karima Fahmy was appointed as an independent non-executive Director of the Company with effect from 19 January 2024. Karima is a corporate lawyer with extensive experience of the UK property sector.

Following a significant increase in other time commitments, Hugh Scott-Barrett retired from his role as non-executive Senior Independent Director in February 2024. I would like to thank Hugh for his considerable contribution to the Company and wise counsel over recent years. I am pleased to confirm that Isobel Sharp, who is Audit and Risk Committee Chair, has also assumed the role of Senior Independent Director.

Environmental, Social and Governance (‘ESG’)

Every Board director is a member of the ESG Committee which is established to ensure that the Managers are driving year-on-year improvements in portfolio performance, process and governance.  The Board was pleased to note the Company’s return to the top of its Global Real Estate Sustainability Benchmark peer group in 2023, achieving a score of 79/100, conferring a three green star rating.

As work has continued to future-proof the portfolio in line with our Net Zero Carbon target and the Minimum Energy Efficiency Standards, the Company is also focused on the ESG fields of social, biodiversity and transitional risk where we expect to make meaningful progress during the upcoming year. Given the composition and quality of the portfolio, the Board and Managers remain of the view that the Company’s asset base is well-positioned in relation to the evolving ESG landscape.

Outlook

Market participants across real estate and the wider financial sectors have been keenly monitoring the outlook for UK interest rates, with the potential for a cut in the base rate in the second half of 2024. There are also upcoming general elections, most notably in the UK and US, which add an extra layer of complexity to the outlook.

The year ahead will most likely see continued divergence in performance across property sectors, sub-sectors and markets. Asset fundamentals rather than market yield compression should provide a platform for value creation, and we believe that this is an opportune time for a diversified strategy.

Paul Marcuse

Chairman

26 April 2024

This announcement may contain forward-looking statements with respect to the financial condition, results of operations and business of the Company. Such statements involve risk and uncertainty because they relate to future events and circumstances that could cause actual results to differ materially from those expressed or implied by forward-looking statements. The forward-looking statements are based on the Directors’ current view and on information known to them at the date of this document. Nothing should be construed as a profit forecast.

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