BMO Commercial Property declines to close high discount for now

The investment trust’s discount widened to 30% in 2020. 

BMO Commercial Property Trust (LSE:BCPT) has decided not to buy back shares to close its large discount, according to the trust’s newly released end-of-year results.

In what has been a tough year for property funds all round, BMO Commercial Property saw particularly poor results. The trust, which is included in the ii Super60 rated list, reported a portfolio total return of -4.8%. In contrast, the MSCI UK Quarterly Property Index provided a return of -2.0%. Performance by other measures was also poor, with net asset value total return sitting at -8.1% and share price total return at -28.3%.

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The chairman of the trust noted: “The disruption caused by the pandemic, coupled with persisting concerns on what a post-Brexit trading environment would mean for the UK, were the two significant factors weighing heavily on the property market.”

However, alongside a generally poor backdrop, the trust was hampered by its portfolio exposure. Notably, the trust has a relatively higher weighting to the retail and office parts of the property market. These two areas were among the hardest hit by the pandemic and resulting lockdowns.

In particular, the trust’s share price was hurt by its exposure to London’s West End through St Christopher’s Place. The trust notes: “The St Christopher’s Place Estate, our largest investment, fell overall by -17% in the year with its two Oxford Street retail units being particularly hard hit (-33%) as yields moved out and rental values were significantly downgraded.”

In contrast, the trust had a lower weighting to the strongly performing logistics sector.

The poor backdrop for property also saw the trust’s discount significantly widen. As the year-end results show, the trust ended 2020 on a discount of almost 32%. In contrast, the trust ended 2019 on a discount of just 11.7%.

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Despite the widening discount, the trust has declined to buy back shares for now. They note: “The persistency of the discount is a primary concern of the Board and is reviewed at each Board Meeting. The option of share buybacks was regularly considered but, in the face of such heightened uncertainty, the immediate preference was to strengthen cash resources and invest in accretive asset management initiatives.”

However, buybacks may be coming. The trust notes that following a review of its strategy in 2020 it expects to sell and rebalance some of its holdings. The proceeds of this sale may be used to buy back shares to narrow the discount, the trust said.

Dzmitry Lipski, interactive investor’s head of funds research, says: “Following the market shock last year, the BMO Commercial Property Trust continued its recovery and has significantly improved its short-term return profile, with the current discount just over 30% down from above 60% in late Q1 2020. The fact that the board has acknowledged the discount is still wide relative to peers and confirmed that buybacks will be considered from any disposal proceeds, gives some level of comfort for investors. 

“The decision by the manager to focus on strengthening cash resources also delivered positive results as the trust reintroduced dividends at 0.25p, 50% of the previous level in August and raised them to 0.35p in December after suspension in April. The current dividend of over 5% is very attractive and fully covered. With rent collections continuing to improve (in Q1 is currently 84.7%), the portfolio is well positioned to begin its recovery once the restrictions surrounding Covid-19 are lifted.”