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BMO Commercial Property Trust has difficult story to sell

The Times

So, what’s in a name? In the case of Foreign & Colonial, certainly not speed. As of last week, F&C Commercial Property Trust has become known as BMO Commercial Property Trust — five years after the fund manager was taken over by BMO Financial, part of Bank of Montreal. It is one of two thematic investment trusts to undergo the rebranding. Whether shareholders will detect any change in its performance under a new moniker is another matter.

F&C Commercial Property Trust, as was, was established in March 2005. Its aim is to generate capital and income growth for shareholders by investing in an array of commercial property in the UK. At 5 per cent, it certainly has an attractive yield.

It has 38 properties in its portfolio, the most valuable of which is St Christopher’s Place, the mixed-use estate in London W1 that is home to a string of high street brands, as well as boutiques, restaurants and offices. It also owns retail warehouses in Newbury, Berkshire, and Wimbledon and offices in Aberdeen. To that extent, its portfolio is diverse: just under 40 per cent is held in offices and nearly 18 per cent in industrial sites. Both generated healthy returns for the trust last year. What will be of more interest to investors, though, is its exposure to retail, which is just over 33 per cent, if large retailing warehouses are included.

This means, inevitably, that the trust has felt the impact of the crisis gripping the high street. Tenants on its retail parks in Newbury and Solihull, in the West Midlands, include New Look, Mothercare and Homebase, which have used company voluntary arrangements to shut shops, and Poundworld, which collapsed into administration. This has put pressure on rents and in some cases has led to vacancies, most recently at 4.9 per cent. It also has depressed property valuations at some locations.

It is of little surprise that the BMO Commercial Property Trust underperformed against its benchmark last year and has continued to struggle this year. The portfolio generated a total return of 4 per cent over the 12 months to the end of December, while its reference index, the MSCI Quarterly Property Universe, delivered a gain of 6.2 per cent.

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Although its industrials portfolio generated a positive return during the first quarter, the rate of improvement slowed. The company’s retail portfolio continued to lose value and its offices in central London also registered a decline in total return.

The trust’s investment manager, BMO Global Asset Management, has not sat on its hands in all this, selling and refurbishing some properties and changing others to non-retailing activities. Separately, it has embarked on turning itself into a real estate investment trust, which will reduce its tax bill and should ensure that shareholders continue to receive a generous dividend.

However, it is not of great comfort to investors that, taken over the longer term, the BMO Commercial Property Trust has ranked relatively low against its peers in the sector over three and five years and posted a performance in the top echelons only over ten years.

The shares, largely flat at 121p yesterday, peaked at 155p just over a year ago. They stock trades at a discount to the net value of the trust’s assets of about 11.8 per cent, good for buyers but not sellers.

There is nothing inherently awry about this trust, which cannot be berated for investing in a retail sector that historically has been as lucrative as it is presently turbulent. However, there are other commercial property trusts that are more enticing.
ADVICE
Avoid
WHY Suffering from its exposure to the retail sector and recent underperformance against peers

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IMI
Strictly speaking, Mark Selway hasn’t failed yet in his ambitious drive to double IMI’s 2014 operating profits over five years — because there’s another 12 months of trading to report on — but it’s clear that it’s not going to happen. Against the backdrop in 2014 of just under £300 million, operating profits last year came in at £266 million. Try getting that to £600 million by the end of December.

Yet it would be disingenous to berate the former chief executive of IMI. The world has changed vastly since he set the target. Besides, Mr Selway, 60 this month, stood aside last month to let new blood, in the form of Roy Twite, 51, have a go.

IMI was founded in Witton, Birmingham, in 1862 by George Kynoch, a Scottish entrepreneur, as a factory making ammunition. Today, it is a precision engineer. Listed since 1966, the company has an annual turnover of almost £2 billion and is a constituent of the FTSE 250 midcap index with a valuation of just under £2.5 billion.

IMI consists of three divisions: critical engineering produces flow control systems for industrial users such as oil and gas and petrochemicals companies; precision engineering makes motion and fluid systems, including for carmakers and in life sciences; and hydronic engineering, the smallest, makes water-based heating and cooling systems for home and commercial builders, mainly in Europe.

What blew apart Mr Selway’s profits dream was a combination of a downturn in the oil and gas markets, a reduction in nuclear developments and pressures on the market for new vehicles, none of which, in fairness, he could have seen coming.

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Among his notable achievements is to have dramatically improved IMI’s cost and operating efficiencies and to have got it to develop new products again. Mr Twite thus has inherited a company with growth potential, but one reliant on the strength of its customers.

The pressures on its markets are reflected in IMI’s share price, which has fallen by almost 32 per cent over the past two years. The shares, up 10p, or 1.1 per cent to 916p yesterday, trade on about 14 times forecast earnings and yield 4 per cent. They are not for this observer.
ADVICE Avoid
WHY Too much pressure on its industrial markets

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