TIDMTRY
RNS Number : 5053I
TR Property Investment Trust PLC
05 December 2022
TR Property Investment Trust plc
London Stock Exchange Announcement
Unaudited results for the six months ended 30 September 2022
Legal Entity Identifier : 549300BPGCCN3ETPQD32
Information disclosed in accordance with Disclosure Guidance and
Transparency Rule 4.2.2
5 December 2022
"This has been a dramatically poor period of performance for
property shares and the Company was no exception, delivering a six
month net asset value total return of -33.6%. Nevertheless, our
investments are focused on balance sheet strength and the security
of income, much of which is index-linked, so I am pleased to report
a 6.6% increase in the interim dividend." David Watson,
Chairman
"Index-linked income remains a valuable part of any inflation
proofing in a portfolio and we continue to focus on companies with
assets which tenants both need and can afford." Marcus
Phayre-Mudge, Fund Manager
Financial Highlights and Performance
At 30 September At 31 March
2022 2022 % Change
================================== =============== =========== ==========
Balance Sheet
Net asset value per share 319.37p 492.43p -35.1
Shareholders' funds GBP1,014m GBP1,563m -35.1
Shares in issue at the end of the
period (m) 317.4 317.4 +0.0
Net debt 1,5 12.0% 10.2%
================================== =============== =========== ==========
Share Price
Share price 296.50p 456.50p -35.0
Market capitalisation GBP941m GBP1,449m -35.0
Half year ended Half year ended 30 September
30 September
===========================
2022 2021 % Change
=========================== ====================== =============== ====================
Revenue and Dividends
Revenue earnings per share 12.05p 10.31p +16.9
Interim dividend per share 5.65p 5.30p +6.6
Half year ended Year ended 31 March
30 September 2022
2022
===================================== ====================== ===============================
Performance: Assets and Benchmark
Net asset value total return 2,5 -33.6% +21.4%
Benchmark total return -33.8% +12.2%
Share price total return 3,5 -33.4% +19.9%
===================================== ====================== ===============================
Ongoing Charges 4,5
Including performance fee +0.59% +2.19%
Excluding performance fee +0.59% +0.60%
Excluding performance fee and direct
property costs +0.55% +0.58%
1 Net debt is the total value of loan notes and loans (including
notional exposure to contracts for differences ('CFDs')) less cash
as a proportion of Net asset value ('NAV').
2 The NAV Total Return is calculated by reinvesting the
dividends in the assets of the Company from the relevant
ex-dividend date. Dividends are deemed to be reinvested on the
ex-dividend date as this is the protocol used by the Company's
benchmark and other indices.
3 The Share Price Total Return is calculated by reinvesting the
dividends in the shares of the Company from the relevant
ex-dividend date.
4 Ongoing Charges are calculated in accordance with the AIC
methodology. The ratio for 30 September 2022 is based on forecast
expenses and charges for the year ending 31 March 2023. The
performance fee provision at 30 September 2022 is nil and therefore
the Ongoing Charges figure, including and excluding the Performance
Fee, is the same.
5 Considered to be an Alternative Performance Measure.
Chairman's Statement
Market Backdrop
This has been a dramatically poor period of performance for
property shares and the Company was no exception delivering a six
months net asset value total return of -33.6%, little better than
our benchmark of -33.8%. The share price total return was -33.4%
and whilst this is no better than the performance of the underlying
asset value, it is encouraging to see that, even after such a
severe correction in property equity prices, the discount of the
share price to the net asset value did not widen.
Macro-economic and political forces continue to dominate both
markets and investors' perceptions of the future trajectory of the
value of all risk assets. Inflation is everyone's focus as we all
grapple with the consequences of the unwinding of the era of cheap
capital engineered by the actions of central banks following the
Global Financial Crisis. Real estate as a leveraged asset class has
been hit hard. As with any market correction, property share prices
move fast and take the brunt of this sentiment change, well ahead
of the underlying physical transaction market.
Our Manager's report shows in more detail that whilst all our
companies have seen dramatic price falls, there has also been a
lack of divergence between the good and the bad. As in all bear
markets, forced sellers who require immediate liquidity dictate the
marginal price and careful stock selection is overwhelmed in the
rush to cash.
As outlined in the Annual Report in May, our Managers continue
to focus on those businesses which have worked hard to prepare
their balance sheets for an era of higher interest rates. Those
companies which have heavily utilised the corporate bond market for
their debt needs are potentially most at risk. This issue is
concentrated in the larger names, particularly those able to
achieve a credit rating. Smaller companies are mainly financed
through bank debt and so are less affected by the lack of bond
market activity. Our portfolio continues to have the small and
midcap bias where we find focused market specialisation, management
alignment and strong underlying real estate attributes. However, we
are acutely aware that smaller companies struggle to find
cheerleaders in difficult times as illiquidity becomes another item
on investors' list of negative indicators.
Revenue results and dividend
The earnings per share at the interim stage are 12.05p per
share, almost 17% ahead of the prior year's comparable figure of
10.31p per share. As in previous years, our earnings are skewed
towards the first half.
The Board is aware of the importance of a growing dividend to
shareholders and is pleased to announce an increase of 6.6% in the
interim dividend to 5.65p per share, up from the prior year interim
dividend of 5.30p.
Revenue outlook
Although we anticipate that income for the full year will be
considerably ahead of last year, we do not expect the growth in
earnings seen in the first half to be repeated in the second half.
This is partly due to the fact that our income is skewed to the
first half whilst most expenses accrue evenly through the year. In
addition we have, once again, seen some advantageous withholding
tax rates on dividends paid in the first half which we do not
expect to see repeated in the second.
As highlighted earlier, the portfolio is well positioned to
benefit from the effects of indexation, although there are clear
headwinds from rising debt costs alongside heightened economic
uncertainty for underlying tenants.
Net Debt and Currencies
Whilst net gearing was slightly higher at 30 September (12.0%)
than 31 March (10.2%), this was not the case across the whole
period.
In absolute terms, GBP10m was repaid on our revolving loan
facilities over the period. The weakening of sterling during
September's political turmoil led to an increase (in sterling
terms) in the valuation of Euro-denominated loan notes. This,
together with the rapidly falling share prices towards the end of
the month resulted in the reported gearing figure increasing in
percentage terms.
Currently all our revolving credit facilities are undrawn.
Discount and Share Repurchases
The discount of the share price to the net asset value hardly
moved over the period, starting at 7.4% and ending on 30 September
at 7.2%. The discount as at 29 November was 5.4% . No share
buy-backs or issues were made during the period.
Board changes
When recruiting to replace Simon Marrison we were delighted to
welcome Andrew Vaughan who brings great experience of property
investing both in the UK and in Continental Europe.
The Board is mindful that, whilst diverse as regards gender, it
is presently entirely white and British. The Board has commenced an
external search for a new Director who will broaden and strengthen
the insights and challenge that the Board can bring to the
Managers' strategic deliberations through their diversity of age
and ethnicity. Embracing all our desired skills within a Board of
just five Directors may prove challenging so the Board is actively
considering the optimum size of the Board to allow us to operate
effectively with the desirable range of experience and
perspectives.
Outlook
Indexation continues to support revenue growth while rising debt
costs pull in the opposite direction. Many of our companies have
the vast majority of their debt costs fixed or hedged for several
years and therefore can confidently look forward to indexation
feeding through to the bottom line. Of course, the key issue then
is how far vacancy rates and tenant retention will be impacted by
the impending recession. Our Manager continues to focus on that
risk but we do need to remember that for all our tenants rent is a
principal business cost. Historically, mild recessions with low
levels of corporate failure have resulted in minimal tenant
delinquencies.
After such a bruising period of weak performance, our Managers
have challenged their investment hypothesis and reasserted their
focus on those businesses which will weather this storm and be able
to take advantage of the opportunities which will no doubt arise
from it. The quoted sector is in a strong place, relative to many
private property enterprises with strong balance sheets,
established credit facilities and high-quality portfolios.
Generalist investors are shunning the sector and that is
reflected in all property share prices. Share prices still stand at
large discounts to our adjusted, real time net asset value
calculations. This Autumn's political events in the UK have been
damaging to the UK's reputation for financial and fiscal prudence.
We can only hope that the new Prime Minister is able to restore
confidence and deliver the stability which markets crave. It is a
tall order but the reduction in the cost of UK Government debt
since the last week of October is not only encouraging but crucial
for all asset values.
David Watson
Chairman
2 December 2022
Interim management report and Directors' responsibility
statement
Interim management report
The Chairman's Statement on pages 3 to 5 and the Manager's
Report on pages 7 to 12 of the half year report give details of the
important events which have occurred during the period and their
impact on the financial statements.
Principal and emerging risks and uncertainties
The principal risks and uncertainties facing the Company have
not changed since the date of the Annual Report 2022 and continue
to be as set out in that report.
The principal risks and uncertainties facing the Company
include, but are not limited to, poor share price performance in
comparison to the underlying NAV; poor investment performance of
the portfolio relative to the benchmark; market risk; the Company
is unable to maintain dividend growth; accounting and operational
risks; financial risks; loss of Investment Trust Status; legal,
regulatory and reporting risks; inappropriate use of gearing and
personnel changes at Investment Manager. An explanation of these
risks and how they are managed are set out on pages 26 to 29 of the
Annual Report and Financial Statements for the year ended 31 March
2022 (which can be found on the Company's website
www.trproperty.com).
Going concern
As stated in note 5 to the financial statements, the directors
are satisfied that the Group has sufficient resources to continue
in operation for a period of at least 12 months from the date of
this report. Accordingly, the going concern basis is adopted in
preparing the condensed financial statements.
Directors' responsibility statement
In accordance with Chapter 4 of the Disclosure Guidance and
Transparency Rules, the Directors confirm that to the best of their
knowledge:
(1) the condensed set of financial statements has been prepared
in accordance with applicable UK Accounting Standards on a going
concern basis and gives a true and fair view of the assets,
liabilities, financial position and net return of the Company;
(2) the half year report includes a fair review of the important
events that have occurred during the first six months of the
financial year and their impact on the financial statements;
(3) the statement of Principal and Emerging Risks and
Uncertainties shown opposite is a fair review of the principal and
emerging risks and uncertainties for the remainder of the financial
year; and
(4) the half year report includes a fair review of the related
party transactions that have taken place in the first six months of
the financial year.
On behalf of the Board
David Watson
Chairman
2 December 2022
Manager's report
as at 30 September 2022
Performance
The net asset value ('NAV') total return for the six months was
-33.6%, the benchmark, FTSE EPRA Nareit Developed Europe TR (in
GBP) fell -33.8%. These figures are clearly disappointing.
Investors will no doubt be concerned that given the scale of the
correction, the direction of travel was obvious and more protective
action should have been taken. It all looks clear in hindsight but
events on the ground were not so straightforward.
Whilst the financial year started poorly with April recording a
-6.2% return, there followed a period of stability in May as
investors hoped that the initial hawkish response from the central
banks would have the required impact. This quickly turned out to be
wishful thinking and June was a dramatic month, with the NAV
falling 15%. July saw a strong reversal (+9.5%) as bond markets
responded to the theme that rising rates were having the required
deflationary impact. Writing this review in November, such market
behaviour feels naively optimistic. Readers will have noticed the
constant references to rates; essentially the entire market
direction for real estate equities was driven by expectations of
central banks and bond market behaviour. Real estate fundamentals
have taken the proverbial back seat.
If the period under review (from 31st March) had ended in
mid-August, the NAV total return would have been just -13% and the
share price total return -8%. The real damage occurred as investors
returned from their summer holidays and absorbed the US Federal
Reserve's hawkish statements at Jackson Hole. Real estate equities
were the worst performing GIC sector in September as inflation
numbers and base rate expectations continued to rise. The perfect
storm of supply driven cost increases meeting economies running at
full employment has resulted in bond markets pricing in ever
greater increases in the cost of money.
Our investment thesis through the Summer and up until September
had been that whilst rates would rise, our portfolio was heavily
focused on businesses with little near term refinancing, manageable
LTVs and all importantly, the ability to grow their top line
earnings through indexation, market rental reversions and even
development. At the sector level markets such as logistics, student
accommodation and private sector residential continue to experience
supply/demand imbalances.
However, September was a glimpse of a new paradigm, investors
are not interested in asset class fundamentals. It is all about
leverage and yield expansion and this is best illustrated by the
performance of German residential property companies. These
businesses have incredibly resilient earnings, their tenants are,
for the most part, paying rents c.20% below open market values and
as a result their share prices reflect asset valuations well below
replacement value. They have very low vacancy rates due to strong
tenant demand. Even in recessions people need accommodation. Over
the last decade they have grown through acquisition, improving
operating efficiencies and crucially accessing bond markets for
lower and lower debt costs. As their shares began to trade at a
discount to asset value they could no longer make accretive
acquisitions whilst simultaneously debt costs rose and bond market
liquidity became an issue. The German element of our benchmark fell
-44.6% in the period. The Company's largest overweight in this area
is Phoenix Spree Deutschland (4% of NAV), an owner of high-quality
Berlin units. This business has no refinancing requirements until
2025, it does not use listed bonds and crucially it has permission
to sell 75% of its apartments as condominiums (i.e. vacant
possession) as and when they become vacant. In the topsy turvy
world of regulated rents, a flat which can be sold empty and not
forced into being let at a restricted rent is 20% more valuable.
However, these facts have not stopped the share price falling 24%
in the first half. Far less than the larger German companies but
still dramatic. We continue to believe that the gulf between demand
and supply remains a valuable underpin of value in cities such as
Berlin.
Performance attribution is straightforward. Any sub-sectors we
were overweight in, regardless of company quality, balance sheet
resilience or opportunities for growth delivered a negative alpha
contribution. Industrials were hard hit as yields had been driven
very low on the expectation of rental growth and now stand well
below the cost of debt - an unsustainable position. Our underweight
to Sweden proved to be an important positive contributor as
investors shied away from the most leveraged businesses in our
coverage. However, their share prices have been incredibly volatile
with the Swedish sub-sector down 24% in June, only to rally +23% in
July. Maintaining conviction in such turbulent times is challenging
given our bottom-up focus on company quality.
Our physical property portfolio fared better with a
like-for-like fall of 7.5% concentrated at our two industrial
assets in Wandsworth and Gloucester. At the Colonnades in
Bayswater, we sold the remaining residential interest for GBP5.05m.
The asset is now a pure commercial play underpinned by a long lease
to Waitrose with fixed rental increases.
Offices
Both occupiers and investors appear clear on one aspect of
office property: they want buildings which are fit for purpose and
will stand up to scrutiny on their environmental credentials. The
jury remains out on the impact of remote working although certain
tenets of corporate behaviour are becoming the new norm. The
majority of Continental European cities (bar Paris) have seen a
return to pre-pandemic occupancy levels, however the UK, and London
in particular, remain well below those levels. Poor infrastructure
and length of commute are the clear drivers. A pattern of tenant
demand is appearing: the most central and best quality buildings
continue to attract demand. Financial tenant focused markets such
as the City of London, Canary Wharf and La Defense are suffering
elevated void rates and falling rents. CBDs with multiple types of
occupier such as London's West End and Central Paris are seeing
rental tension and broad stability. Knight Frank reports that in
Q2, Paris CBD saw vacancy fall to 3.3% (close to a record low) with
prime rents close to EUR950 per m (2) , again closing in on a
previous peak. Take up is lower than Q4 2021 but so is the
available space. We believe this trend is set to continue in these
best placed assets.
Investors still appear attracted to trophy, new builds. The
recent deals such as the sale of Deutsche Bank's new HQ at 21
Moorfields at an initial yield of 4.4% already looks a good deal
for the vendor, Landsec, but the index-linked income and very long
lease is understandably attractive to its new pension fund owner.
Foreign capital is also visible with the German buyer at GPE's 50
Finsbury Square and the Chinese buyer of TikTok's HQ built by
Helical Bar.
Elsewhere we see rents retrenching. Tenants are back in the
'wait and see' mode. Having spent the last 18 months working out
what space they need in a hybrid world, they now need to assess the
impact of the forthcoming recession (mild or otherwise) on their
requirements. Shorter leases and flexibility (which may ultimately
be more expensive) are becoming the norm. Landlords have to adapt
and investors then need to price in the risk of rental volatility.
Improving energy efficiency is now a central part of any office
refurbishment and we believe landlords of suburban and regional
properties with lower rents (and capital values) are
underestimating the costs of these expanding regulatory
requirements.
Retail
The structural shift to omni-channel continues. The helicopter
view remains the same. Retailers will happily pay if the location
delivers sales, but the number of such locations continues to fall.
Collectively we have too much retail space and the UK remains the
worst culprit (compared to Continental Europe). However, retail
rents have effectively halved over the last decade and valuations
have collapsed. We will therefore see smaller capital value falls
in the MSCI/IPD data for shopping centres versus logistics as
moving yields from 8% to 9% results in half the capital fall
compared to moving from 3% to 4%. Simply put, retail has already
been repriced. This statement applies to the UK. Europe is a
different playing field where valuers react much more slowly and
will remain comforted by rental stability. This stability will be
delivered, in the short run, by substantial indexation compensating
for rising tenant failures.
Two parts of the retail landscape which continue to outperform
are outlet centres and retail warehousing. The former because it
offers a more 'internet-proof' sales channel and the latter because
rents are much lower and they have become an increasingly critical
part of the omni-channel sale process. Click and collect from an
edge of town, easy access location rather than a regional shopping
centre with your car a 10-minute walk from the store. Consumers'
discretionary spend is reducing as energy costs, mortgage rates and
rental levels rise. We like the domination of value-focused
retailers on the retail warehouse parks we partially own through
Ediston Property. The company trades at a 30% discount to its asset
value and has no major refinancing until late 2027. The dividend
yield is 8.3%.
Supermarkets have been our other major retail exposure through
both Supermarket REIT in the UK and Cibus in Finland. The
fundamentals for food shopping margins remain very resilient when
compared to more discretionary spending. Food sales in both
countries are dominated by a small group of competitors across the
complete value/price landscape. This quality of counterparties
together with index-linked leases will prove to be a valuable
provider of top line earnings growth. The problem for both these
companies was the managerial failure to fix their cost of debt;
both businesses had too much floating rate debt and both had their
share prices pummelled as a result. Cibus saw its price fall 25%
from the middle of August to the end of September even though its
top line is growing with healthy indexation. Post the interim,
Supermarket Income REIT entered into interest rate swaps that
hedged all of its floating rate debt at an effective 2.6%. This
cost 2.5% of net asset value. Expensive insurance against rising
rates.
Industrial
The strong momentum in the logistics market has continued
despite the news that Amazon was slowing its take up of space
across the globe. Essentially, we see other operators taking
advantage of the behemoth's space indigestion. Whilst European
economic growth is going to slow or even enter a recession, the
structural tailwinds for this sector persist, particularly the need
to re-engineer complex supply chains which invariably result in the
need to store more materials, ingredients and parts closer to their
end market. Savills reported pan-European take up in H1 2022 of
20million m (2) , up 12% on the same prior-year period, mainly
driven by the UK and Germany. Vacancy rates across Europe have
dropped to a record low of 2.9% and led to headline rents
increasing by an average of 8% over the past 12 months.
It is no surprise that investors had continued to drive yields
lower (and capital values higher) given the expectation of ongoing
rental growth and development gains. However, the increases in the
cost of borrowing have dramatically reversed this yield tightening
cycle. As highlighted earlier, when yields are as low as 3.5%, a
100bps increase to 4.5% reduces the capital value by 22%. Whilst
not all logistics property is valued at these historically low
levels, the sector's pricing continues to reflect good rental
growth prospects. We remain confident that the structural
undersupply of logistics and industrial space in urban markets will
continue to drive rents. Our experience at Ferrier Street,
Wandsworth where we are offering short leases ahead of potential
redevelopment bears this out.
Residential
The shortage of private sector rental accommodation remains
acute. In Germany the regulation of rents (resulting in approx. 20%
below market rents) results in tenant turnover being lower than in
open market jurisdictions leading to very high occupancy levels
with commensurately low payment delinquency. However, the impact of
energy costs and the difficulty in forecasting the increased
service charge recovery rates has led to a reduction in the
expectation of the rate of rental growth.
In markets where the private rented sector is a smaller sector,
such as the UK, regulation had already reduced the number of small
landlords and this has now been compounded by rising mortgage
rates. Large amounts of the private rental sector owned by
'amateur' landlords (owning less than 5 units) have been sold to
the owner-occupier market. The consequence is inflation busting
rental growth in any undersupplied city. London remains top of the
list. As house prices begin to fall, we may well see more people
choosing to temporarily rent, again adding to demand.
Finally, with historically high levels of employment leading to
wage inflation, we see nominal increases in residential rents in
open market jurisdictions such as the UK and Finland as
sustainable.
Alternatives
Purpose built student accommodation continues to fare relatively
well, with rising numbers of students competing for a limited (but
growing) number of beds. Rents in the private rented sector also
continue to rise, particularly as regulation of HMOs (Houses in
Multiple Occupation) continues to squeeze margins for private
landlords. According to Bonsard, rents have increased on average by
9.7% in the 2022 academic year. The survey looked at 140 operations
across all European countries and the highest rates of growth were
in the severely undersupplied Eastern European markets. We continue
to own Unite (UK) and Xior (Belgium and Spain) who have recently
completed a significant corporate acquisition raising EUR61m in a
placing which we participated in.
Self-storage also continues to confound the sceptics with the
Self-Storage Association UK reporting further occupancy growth
across its members. We are fully aware that reduced housing
transaction volumes should impact turnover but the growth of
commercial customers and the growing awareness of the sector remain
long-term, systemic trends.
Healthcare continues to be the poor performer in the
'alternatives' space whether it is primary or nursing care. Whilst
the former has the benefit of direct or indirect NHS rental
support, the latter has far greater exposure to private operators.
These operators do receive large amounts of their revenue from the
government but their operating margins continue to be squeezed
through wage inflation and higher energy bills.
Debt and Equity Markets
Listed bond markets have been effectively closed, particularly
during the second half of the period under review. Just EUR1.4bn
was raised in the period, with only EUR450m after April. This
compares to EUR12.3bn in the same period last year and EUR7.7bn in
Q1 2022.
The central banks' hawkish rhetoric followed by action has
driven spreads on existing bonds to historically wide levels.
Equity owners are looking carefully at any likely moves by the
credit rating agencies, particularly those companies with bonds
trading just a notch or two above sub-investment grade. The vicious
cycle of an earnings downgrade, leading to a credit downgrade,
leading to a higher cost of debt and consequently further falls in
earnings is clearly to be avoided at all costs.
It will come as no surprise that equity capital markets were
virtually closed. However, we did see the first deeply discounted
rights issue with TAG Immobilien, a German residential owner who
had over stretched themselves with the purchase of a Polish
developer. After an incredibly busy period of M&A activity in
the previous 18 months (as detailed in the annual report) fuelled
by cheap debt, the focus of activity in this latest six-month
period was more merger than acquisition with Shaftesbury and CapCo
finally agreeing terms. The transaction had been widely anticipated
since CapCo acquired a 26% stake from Samuel Tak Lee in May 2020.
Given that this was a friendly merger, we remain astonished at the
estimated deal fees of over GBP15m. Also in May, LXI and Secure
Income REIT agreed to merge on a NAV for NAV basis, creating a
liquid, cost-efficient REIT with a GBP3.9bn of index-linked income.
As a large holder in Secure Income, we were pleased with the
transaction as the stock had been trading at a 12% discount to NAV
prior to the deal.
In Germany, ECE, the external manager of Deutsche Euroshop, a
shopping centre owner effectively completed a management buyout
backed by Oaktree (US private equity). Alexander Otto already owned
20% of Deutsche Euroshop as well as controlling ECE.
Investment Activity - property shares
Turnover (purchases and sales divided by two) totalled GBP203m
in the period, considerably ahead of the GBP150m for the same
period last year, as a series of sharp bear market rallies resulted
in more stock rotation. With average net assets over the period of
GBP1.3bn, turnover was 15.5%.
With such a dramatic market correction and with each rally then
trending down to a new low, virtually all buys look poor and all
sells look clever. Throughout the period I have maintained the
discipline of buying (or adding) to companies where I am confident
that they have two crucial underpins to their respective
businesses. Firstly, the balance sheet capability (in terms of
quantum of leverage, cost and duration of debt) to withstand the
near-term adjustment in their cost of capital. Secondly, the
resilience of their top line earnings, measuring counterparty
(tenant) strength and where they will benefit from indexation.
These criteria resulted in a marked reduction in our exposure to
Swedish property companies and this has continued post the half
year. The weakness in the share prices of German residential names
has been highlighted earlier alongside the performance of our
largest relative position, Phoenix Spree. In hindsight, the
strength of the top line earnings (low vacancy and minimal tenant
delinquency) was not enough of an attraction for investors. These
are low yielding assets and even small outward yield shift has a
large impact on valuation. With most of the German residential
names now trading at +50% discounts to asset value and even greater
discounts to replacement cost, we are no longer sellers.
Our industrial names, for several years the darlings of the
market given the prospects for rental growth, suddenly looked
expensive as structural tailwinds reshaped the demand for
logistics. Trading on large premiums, implied yields had been
driven too low. Recessionary fears reduced rental growth
expectations and capitalisation rates rose. Segro's share price has
almost halved from 1400p to below 750p (late October). I closed
much of the underweight position as the stock price dropped below
GBP10. This has clearly proved premature. Urban logistics and their
pan-European development programme (mostly pre-let) remain drivers
of returns. I did trim exposure to those industrial names heavily
focused on development (VGP, Montea and Warehouses de Pauw) whilst
holding our positions in Argan, Industrials REIT and LondonMetric
Property.
Our retail exposure in the UK remains minimal. However, I have
steadily added to the specialist retail warehouse owner, Ediston,
where we now own [16%] of the company. It has successfully
deleveraged with the sale of its remaining office buildings and is
now a pure retail warehouse play. As a very small company in listed
terms (market cap. GBP130m) it has failed to attract a broader
range of investors even though its portfolio and balance sheet are
sound. Its dividend yield is over 7% and its implied yield on
current share price of over 10%. It has no refinancing requirements
until late 2025 with 100% fixed priced debt.
European shopping centre names such as Eurocommercial Properties
and Klepierre, our two preferred stocks, have performed relatively
well with their higher earnings yield and secure balance sheets.
They compare well to Unibail Rodamco which needs to secure asset
sales in both Europe and the US and is a good example of where
investors have punished stretched balance sheets.
Office stocks remain a difficult call. London developers such as
Derwent London and GPE have very secure balance sheets with low
leverage but also few short-term value drivers. Best in class,
energy efficient (green) buildings are the future and rents will be
driven higher by the lack of supply. These businesses have the
experience and expertise to deliver this new product, however the
near-term value correction in their standing portfolios remains a
focal point for shareholders.
Many office occupiers are still deferring large property
decisions as they wrestle with their post Covid-19 space
requirements and new working practices alongside the growing risks
of an economic slowdown. The result has been an increase in
short-term letting and the use of serviced offices. All the listed
players now have a 'serviced' offer as they respond to this demand
but they are of course in competition with a multitude of branded
offerings such as WeWork, Regus and The Office Group. My response
has been to reduce our suburban exposure through the sale of CLS
and McKay Securities. In the case of the latter, whilst I took the
maximum cash in the takeover by Workspace, I have subsequently
added to our initial holding (which came with the stock element of
the deal). Across Europe, I have followed the same strategy,
holding prime CBD exposure in the largest cities such as Gecina
(Paris), Fabege (Stockholm) and Arima Real Estate (Madrid) but also
city centre assets in smaller cities which have seen a high return
to office such as Wihlborgs (Malmo).
Revenue and Revenue Outlook
Revenue at 12.05p per share was some 17% ahead of the prior year
interim earnings. Once again, we are expecting the earnings to be
skewed to the first half. We have always earned more income in the
first half than the second. Ten years ago, this was in excess of
80% of full year earnings but in subsequent years it reduced as
companies changed to smaller and more frequent dividends. In the
year to March 2021 the interim earnings represented 62% of the full
year earnings. Post Covid-19 we observed the pattern changing
again. Some dividends were cancelled through the pandemic but when
they resumed, companies seemed to be paying less frequently again.
We commented at the last year end that this had changed quite
dramatically for the year to 31 March 2022, with three-quarters of
earnings being attributed to the first half, although there were
also some one-off items which contributed to that. We expected a
resumption of more frequent payments in due course, but this has
generally not been the case to date and the pattern of earnings in
the current year looks set to replicate the last.
Underlying income is still strong with indexation in part of the
portfolio driving growth. Debt costs are rising but many of our
companies have fixed debt for several years so this will take a
while to impact.
We are focusing on tenant retention and the potential
performance of companies through an impending recession to protect
our income. We expect the current year dividend to be fully
covered.
Gearing and Debt
All our revolving credit facilities are undrawn at the time of
writing and gearing is 11.5%.
We have just renewed our loan facility with ICBC. Margins have
increased but the revolving credit facilities (where we can repay
and redraw debt as we wish) offer us maximum flexibility in terms
of being able to vary our gearing level, so are attractive. We have
a total of GBP130m of these revolving facilities available across
three different banks.
We have a EUR50m loan note bearing an interest rate of 1.92%
which is due to mature in 2026 and GBP15m at 3.59% due to mature in
2031. Holding positions through contracts for difference ('CFDs')
can also create gearing. We pay a floating interest rate on these
positions with a small margin. We can reduce the gearing impact by
increasing the cash collateral held against them. For some
shorter-term holdings there are additional benefits in holding the
positions in this way, so CFDs will continue to be part of our
portfolio even when we are aiming for modest gearing levels.
We believe this mixture of debt gives us a balance between
flexibility and interest rate certainty.
At our current gearing level, approximately half the interest
cost is at a fixed rate and half at a floating rate.
In assessing the appropriate gearing level, we also consider the
profile of our investment portfolio. The direct property portfolio
and some of our smaller equities do not react to market conditions
in the same way, or at least in the same time horizons, as the
medium size and larger holdings, therefore the impact of gearing is
diluted to some extent across the entire portfolio. Our physical
portfolio, which has no see-through leverage at the asset level
also attracts far less volatility than the equity portfolio.
Physical Portfolio
The last six months have been a busy period for the physical
property portfolio. However, the completion of a variety of
successful asset management initiatives only partly protected the
portfolio from the inevitable valuation declines driven by the
universal rise in the cost of capital. The property portfolio
produced a total return of -6.2%, made up of a capital return of
-7.8% and an income return of 1.6%. During the period the Company
sold its residential holdings at the Colonnades for GBP5.05m. This
was done through the granting of a new 999-year lease over the
residential element with the Company retaining the freehold and
ownership of all the commercial elements. Over the last 20 years of
ownership, the Company has completed lease extensions on over 70%
of the flats, receiving in excess of GBP11m in lease premiums.
At our industrial estate in Wandsworth, we continue to build in
flexibility to the lease expiry profile to allow the full-scale
redevelopment in the medium term. To that end we have continued to
renew leases based on an earliest redevelopment date of June 2024.
Over the past 6 months we have renewed 5 leases increasing the
total rent roll by 26% and completed one new lease. There are a
further 4 lease renewals in solicitors' hands. Similarly, at our
industrial estate in Gloucester we have completed the rent review
on two units increasing the rent by 10%. We are working with the
tenant to install photovoltaic (PV) cells on the roof with the aim
of generating in excess of c.75% of their annual electricity
onsite.
Outlook
Pan-European real estate equity prices are now reflecting very
significant corrections in the value of the underlying real estate,
across all sectors. These shifts in valuation have been primarily
driven by the cost of borrowing and it has been the lowest yielding
(and therefore the most highly rated) sectors of our universe which
have been impacted the most. The worst performers were
industrial/logistics and residential. These are also the two
sub-markets with the strongest outlooks based on the ongoing
mismatch between demand and supply. These market fundamentals will,
at some point, reassert themselves in investors' decision making.
However, in the near-term, markets will continue to be driven by
central bank behaviour and equity markets will respond strongly to
any indication that the tempo of rate rises is slowing. The
question is therefore will the central banks need to see evidence
of disinflation or even recession before adjusting their
strategies. Clearly this is an unanswerable question and the
behaviour of the Bank of England and the ECB may well differ.
Either way, we will continue to focus on owning companies which can
withstand both higher interest rates and a recessionary
backdrop.
It is important to recognise that the downward leg of any
property cycle has been driven by an increase in the cost of debt
and/or a rental collapse caused by over development in a buoyant
upswing. Outside of retail property's well-rehearsed structural
changes we see very few signs of over supply. Our portfolio
positioning does reflect our nervousness towards older, lower value
(suburban) offices, many of which will fall foul of new energy
efficiency requirements. In many markets we see demand for property
as an affordable and necessary factor of production offering
index-linked income. Above and beyond the ability to maintain
income in their respective standing portfolios, many of our
companies have the track record and required skills to drive
development and asset re-positioning which will generate positive
returns post this near-term correction in market pricing.
Marcus Phayre-Mudge
Fund Manager
2 December 2022
Distribution of Investments
30 Sep 30 Sep 31 Mar 31 Mar
=============================
2022 2022 2022 2022
=============================
GBP'000 % GBP'000 %
============================= ========================== ============================
UK Securities 1
- quoted 335,729 34.6 518,417 33.2
UK Investment Properties 83,653 8.6 96,255 6.1
================================== ============= ============ ============ ==========
UK Total 419,382 43.2 614,672 39.3
Continental Europe Securities
- quoted 566,358 58.2 940,744 60.2
================================== ============= ============ ============ ==========
Investments held at fair
value 985,740 101.4 1,555,416 99.5
- CFD creditor 2 (13,658) (1.4) 7,657 0.5
================================== ============= ============ ============ ==========
Total Investment Positions 972,082 100.0 1,563,073 100.0
================================== ============= ============ ============ ==========
Investment Exposure
30 Sep 30 Sep 31 Mar 31 Mar
============================
2022 2022 2022 2022
============================
GBP'000 % GBP'000 %
============================ ========================== =========================
UK Securities
- quoted 335,729 29.5 518,417 30.5
- CFD exposure 3 81,948 7.2 57,324 3.4
UK Investment Properties 83,653 7.3 96,255 5.7
=================================== ============= ========== ============= ========
UK Total 501,330 44.0 671,996 39.6
Continental Europe Securities
- quoted 566,358 49.7 940,744 55.3
- CFD exposure 3 72,317 6.3 87,318 5.1
=================================== ============= ========== ============= ========
Total Investment Exposure4 1,140,005 100.0 1,700,058 100.0
=================================== ============= ========== ============= ========
Portfolio Summary
30 Sep 31 Mar 31 Mar 31 Mar 31 Mar
2022 2022 2021 2020 2019
============================ ========= ========= ========= ========= =========
Total investments GBP986m GBP1,555m GBP1,401m GBP1,155m GBP1,291m
Net assets GBP1,014m GBP1,563m GBP1,326m GBP1,136m GBP1,328m
UK quoted property
shares 34% 33% 28% 31% 33%
Overseas quoted property
shares 58% 60% 66% 61% 59%
Direct property (externally
valued) 8% 6% 6% 8% 8%
============================ ========= ========= ========= ========= =========
Net Currency Exposures
30 Sep 30 Sep 31 Mar 31 Mar
====
2022 2022 2022 2022
====
Fund Benchmark Fund Benchmark
% % % %
==== ====== ========= ====== =========
GBP 33.3 34.1 33.9 33.6
EUR 43.0 43.1 41.9 42.3
CHF 9.7 9.6 7.4 7.1
SEK 13.6 12.9 16.3 16.3
NOK 0.4 0.3 0.5 0.4
==== ====== ========= ====== =========
1 UK Securities includes one unlisted holding (0.01%) (31 March 2022: 0.01%)
2 Unrealised profit on CFD contract positions are held as a
current asset and unrealised losses on CFD contracts held as
balance sheet creditor.
3 Gross value of CFD positions.
4 Total investments illustrating market exposure including the
gross value of CFD positions.
Investment portfolio by country
Market
GBP'000 value
%
============================== =============== ===============
Belgium
Aedifica Warehouses 16,227 1.7
De Pau Cofinimmo
Xior Student Housing 10,080 1.0
VGP
Care Property Invest 9,113 1.0
Intervest Offices & 6,045 0.6
Warehouses
Montea 4,600 0.5
2,346 0.2
2,304 0.2
2,129 0.2
============================== =============== ===============
52,844 5.4
============================== =============== ===============
France Argan Gecina
Klepierre Covivio Carmila
Altarea
57,439 5.9
20,723 2.1
18,933 2.0
9,405 1.0
7,082 0.7
1,314 0.1
============================== =============== ===============
114,896 11.8
============================== =============== ===============
Germany Vonovia LEG
Aroundtown TAG 90,796 9.3
Adler Group 35,835 3.7
13,169 1.4
9,726 1.0
879 0.1
============================== =============== ===============
150,405 15.5
============================== =============== ===============
Ireland
Irish Residential Properties 1,358 0.1
============================== =============== ===============
1,358 0.1
============================== =============== ===============
Netherlands Eurocommercial
Properties Unibail
Rodamco Westfield NSI
33,980 3.5
6,510 0.7
3,036 0.3
============================== =============== ===============
43,526 4.5
============================== =============== ===============
Norway
Entra 3,750 0.4
============================== =============== ===============
3,750 0.4
============================== =============== ===============
Spain
Merlin Properties Arima 29,624 3.0
Real Estate
20,169 2.1
============================== =============== ===============
49,793 5.1
============================== =============== ===============
Companies shown by country of listing.
Financial statements
Group statement of comprehensive income
Half year ended Half year ended Year ended
30 September 2022 30 September 2021 31 March 2022
(Unaudited) (Unaudited) (Audited)
Revenue Capital Revenue Capital Revenue Capital
Return Return Total Return Return Total Return Return Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------- -------- ---------- ---------- -------- --------- --------- -------- --------- ---------
Income
Investment income 36,589 - 36,589 32,692 - 32,692 44,170 - 44,170
Other operating
income 69 - 69 - - - 5 - 5
Gross rental income 1,576 - 1,576 1,501 - 1,501 2,773 - 2,773
Service charge
income 463 - 463 533 - 533 1,103 - 1,103
(Losses)/gains
on investments
held at fair value - (616,054) (616,054) - 195,779 195,779 - 249,038 249,038
Net movement on
foreign exchange;
investments and
loan notes - (191) (191) - 1,854 1,854 - 1,136 1,136
Net movement on
foreign exchange;
cash and cash
equivalents - 2,508 2,508 - (147) (147) - 637 637
Net returns on
contracts for
difference 5,825 58,420 64,245 4,138 (11,040) (6,902) 5,701 16,361 22,062
-------------------- -------- ---------- ---------- -------- --------- --------- -------- --------- ---------
Total income 44,522 (555,317) (510,795) 38,864 186,446 225,310 53,752 267,172 320,924
-------------------- -------- ---------- ---------- -------- --------- --------- -------- --------- ---------
Expenses
Management and
performance fees
(note 2) (824) (2,473) (3,297) (813) (12,721) (13,534) (1,663) (29,477) (31,140)
Direct property
expenses, rent
payable and
service
charge costs (808) - (808) (726) - (726) (1,435) - (1,435)
Other
administrative
expenses (598) (253) (851) (471) (310) (781) (1,621) (608) (2,229)
-------------------- -------- ---------- ---------- -------- --------- --------- -------- --------- ---------
Total operating
expenses (2,230) (2,726) (4,956) (2,010) (13,031) (15,041) (4,719) (30,085) (34,804)
-------------------- -------- ---------- ---------- -------- --------- --------- -------- --------- ---------
Operating
profit/(loss) 42,292 (558,043) (515,751) 36,854 173,415 210,269 49,033 237,087 286,120
Finance costs (463) (1,389) (1,852) (315) (945) (1,260) (629) (1,886) (2,515)
-------------------- -------- ---------- ---------- -------- --------- --------- -------- --------- ---------
Profit/(loss)
from operations
before tax 41,829 (559,432) (517,603) 36,539 172,470 209,009 48,404 235,201 283,605
Taxation (3,603) 1,190 (2,413) (3,809) 2,247 (1,562) (4,967) 3,049 (1,918)
-------------------- -------- ---------- ---------- -------- --------- --------- -------- --------- ---------
Total comprehensive
income 38,226 (558,242) (520,016) 32,730 174,717 207,447 43,437 238,250 281,687
-------------------- -------- ---------- ---------- -------- --------- --------- -------- --------- ---------
Earnings per
Ordinary share
(note 3) 12.05p (175.91)p (163.86)p 10.31p 55.06p 65.37p 13.69p 75.07p 88.76p
The total column of this statement represents the Group's
Statement of Comprehensive Income, prepared in accordance with
UK-adopted international accounting standards. The Revenue Return
and Capital Return columns are supplementary to this and are
prepared under guidance published by the Association of Investment
Companies. All items in the above statement derive from continuing
operations.
The Group does not have any other income or expense that is not
included in the above statement therefore "Total comprehensive
income" is also the profit or loss for the period.
All income is attributable to the shareholders of the parent
Company.
The final dividend of 9.20p (2021: 9.00p) in respect of the year
ended 31 March 2022 was declared on 31 May 2022 and was paid on 2
August 2022. This can be found in the Group Statement of Changes in
Equity for the half year ended 30 September 2022.
The interim dividend of 5.65p (2021: 5.30p) in respect of the
year ending 31 March 2023 was declared on 2 December 2022 and will
be paid on 12 January 2023 to shareholders on the register on 16
December 2022. The shares will be quoted ex-dividend on 15 December
2022.
Group statement of changes in equity
Share Capital
Share Premium Redemption Retained
For the half year ended Capital Account Reserve Earnings Total
30 September 2022 (Unaudited) GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- --------- --------- ------------ ---------- ----------
At 31 March 2022 79,338 43,162 43,971 1,396,268 1,562,739
Net loss for the half year - - - (520,016) (520,016)
Dividends paid - - - (29,196) (29,196)
-------------------------------- --------- --------- ------------ ---------- ----------
At 30 September 2022 79,338 43,162 43,971 847,056 1,013,527
-------------------------------- --------- --------- ------------ ---------- ----------
Share Capital
Share Premium Redemption Retained
For the half year ended Capital Account Reserve Earnings Total
30 September 2021 (Unaudited) GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------------- --------- --------- ------------ ---------- ----------
At 31 March 2021 79,338 43,162 43,971 1,159,962 1,326,433
Net profit for the half
year - - - 207,447 207,447
Dividends paid - - - (28,562) (28,562)
-------------------------------- --------- --------- ------------ ---------- ----------
At 30 September 2021 79,338 43,162 43,971 1,338,847 1,505,318
-------------------------------- --------- --------- ------------ ---------- ----------
Share Capital
Share Premium Redemption Retained
For the year ended Capital Account Reserve Earnings Total
31 March 2022 (Audited) GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
-------------------------- --------- --------- ------------ ---------- ----------
At 31 March 2021 79,338 43,162 43,971 1,159,962 1,326,433
Net profit for the year - - - 281,687 281,687
Dividends paid - - - (45,381) (45,381)
-------------------------- --------- --------- ------------ ---------- ----------
At 31 March 2022 79,338 43,162 43,971 1,396,268 1,562,739
-------------------------- --------- --------- ------------ ---------- ----------
Group balance sheet
30 September 30 September 31 March
2022 2021 2022
(Unaudited) (Unaudited) (Audited)
GBP'000 GBP'000 GBP'000
-------------------------------------- ------------- ------------- ----------
Non-current assets
Investments held at fair value 985,740 1,581,562 1,506,436
Investments held at for sale - - 48,980
-------------------------------------- ------------- ------------- ----------
985,740 1,581,562 1,555,416
Deferred taxation asset 903 - 903
-------------------------------------- ------------- ------------- ----------
986,643 1,581,562 1,556,319
Current assets
Debtors 95,476 71,604 97,673
Cash and cash equivalents 30,442 14,415 32,109
-------------------------------------- ------------- ------------- ----------
125,918 86,019 129,782
Current liabilities (40,155) (104,287) (66,109)
-------------------------------------- ------------- ------------- ----------
Net current assets/(liabilities) 85,763 (18,268) 63,673
-------------------------------------- ------------- ------------- ----------
Total assets plus net current assets 1,072,406 1,563,294 1,619,992
Non-current liabilities (58,879) (57,976) (57,253)
-------------------------------------- ------------- ------------- ----------
Net assets 1,013,527 1,505,318 1,562,739
-------------------------------------- ------------- ------------- ----------
Capital and reserves
Called up share capital 79,338 79,338 79,338
Share premium account 43,162 43,162 43,162
Capital redemption reserve 43,971 43,971 43,971
Retained earnings (note 7) 847,056 1,338,847 1,396,268
-------------------------------------- ------------- ------------- ----------
Equity shareholders' funds 1,013,527 1,505,318 1,562,739
-------------------------------------- ------------- ------------- ----------
Net asset value per:
Ordinary share 319.37p 474.34p 492.43p
-------------------------------------- ------------- ------------- ----------
Group cash flow statement
Half year ended Half year ended Year ended
30 September 30 September 31 March
2022 2021 2022
(Unaudited) (Unaudited) (Audited)
GBP'000 GBP'000 GBP'000
--------------------------------------------------------------------- ---------------- ---------------- -----------
Reconciliation of profit from operations before tax to net cash
outflow from operating activities
(Loss)/profit from operations before tax (517,603) 209,009 283,605
Finance costs 1,852 1,260 2,515
Losses/(gains) on investments and derivatives held at fair value
through profit or loss 557,634 (184,739) (265,399)
Net movement on foreign exchange; cash and cash equivalents and loan
notes (882) (3,239) (977)
Scrip dividends included in investment income and net returns on
contracts for difference (6,061) (10,722) (10,839)
Sales of investments 205,676 156,192 544,370
Purchases of investments (166,258) (129,670) (430,830)
Decrease in prepayments and accrued income 1,554 1,597 8
Decrease/(Increase) in sales settlement debtor 26,887 5,019 (32,871)
(Decrease)/Increase in purchase settlement creditor (5,364) (194) 5,170
(Increase)/decrease in other debtors (32,933) (12,451) 2,951
(Decrease)/increase in other creditors (24,411) 860 13,809
--------------------------------------------------------------------- ---------------- ---------------- -----------
Net cash inflow from operating activities before interest and
taxation 40,091 32,922 111,512
Interest paid (1,852) (1,260) (2,515)
Taxation paid (3,218) (2,652) (1,258)
--------------------------------------------------------------------- ---------------- ---------------- -----------
Net cash inflow from operating activities 35,021 29,010 107,739
Financing activities
Equity dividends paid (29,196) (28,562) (45,381)
Repayment of loans (note 6) (10,000) (15,000) (60,000)
--------------------------------------------------------------------- ---------------- ---------------- -----------
Net cash outflow from financing activities (39,196) (43,562) (105,381)
--------------------------------------------------------------------- ---------------- ---------------- -----------
(Decrease)/increase in cash (4,175) (14,552) 2,358
Cash and cash equivalents at start of period 32,109 29,114 29,114
Net movement on foreign exchange; cash and cash equivalents 2,508 (147) 637
--------------------------------------------------------------------- ---------------- ---------------- -----------
Cash and cash equivalents at end of period 30,442 14,415 32,109
--------------------------------------------------------------------- ---------------- ---------------- -----------
Notes to the financial statements
1 Basis of accounting
The accounting policies applied in these interim financial
statements are consistent with those applied in the Company's most
recent annual financial statements. The financial statements have
been prepared on a going concern basis and in accordance with
UK-adopted International Accounting Standards (IAS) 34 'Interim
Financial Reporting'.
The financial statements have also been prepared in accordance
with the Statement of Recommended Practice (SORP), "Financial
Statements of Investment Trust Companies and Venture Capital
Trusts", to the extent that it is consistent with UK-adopted
International Accounting Standards.
The financial statements are presented in sterling and all
values are rounded to the nearest thousand pounds (GBP'000) except
where otherwise indicated.
In accordance with UK-adopted IAS, IFRS 10, the Company has been
designated as an investment entity on the basis that:
-- It obtains funds from investors and provides those investors
with investment management services;
-- It commits to its investors that its business purpose is to
invest solely for returns from capital appreciation and investment
income; and
-- It measures and evaluates performance of substantially all of
its investments on a fair value basis.
Each of the subsidiaries of the company was established for the
sole purpose of operating or supporting the investment operations
of the company (including raising additional financing), and is not
itself an investment entity. UK--adopted IAS, IFRS 10, sets out
that in the case of controlled entities that support the investment
activity of the investment entity, those entities should be
consolidated rather than presented as investments at fair value.
Accordingly, the Company has consolidated the results and financial
positions of those subsidiaries.
Subsidiaries are consolidated from the date of their
acquisition, being the date on which the Company obtains control,
and continue to be consolidated until the date that such control
ceases. The financial statements of subsidiaries used in the
preparation of the consolidated financial statements are based on
consistent accounting policies. All intra-group balances and
transactions, including unrealised profits arising therefrom, are
eliminated. This is consistent with the presentation in previous
periods.
All the subsidiaries of the Company have been consolidated in
these financial statements.
The accounting policies adopted are consistent with those of the
previous consolidated annual financial statements.
The standards issued before the reporting date that become
effective after 30 September 2022 are not expected to have a
material effect on equity or profit for the subsequent period. The
Group has not early adopted any new UK-adopted International
Accounting Standards or Interpretation. Standards, amendments and
interpretations issued but not yet effective up to the date of
issuance of the Group's financial statements are listed below:
IAS 1 Amendments - Classification of Liabilities as Current or
Non-Current (effective date 1 January 2023). The amendments specify
the requirements for classifying liabilities as current or
non-current. The amendments are not expected to have a material
impact on the Group's financial statements.
IAS 1 Amendments - Disclosure of Accounting Policies (effective
1 January 2023). The amendments require an entity to disclose its
material accounting policy information instead of its significant
accounting policies. The amendments contain guidance and examples
on identifying material accounting policy information. The
amendments are not expected to have a material impact on the
Group's financial statements.
IAS 1 Amendments - Non-current Liabilities with Covenants
(effective date 1 January 2024). The amendments improved the
information an entity provides when its right to defer settlement
of a liability for at least twelve months is subject to compliance
with covenants. The amendments also responded to stakeholders'
concerns about the classification of such a liability as current or
non-current.
IAS 8 Amendments - Definition of Accounting Estimates (effective
1 January 2023) The amendments define accounting estimates as
"monetary amounts in financial statements that are subject to
measurement uncertainty". The amendments also clarify the
interaction between an accounting policy and an accounting
estimate. The amendments are not expected to have a material impact
on the Group's financial statements.
IAS 12 Amendments - Deferred Tax related to Assets and
Liabilities arising from a Single Transaction (effective 1 January
2023). The amendments require entities with certain assets to
recognise deferred tax on particular transactions that, on initial
recognition, give rise to equal amounts of taxable and deductible
temporary differences.
2 Management fees
Half year ended Half year ended Year ended
30 September 2022 30 September 2021 31 March 2022
(Unaudited) (Unaudited) (Audited)
Revenue Capital Revenue Capital Revenue Capital
Return Return Total Return Return Total Return Return Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Management
fee 824 2,473 3,297 813 2,439 3,252 1,663 4,988 6,651
Performance
fee - - - - 10,282 10,282 - 24,489 24,489
------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
824 2,473 3,297 813 12,721 13,534 1,663 29,477 31,140
------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
No provision has been made for a performance fee based on the
net assets at 30 September 2022. Any payments are not due until the
full year performance fee is calculated at 31 March 2023.
3 Earnings per ordinary share
The earnings per Ordinary share can be analysed between revenue
and capital, as below.
Half year Half year
ended ended Year ended
30 September 30 September 31 March
2022 2021 2022
(Unaudited) (Unaudited) (Audited)
GBP'000 GBP'000 GBP'000
------------------------------------- ------------- ------------- ------------
Net revenue profit 38,226 32,730 43,437
Net capital (loss)/profit (558,242) 174,717 238,250
------------------------------------- ------------- ------------- ------------
Net total (loss)/profit (520,016) 207,447 281,687
------------------------------------- ------------- ------------- ------------
Weighted average number of Ordinary
shares in issue during the period 317,350,980 317,350,980 317,350,980
------------------------------------- ------------- ------------- ------------
pence pence pence
------------------------------------- --------- ------ ------
Revenue earnings per Ordinary share 12.05 10.31 13.69
Capital earnings per Ordinary share (175.91) 55.06 75.07
------------------------------------- --------- ------ ------
Earnings per Ordinary share (163.86) 65.37 88.76
------------------------------------- --------- ------ ------
4 Changes in share capital
During the half year and since 30 September 2022 no Ordinary
shares have been purchased and cancelled.
As at 30 September 2022 there were 317,350,980 Ordinary shares
(30 September 2021: 317,350,980; 31 March 2022: 317,350,980
Ordinary shares) of 25p in issue.
5 Going concern
In assessing the going concern basis of accounting the Directors
have had regard to the guidance issued by the Financial Reporting
Council. They have also considered the Company's objective,
strategy and policy; current cash position; the availability of the
loan facility and compliance with all financial loan covenants; and
the operational resilience of the Company and its service
providers.
At present the global economy is suffering considerable
disruption due to the effects of the COVID-19 pandemic,
inflationary concerns and the war in Ukraine and the Directors have
given serious consideration to the consequences for this Company. A
detailed assessment of the ability of the Company and Group to meet
its liabilities as they fall due, including stress and liquidity
tests which considered the effects of substantial falls in
investment valuations, substantial reductions in revenue received
and reductions in market liquidity as a result of these
factors.
Based on this information, their knowledge and experience of the
Company's portfolio and stockmarkets, the Directors believe that
the Company has the ability to meet its financial obligations as
they fall due for a period of at least twelve months from the date
of approval of these financial statements. Accordingly, these
financial statements have been prepared on a going concern
basis.
6 Fair value of financial assets and financial liabilities
Financial assets and financial liabilities are carried in the
Balance Sheet either at their fair value (investments) or the
balance sheet amount is a reasonable approximation of fair value
(due from brokers, dividends and interest receivable, due to
brokers, accruals and cash at bank).
Fair value hierarchy disclosures
The table below sets out fair value measurements using
UK-adopted IAS (IFRS 13) fair value hierarchy.
Financial assets/(liabilities) at fair value through profit or
loss
Level 1 Level 2 Level 3 Total
------------------------------------
At 30 September 2022 (Unaudited) GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ -------- --------- -------- ---------
Equity investments 899,514 - 2,573 902,087
Investment properties - - 83,653 83,653
Contracts for difference - (13,658) - (13,658)
Foreign exchange forward contracts - 442 - 442
------------------------------------ -------- --------- -------- ---------
899,514 (13,216) 86,226 972,524
------------------------------------ -------- --------- -------- ---------
Level 1 Level 2 Level 3 Total
At 30 September 2021 (Unaudited) GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ ---------- --------- -------- ----------
Equity investments 1,490,133 - 1,651 1,491,784
Investment properties - - 89,778 89,778
Contracts for difference - (12,185) - (12,185)
Foreign exchange forward contracts - 1,028 - 1,028
------------------------------------ ---------- --------- -------- ----------
1,490,133 (11,157) 91,429 1,570,405
------------------------------------ ---------- --------- -------- ----------
Level 1 Level 2 Level 3 Total
At 31 March 2022 (Audited) GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ ---------- -------- -------- ----------
Equity investments 1,456,820 - 2,341 1,459,161
Investment properties - - 96,255 96,255
Contracts for difference - 7,657 - 7,657
Foreign exchange forward contracts - 2,736 - 2,736
------------------------------------ ---------- -------- -------- ----------
1,456,820 10,393 98,596 1,565,809
------------------------------------ ---------- -------- -------- ----------
Categorisation within the hierarchy has been determined on the
basis of the lowest level input that is significant to the fair
value measurement of the relevant asset as follows:
Level 1 - valued using quoted prices in an active market for
identical assets.
Level 2 - valued by reference to valuation techniques using
observable inputs other than quoted prices within level 1.
Level 3 - valued by reference to valuation techniques using
inputs that are not based on observable market data.
Contracts for Difference are synthetic equities and are valued
by reference to the investments' underlying market values.
Valuations of Investment Properties - Level 3
The Group carries its investment properties at fair value in
accordance with UK-adopted IAS (IFRS 13), revalued twice a year,
with changes in fair values being recognised in the Group Statement
of Comprehensive Income. The Group engaged Knight Frank LLP as
independent valuation specialists to determine fair value as at 30
September 2022.
Determination of the fair value of investment properties has
been prepared on the basis defined by the RICS Valuation - Global
Standards (The Red Book Global Standards) as follows:
"The estimated amount for which a property should exchange on
the date of valuation between a willing buyer and a willing seller
in an arm's length transaction after proper marketing wherein the
parties had each acted knowledgeably, prudently and without
compulsion."
The valuation takes into account future cash flow from assets
(such as lettings, tenants' profiles, future revenue streams,
capital values of fixtures and fittings, plant and machinery, any
environmental matters and the overall repair and condition of the
property) and discount rates applicable to those assets. These
assumptions are based on local market conditions existing at the
balance sheet date.
In arriving at their estimates of fair values as at 30 September
2022, the valuers have used their market knowledge and professional
judgement and have not only relied solely on historical
transactional comparables.
Reconciliation of movements in Financial assets categorised as
level 3
31 March Appreciation/ 30 September
At 30 September 2022 Purchases Sales (Depreciation) 2022
2022 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
----------------------------- --------- ---------- --------- ---------------- -------------
Unlisted equity investments 2,341 - - 232 2,573
----------------------------- --------- ---------- --------- ---------------- -------------
Investment properties
- Mixed use 48,187 97 (5,050) (1,661) 41,573
- Office & Industrial 48,068 88 - (6,076) 42,080
----------------------------- --------- ---------- --------- ---------------- -------------
96,255 185 (5,050) (7,737) 83,653
----------------------------- --------- ---------- --------- ---------------- -------------
98,596 185 (5,050) (7,505) 86,226
----------------------------- --------- ---------- --------- ---------------- -------------
Transfers between hierarchy levels
There were no transfers between any levels during the
period.
Sensitivity information
The significant unobservable inputs used in the fair value
measurement categorised within Level 3 of the fair value hierarchy
of investment properties are:
-- Estimated rental value: GBP6.5 - GBP65 per sq ft
-- Capitalisation rates: 2.0% - 6.0%
Significant increases (decreases) in estimated rental value and
rent growth in isolation would result in a significantly higher
(lower) fair value measurement. A significant increase (decrease)
in capitalisation rates in isolation would result in a
significantly lower (higher) fair value measurement.
Loan Notes
On the 10 February 2016, the Company issued 1.92% Unsecured Euro
50,000,000 Loan Notes and 3.59% Unsecured GBP 15,000,000 Loan Notes
which are due to be redeemed at par on the 10 February 2026 and 10
February 2031 respectively.
The fair value of the 1.92% Euro Loan Notes at 30 September 2022
was GBP43,930,000 (30 September 2021: GBP43,389,000; 31 March 2022:
GBP42,340,000).
The fair value of the 3.59% GBP Loan Notes at 30 September 2022
was GBP14,084,000 (30 September 2021: GBP15,568,000; 31 March 2022:
GBP14,879,000).
Using the UK-adopted IAS (IFRS 13) fair value hierarchy the Loan
Notes are deemed to be categorised within Level 2.
The loan notes agreement requires compliance with a set of
financial covenants, including:
-- Total Borrowings shall not exceed 33% of Adjusted Net Asset Value;
-- the Adjusted Total Assets shall at all times be equivalent to
a minimum of 300% of Total Borrowings; and
-- the Adjusted NAV shall not be less than GBP260,000,000.
The Company and Group complied with the terms of the loan notes
agreement throughout the year.
Multi-currency revolving loan facilities
The Group also has unsecured, multi-currency, revolving
short-term loan facilities totalling GBP130,000,000 (30 September
2021: GBP130,000,000; 31 March 2022: GBP130,000,000). At 30
September 2022, GBP25,000,000 was drawn on these facilities (30
September 2021: GBP80,000,000; 31 March 2022: GBP35,000,000). The
fair value is considered to approximate the carrying value and the
interest is paid at a margin over LIBOR.
7 Retained earnings
30 September 30 September 31 March
2022 2021 2022
(Unaudited) (Unaudited) (Audited)
GBP'000 GBP'000 GBP'000
----------------------------------- ------------- ------------- ----------
Investment holding (losses)/gains (121,128) 480,028 412,934
Realised capital reserves 893,877 786,858 918,057
----------------------------------- ------------- ------------- ----------
772,749 1,266,886 1,330,991
Revenue reserve 74,307 71,961 65,277
----------------------------------- ------------- ------------- ----------
847,056 1,338,847 1,396,268
----------------------------------- ------------- ------------- ----------
8 Related party transactions
There have been no material related party transactions during
the period and no changes to related parties.
During the period Thames River Capital charged management fees
as detailed in Note 2.
The remuneration of the Directors has been determined in
accordance with rates outlined in the Directors' Remuneration
Report in the Annual Financial Statements.
9 Comparative information
The financial information contained in this Half-Year Report
does not constitute statutory accounts as defined in section 435(1)
of the Companies Act 2006. The financial information for the half
year periods ended 30 September 2022 and 30 September 2021 has not
been audited or reviewed by the Group auditors. The figures and
financial information for the year ended 31 March 2022 are an
extract from the latest published financial statements and do not
constitute statutory financial statements for that year. Those
financial statements have been delivered to the Registrar of
Companies and include the report of the auditors, which was
unqualified and did not contain a statement under either section
498(2) or 498(3) of the Companies Act 2006.
Disclaimer
The loan notes have not been and will not be registered under
the U.S. Securities Act of 1933, as amended (the "Act") and may not
be offered or sold in the United States absent registration or an
applicable exemption from the registration requirements of the Act.
This notice is for information only, does not constitute an offer
to sell or the solicitation of an offer to buy any security and
shall not constitute an offer, solicitation or sale of any
securities in any jurisdiction in which such offer, solicitation or
sale would be unlawful.
This announcement and the information contained herein is not
for publication, distribution or release in, or into, directly or
indirectly, the United States, Canada, Australia or Japan and does
not constitute, or form part of, an offer of securities for sale in
or into the United States, Canada, Australia or Japan.
The securities referred to in this announcement have not been
and will not be registered under the U.S. Securities Act of 1933,
as amended (the "Securities Act") and may not be offered or sold in
the United States unless they are registered under the Securities
Act or pursuant to an available exemption therefrom. The Company
does not intend to register any portion of securities in the United
States or to conduct a public offering of the securities in the
United States. The Company will not be registered under the U.S.
Investment Companies Act of 1940, as amended, and investors will
not be entitled to the benefits of that Act.
This announcement does not constitute an offer to sell or the
solicitation of an offer to buy, nor shall there be any sale of the
securities referred to herein in any jurisdiction in which such
offer, solicitation or sale would be unlawful prior to
registration, exemption from registration or qualification under
the securities law of any such jurisdiction.
The contents of this announcement include statements that are,
or may be deemed to be, "forward-looking statements". These
forward-looking statements can be identified by the use of
forward-looking terminology, including the terms "believes",
"estimates", "anticipates", "expects", "intends", "may", "will" or
"should". They include the statements regarding the target
aggregate dividend. By their nature, forward-looking statements
involve risks and uncertainties and readers are cautioned that any
such forward-looking statements are not guarantees of future
performance. The Company's actual results and performance may
differ materially from the impression created by the
forward-looking statements. The Company undertakes no obligation to
publicly update or revise forward-looking statements, except as may
be required by applicable law and regulation (including the Listing
Rules). No statement in this announcement is intended to be a
profit forecast.
By order of the Board
Columbia Threadneedle Investment Business Limited
Company Secretary,
2 December 2022
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into, or forms part of, this
announcement.
ENDS
A copy of the Half Year Report will be submitted to the National
Storage Mechanism and will shortly be available for inspection at
data.fca.org.uk/#/nsm/nationalstoragemechanism
The Half Year Report will also be available shortly on the
Company's website at www.trproperty.com where up to date
information on the Company, including daily NAV and share prices,
factsheets and portfolio information can also be found.
For further information please contact:
Marcus Phayre-Mudge
Fund Manager, TR Property Investment Trust plc
020 7011 4711
Mark Young
Stifel
0207 710 7633
Tom Scrivens
Panmure Gordon (UK) Limited
0207 886 2648
This information is provided by RNS, the news service of the
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END
IR BKBBBOBDDFBK
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December 05, 2022 02:00 ET (07:00 GMT)
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