Unaudited results for the six months ended 30 September 2023
TR Property Investment Trust plc
London Stock Exchange Announcement
Unaudited results for the six months ended 30 September 2023
Legal Entity Identifier: 549300BPGCCN3ETPQD32
Information disclosed in accordance with Disclosure Guidance and Transparency Rule 4.2.2
Kate Bolsover, Chairman:
“Generalist investors have avoided real estate over the last 18 months. This has given our managers the opportunity to select carefully not only companies with the best underlying exposures but also those with the most robust balance sheets. The sector M&A activity we have benefited from is a testament to this strategy – and may well be a portent of better times ahead.”
Marcus Phayre-Mudge, Fund Manager:
“As we release this statement, cooling inflation is providing a psychologically important boost for markets. Expectations that we have reached ‘peak rate’ seem to be solidifying, following several false dawns in the first half of 2023. Market cycles over the last 30 years have shown that when interest rates do peak, property equities recover more sharply than the wider stock market.”
Financial Highlights and Performance
| 30 September 2023 | 31 March 2023 | Change | |
| Balance Sheet | |||
| Net asset value per share | 304.74p | 305.13p | -0.1% |
| Shareholders’ funds (£’000) | 967,098 | 968,346 | -0.1% |
| Shares in issue at the end of the period (m) | 317.4 | 317.4 | 0.0% |
| Net debt 1,5 | 12.5% | 12.3% | |
| Share Price | |||
| Share price | 281.00p | 279.00p | +0.7% |
| Market capitalisation | £892m | £885m | +0.8% |
| Revenue | |||
| Revenue earnings per share | 7.31p | 12.05p | -39.3% |
| Interim dividend per share | 5.65p | 5.65p | 0.0% |
| 30 September 2023 | 31 March 2023 | ||
| Performance Assets and Benchmark | |||
| Net asset value total return 2,5 | +3.3% | -35.5% | |
| Benchmark total return | -0.8% | -34.0% | |
| Share price total return | +4.5% | -36.2% | |
| Ongoing charges 4,5 | |||
| Including performance fee | +1.36% | +0.73% | |
| Excluding performance fee | +0.84% | +0.73% | |
| Excluding performance fee and direct property costs | +0.80% | +0.67% |
1. Net debt is the total value of loan notes, loans (including notional exposure to contracts for differences (‘CFDs’) less cash as a proportion of Net asset value (‘NAV’).
2. The net asset value 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 2023 is based on forecast expenses and charges for the year ending 31 March 2024.
5. Considered to be an Alternative Performance Measure as defined in the Half Year Report.
Chairman’s Statement
This is my first Chairman’s statement since I took on the role from David Watson. His wisdom and insights have been valuable to us all over the past years and I wanted to express my thanks as well as those of the Board and management team for his leadership and support. I am excited to be taking on the role of Chairman and look forward to working with the Board and management team as we move into the next few years of economic and social change.
Market backdrop
Macro-economic forces continue to dominate investor behaviour. The trajectory of inflation and bond yields remains foremost in investors’ minds. The response of the US and European central banks has clearly been dramatic over the last two years with a record-breaking number of consecutive base rate increases in all jurisdictions. The current interest rates are beginning to achieve their objective of slowing consumption and economic activity. The impact on asset prices, including real estate, has been marked.
Over the six months under review, the Company’s net asset value (‘NAV’) total return was +3.3%, ahead of the benchmark’s total return of -0.8%. As the Manager’s Report will expand on, the period has been one of oscillating performance as sentiment waxed and waned over the path of the interest rate cycle. Whilst property market fundamentals have been so often drowned out by the macro-economic overlay, your management team continue to focus on well-run companies exposed to asset classes enjoying tenant demand. These businesses must also have balance sheets which can withstand interest rates remaining at current levels. In other words, they are considering whether the debt held by these companies is of a suitable duration and cost. The good news is that the vast majority of our companies have made great strides to improve their debt books over the last 18 months. Valuable lessons were learned in the Global Financial Crisis (‘GFC’) and excessive leverage has (in the main) been avoided in the listed sector in this cycle. Many companies have been forced to take corrective action with dividend reductions or suspensions, but we have not seen the wave of defensive capital issuance to rebuild balance sheets that we saw in 2008.
Much more real estate is owned privately than publicly. Public markets offer real time pricing and the opportunity to allow sentiment to override substance. If public markets undervalue real assets, then privatisations and consolidation will – quite correctly – occur. The last six months has seen four important examples of merger and acquisition (‘M&A’) activity in our investment universe. The Company was heavily exposed to three of them and the NAV received a significant uplift from all three. More detail will be provided later in the Manager’s report but suffice to say these are important valuation underpins. We may well look back and view them as portents of better times ahead.
Revenue Results, Dividend and Outlook
The interim earnings at 7.31p are some 39% lower than the prior year interim earnings.
A fall in earnings was flagged in the last annual report. Earnings in the year to March 2023 were flattered by some one-off changes and also a significant number of shifts in companies’ dividend timetables. At the year-end we were also highlighting that a number of German residential companies and Swedish companies had announced dividend suspensions or cuts and the consequence for our earnings in the following financial year. Increases in interest rates have had a negative impact on our own revenue account and the increase in the UK corporation tax charge has also increased the revenue tax charge, although, our overall taxation charge (when taking into account the capital account credit) remains low.
A number of companies were quick to suspend or reduce dividends in the face of rising interest rates. It is still difficult to predict whether interest rates have reached a peak and how high they will stay and for how long. The property sector is highly sensitive to interest rates at both income and capital levels. The German residential sector is 14.6% of our benchmark, many of these companies have suspended or substantially cut their dividends while they reorganise their balance sheets, make sales to deleverage and reposition their portfolios for a higher interest rate environment. We expect them to resume distributions in due course but the timetable is uncertain. In the meantime, our own income account will reflect this reduced source of income.
Our Managers are mandated by the Board to meet the Company’s investment objective, which is to maximise Shareholders’ total return relative to the benchmark. They are asked to have an eye for the income account, but the positioning of the portfolio is driven primarily by the total return objective. There are times when it is not possible to deliver progressive income whilst meeting that total return objective. In light of the potential for leaner periods of income, the Board has strategically built healthy revenue reserves. Providing we are comfortable of achieving a covered dividend in the longer term, we will be happy to supplement dividend distributions from reserves.
The interim dividend has been maintained at 5.65p per share.
Net Debt and Currencies
Gearing appeared broadly unchanged over the period, moving from 12.3% to 12.5%. As usual, the starting and end points do not give any insight into range over the period, increasing from the year through to June to around 16.0% and reducing thereafter as sentiment changed. At the time of writing the gearing remains around 12.0%.
The cost of our own balance sheet debt continued to rise over the period as the reference base rates increased. Margins are also widening. It was decided not to renew one of our three revolving credit facilities in November as we have sufficient gearing capacity (in our loan notes, remaining facilities and contracts for difference (‘CFD’) capability) without it.
Currencies were not especially volatile; sterling showed some strengthening over the summer which had a detrimental impact on the non-sterling income received over that period, however this petered out to a large extent over September.
Discount and Share Repurchases
The Company’s shares have traded at an average discount of just over 8% over the period, moving from 8.6% at the end of March to 7.8% at the end of September. This is slightly wider than the five-year average of 5.4%. There were no share repurchases during the period.
Board changes
Following David Watson’s retirement, we appointed Tim Gillbanks as Senior Independent Director. Having been appointed to the Board in January this year, and as part of our Board succession planning,
Busola Sodeinde was appointed Chairman of the Audit Committee with effect from 1 October 2023. We have now returned to a Board of directors of five and do not anticipate any further changes in the
near future.
Outlook
The current interest rate rising cycle has been underway since mid-2022. Hindsight is a wonderful thing, and all market participants can agree that central banks should have started earlier with various forms of money supply tightening. However, looking ahead and given the record-breaking speed and intensity of the rate increases, the same commentators are confident that we are closing in on ‘peak rate’. The narrative now is very much about whether rates remain here for the foreseeable future (our view) or whether central banks will seek to bring them back down.
Given our Manager’s central case, it is no surprise that we will continue to focus on those market segments still experiencing rental growth driven by supply/demand disequilibrium. The Manager’s report highlights the very wide range of forecasted returns across the different property types and jurisdictions. However, generalist investors have sought actively to avoid the asset class and much has been discarded in the self-fulfilling price rout. This has given us the opportunity to select carefully not only those companies with the best underlying exposures but also those with the most robust balance sheets.
This positioning has been taking place since the interest rate cycle started 18 months ago. The M&A activity that has taken place is testament to this strategy. Other investors are happy to pay for assets (and debt structures) which we have identified as attractive in the current economic environment. We suspect there may well be more to come.