REG - TR Property Inv. - Half-year Report
05/12/2022 07:00
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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 £1,014m £1,563m -35.1
Shares in issue at the end of the period (m) 317.4 317.4 +0.0
Net debt1,5 12.0% 10.2%
Share Price
Share price 296.50p 456.50p -35.0
Market capitalisation £941m £1,449m -35.0
Half year ended 30 September Half year ended 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 30 September Year ended 31 March
2022 2022
Performance: Assets and Benchmark
Net asset value total return2,5 -33.6% +21.4%
Benchmark total return -33.8% +12.2%
Share price total return3,5 -33.4% +19.9%
Ongoing Charges4,5
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, £10m 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
£5.05m. 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 €950
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 €61m 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 €1.4bn was raised in the
period, with only €450m after April. This compares to €12.3bn in the same
period last year and €7.7bn 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 £15m. 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 £3.9bn 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 £203m in the period,
considerably ahead of the £150m 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 £1.3bn, 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 £10. 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. £130m) 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 £130m of these revolving
facilities available across three different banks.
We have a €50m loan note bearing an interest rate of 1.92% which is due to
mature in 2026 and £15m 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 £5.05m. 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 £11m 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
£'000 % £'000
%
UK Securities1
- 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 creditor2 (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 202
2
202
2
£'000 % £'0
00
%
UK Securities
- quoted 335,729 29.5 518,417 30.5
- CFD exposure3 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 exposure3 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 £986m £1,555m £1,401m £1,155m £1,291m
Net assets £1,014m £1,563m £1,326m £1,136m £1,328m
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 value
£'000 %
Belgium
Aedifica Warehouses De Pau Cofinimmo 16,227 1.7
Xior Student Housing VGP 10,080 1.0
Care Property Invest 9,113 1.0
Intervest Offices & Warehouses 6,045 0.6
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 Real Estate 29,624 3.0
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
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'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
For the half year ended Share Share Capital Retained Total
30 September 2022 (Unaudited) Capital Premium Redemption Earnings £'000
£'000 Account Reserve £'000
£'000 £'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
For the half year ended Share Share Capital Retained Total
30 September 2021 (Unaudited) Capital Premium Redemption Earnings £'000
£'000 Account Reserve £'000
£'000 £'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
For the year ended Share Share Capital Retained Total
31 March 2022 (Audited) Capital Premium Redemption Earnings £'000
£'000 Account Reserve £'000
£'000 £'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)
£'000 £'000 £'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)
£'000 £'000 £'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 557,634 (184,739) (265,399)
profit or loss
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 (6,061) (10,722) (10,839)
difference
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 (£'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
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'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 ended Half year ended Year ended
30 September 30 September 31 March
2022 2021 2022
(Unaudited) (Unaudited) (Audited)
£'000 £'000 £'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
At 30 September 2022 (Unaudited) Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'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) £'000 £'000 £'000 £'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) £'000 £'000 £'000 £'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
At 30 September 2022 31 March Purchases Sales Appreciation/ 30 September
2022 £'000 £'000 (Depreciation) 2022
£'000 £'000 £'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: £6.5 - £65 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
£43,930,000 (30 September 2021: £43,389,000; 31 March 2022: £42,340,000).
The fair value of the 3.59% GBP Loan Notes at 30 September 2022 was
£14,084,000 (30 September 2021: £15,568,000; 31 March 2022: £14,879,000).
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 £260,000,000.
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 £130,000,000 (30 September 2021: £130,000,000; 31 March
2022: £130,000,000). At 30 September 2022, £25,000,000 was drawn on these
facilities (30 September 2021: £80,000,000; 31 March 2022: £35,000,000). 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)
£'000 £'000 £'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
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)
The Half Year Report will also be available shortly on the Company's website
at www.trproperty.com (http://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
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