TR Property Investment Trust : May 2023

After a promising recovery in April, Pan European real estate equities slipped back in May, almost to the calendar low of late March. The benchmark, the FTSE EPRA Nareit Developed Europe Index (total returns, in sterling terms), fell -9.4% while the Trust's net asset value (NAV) fell a little less at -7.9%.

Once again, there were renewed jitters around the stubbornness of inflation, even as all central banks committed to further hikes. The most leveraged companies suffered the most, including SBB in Sweden, the longstanding poster child for extreme gearing and complete lack of debt prudence. The stock was downgraded by S&P to BB+ (negative outlook), made a fire sale of its 29% stake in JM (a listed housebuilder) and withdrew from a potential D share issuance. All of this contributed to a -69.1% return in May. Also in Sweden, the long awaited Castellum SEK10bn rights issue was announced. As a 1 for 2, it is sizeable, and at SEK62 per share, it is at a 39% discount to the theoretical ex rights price and a 65% discount to the NAV. This is an expensive capital raise but does give the company breathing space. We have closed our underweight following the completion of the rights issue, given the new balance sheet stability. Collectively, the Swedish property companies fell -14.2% in May. German property companies also had a poor month (-10.4%) despite announcements from Vonovia and TAG that they had successfully made further disposals. All of the German residential businesses need to reduce leverage, and the smaller companies will be the quickest to make a difference to their respective balance sheets.

Our overweight to the UK was a major contributor to relative performance during the month. We saw two more pieces of M&A activity, with London Metric making an all-paper offer for CT Property Trust. We own 10% of CTPT and the stock returned 25.8% during the month. The all-share offer equates to 85.5p per share (£199m) and was at a premium of 34% to the previous price. The other news involved social housing operator, Civitas, where CK Holdings made a cash bid. CK already own part of the manager of Civitas and, while the bid is below the NAV, it is likely to succeed given the 45% premium to the undisturbed share price. We would welcome more consolation (between listed names) rather than privatisations (where assets leave the listed sector). However, transactions such as Industrials REIT (acquisition by Blackstone announced in April) and Civitas remind us that if the equity market continues to undervalue these listed assets, then private capital will sweep in and acquire them.

Elsewhere, we saw strong relative performance from a number of our small caps such as Argan (-1.1%), our preferred French logistics developer, Arima (+7.4%), our Madrid office developer that has very little debt and Xior (-2.9%), our European student housing business. Purpose-built student accommodation remains an undersupplied market, and Xior is the only listed Continental European exposure. We hold Unite in the UK.

The Trust published its FY23 results on 2 June, with a final dividend of 9.85p, bringing the full-year dividend to 15.5p. The dividend yield is 5.4%. Audited results are now on our website: www.trproperty.com.

Discrete rolling annual performance as at 31.05.2023 (%):