March 2020 saw the most dramatic real estate equity market performance in living memory (and certainly in the 24 years I have been involved in the management of TR Property). The net asset value (NAV) fell -19.8%, while the benchmark was down -19.1%. The share price fell by -26.7%. These were all unprecedented figures over the course of 22 trading days. When viewed from the sector’s peak of 19 February to the most recent trough (18 March), the NAV fall reached -37%. This information is historical, but what is still evolving – in real time – is companies’ response to the downturn in consumption and the dramatic falls in GDP. Our focus is on assessing the security (or fragility) of earnings alongside balance-sheet strength. To be clear, we do not currently draw strong parallels with the global financial crisis of 2008; the distress is on the balance sheet of the few rather than the many. The banks are not the real villain this time. Lenders and creditors have the backstop of central banks; margins will rise but liquidity is still broadly available. The exceptions to this statement are in the retail sub-sector, which was already drawn into the whirlpool of further devaluation long before COVID-19. The structural headwinds will now blow even harder as more consumers experience shopping without entering a shopping centre. There will be an immediate rebound in footfall when the lockdown ends, but we believe that this will be short-lived.
While the scale of the market correction was breath-taking, the response at the sector level was rational. The best-performing sectors were those whose earnings were expected to be impacted the least, namely healthcare, PRS, industrial, logistics and supermarkets. Assura and PHP, the primary health centre investors, produced standout returns of +14.5% and 10.9%, respectively. Our German residential exposure (26% of the portfolio) stood up well, with LEG, our largest active position in that sector, falling just 5% over the month. The weakest positions were all other forms of retail, hotels, leisure and student accommodation. The worst performers were Intu (-63.4%) and Hammerson (-62.9%), both of which have made poor strategic decisions over many years – failing to reduce debts amid declining asset values. While the Trust did not own those stocks, we did have a large holding in Unite, the student accommodation specialist. The realisation that students may potentially not return until the new educational year in October weighed heavily, with the stock returning -29.3%. In the office space, those stocks with perceived shorter income streams or those offering more flexibility for tenants were hit hardest, including London-exposed Workspace (-33%) and regional-Germany focused Sirius (-18%).
The Trust has a large exposure to high-quality, conservatively managed small-cap stocks that have proved to be a steady driver of returns over many years. They have often provided us with exposure to sub-markets that would have been hard to access otherwise, such as super prime French offices (Terries); Dublin offices (Green REIT); Spanish hotel recovery (Hispania); and regional UK multi-let industrial (Mucklow). In each of those examples, subsequent M&A activity provided a rich source of additional returns. The current cohort includes McKay Securities, CLS, Stenprop, Picton, Argan, VIB Vermogen, Sirius, CIBUS and Arima. However, in the short run and in tempestuous markets, these little companies often suffer greater volatility than their larger brethren, and a single determined seller can quickly wreak share-price havoc. While I added to a number of these stocks over the month, they were collectively significant detractors from our relative performance over the month.
One bright spot in the month was the six-monthly revaluation of our physical portfolio (which represents 8.5% of net assets). The revaluation saw a gain of £6.5m (or 7.2%) as the independent valuers recognised various successful asset management initiatives. At our 35,000-foot industrial estate in Wandsworth, we gained permission for a mixed-use scheme (residential, office and light industrial) of 200,000 feet, as well as a new lease on our urban logistics centre in Bristol, where rent increased by 47%.
The end of March is also the end of the Trust’s financial year. The 12-month total return NAV was -11.7%, with the benchmark recording -14.0%. That means relative outperformance of 230 basis points (bps) over the year. The share price total return was a more disappointing -16.8%, as the discount widened hugely in March. It is encouraging to note that the discount continues to narrow from the low point of 18 March.
Discrete rolling annual performance as at 31.03.2020 (%):
Past performance should not be seen as an indication of future performance