Tag: Property companies

EDGE Performance VCTs, REITs and Paypoint

I am glad to read that Edge Performance VCT (EDGH) is planning to wind-up. I have written about this VCT several times in the past despite never holding it and I always considered it a basket case which seemed to be run more in the interests of the management and advisors than shareholders. ShareSoc ran a campaign on the company to try and get it reformed, but ultimately without success.

It has now been revealed that they paid dividends illegally for which they are asking shareholders to vote through a “whitewash”. The latest announcement also says: “As Shareholders will be aware, the Company’s net asset value has significantly reduced in recent months, with, among other things, market-related reductions in the portfolio valuation, a dividend paid on 6 May 2022, share buy-backs and the payment of advisers’ fees having substantially depleted the Company’s cash. As a result, the Board and the Investment Manager are of the opinion that the Company is sub-scale and that the Company’s ongoing charges ratio will be too high at approximately 14.89 per cent.

Following lengthy discussions with the Investment Manager as to the Company’s current position and the overall market outlook, the Board does not foresee any reasonable opportunity for the Company to grow in the short term. Accordingly, after careful consideration the Board believes that it is in Shareholders’ best interests that the Company be placed into a members’ solvent voluntary liquidation, with the intention that there will be an orderly winding down of the Company, realisation for cash of the Company’s assets and a return of that cash to Shareholders in a manner which will be intended to preserve VCT tax-reliefs”.

This decision is several years too late in my view while in the meantime managers and advisors have extracted large amounts of cash.

On another subject, my portfolio is down again today mainly because the share prices of property funds/trusts including REITs have fallen sharply. This is no doubt due to the rise, and prospective more rises, in interest rates. This might impact property companies when their debts need to be refinanced. This has affected all property companies, even those who have fixed their interest on debt at low levels and have many years to run before they need refinancing.

In a few years time, the position on interest rates may be very different as inflation is forecast to fall rapidly next year. Property companies should be long-term holding so I won’t be panicking over the latest share price falls.

Another share that has fallen today is Paypoint (PAY) which I hold. That’s despite recent director share buying including another deal today. What do they know that I don’t is the question one asks oneself in such circumstances. Perhaps they are convinced that the recently announced bid for another company is really a good deal when the market seems to think otherwise.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Why Property Companies Are Falling

A couple of articles in the FT today explain why commercial property company share prices have been falling of late, causing some damage to my portfolio.

First there is an article headlined “Goldman Sachs sounds alarm on UK commercial property”. They predict that with a sharp rise in borrowing costs billions of pounds will be wiped off their value. Prices could fall by 15 to 20 per cent by the end of 2024 they say. See https://www.ft.com/content/f4f96cf7-29a2-4416-a1cd-83ea362cfcaa

The article also points out that the “mini” budget which caused a disruption in the gilt market has caused pension funds to sell their property holdings. Several property funds have suspended redemptions so no doubt they are ditching holding in property investment trusts instead which I hold rather than open-ended funds. This means that a company such as Schroder REIT (SREI) has fallen to a 47% discount to NAV which seems excessive.

But gilts have rallied today which might relieve the pressure on pension funds. Another FT article said this: “Investors had previously been unnerved by confirmation from [Andrew] Bailey on Tuesday that the BoE’s bond-buying programme would not be extended beyond Friday, with the Bank warning troubled pension schemes that they had just three days left to sell whatever assets they needed to in order to restore their cash buffers. However, after the central bank purchased £4.4bn of bonds on Wednesday — easily the biggest daily volume so far in the BoE’s programme — markets were reassured by signs that pension funds were taking advantage of the facility to offload gilts and raise cash”.

Comment: I am getting really annoyed by these gyrations. When commercial property should be one of the less volatile of shares they are being driven into bouncing around by speculation on what the chancellor and governor of the Bank of England will do.

Even the negative prognostications on borrowing rates from Goldman are misconceived. Property companies rarely need to refinance their loans in the short-term and their loan to book values are generally not high (28% in the case of SREI in March this year for example). If loans need to refinanced in a few years time, what will be the loan interest rates achievable then? They are likely to be somewhat higher as the rates have been unrealistically low for many years but nobody really knows.

In summary these gyrations might soon be making property trusts more attractive but the general malaise in the stock market is not going to encourage anyone to buy unless the outlook seems brighter and the gilt market stablises.  

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Property Trusts and Supermarket Income REIT

Commercial property investment trusts should be a good defence in a market downturn – at least that is what the investment pundits have been saying. As the market heads south I have been selling overvalued tech stocks and retail stocks vulnerable to a recession and reduced consumer spending. Property trusts should be less volatile as although the property market has been changing in some regards, property companies have longer term leases with their customers in general. So long as I avoided the London office market and retail shopping centres I expected to be OK.

I have therefore been holding on to several property REITs but that has not proved to be a great success. For example generalist trust TR Property (TRY) is down 34% since last September. Even companies such as Segro (SGRO) and Urban Logistics (SHED) who have been doing well by providing warehouses for internet delivery operations have fallen back substantially. They also provide buffers to supply chain disruptions which have become a big problem of late. But in a bear market, which we are definitely in, everything is sold off regardless of sector or performance.

Supermarket Income REIT (SUPR) published their final results this morning for the year ending June. Like other property companies their shares have been falling – down about 15% from last summer and I am losing money on a fairly recent purchase.

But the results were positive – EPRA earnings per share up 5%, assets per share up and dividends up – yield now over 5% on the current share price. One particular point to note in the announcement was that 81% of leases are inflation linked. As people have to eat and supermarkets are both retail stores and internet delivery operations now, this company should be a good defence against a prospective recession.

There are some interesting comments from Justin King in the SUPR  announcement – for example in response to a question on what supermarkets should do: “… you need to remember that in a recession the first change the customer will make is a shift away from expensive calories and the most expensive are those consumed out of the home in restaurants and takeaways. Rarely will a customer’s total calorie consumption change through the economic cycle, instead what you observe is a shift in the discretionary additional spend of their calorie consumption from eating out, to eating in. In a recession, that favours the supermarket. So, the net impact of a customer shifting towards perhaps lower margin value range is often offset via an increase in overall volumes across all price ranges”.

It’s worth reading to get an impression of what supermarket retailers are thinking at present. 

SUPR is still expanding by buying more properties but they acknowledge that rising interest rates on debt are having a negative impact. They have hedged their debt at an effective fixed rate of 2.6%

It was noticeable that the shares perked up this morning along with a number of other property trusts I hold. Dividend yields have been rising as share prices have fallen. Perhaps they are coming back into favour?

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Year End Review of 2021

As I have published in previous years, here is a review of my own stock market portfolio performance in the calendar year 2021. I’ll repeat what I said last year to warn readers that I write this is for the education of those new to investing because I have no doubt that some experienced investors will have done a lot better than me, while some may have done worse.

It’s worth bearing in mind that my portfolio is very diversified across FTSE-100, FTSE-250 and smaller company (e.g. AIM) shares listed in the UK. I also hold a number of UK investment trusts which gives me exposure to overseas markets, and some Venture Capital Trusts (VCTs). Although I have some emphasis on AIM shares, they are not the very speculative ones.

One feels wary of publishing such data because when you have a good year you appear to be a clever dick with an inflated ego, while in a bad year you look a fool. Consistency is not applauded on social media. But here’s a summary of my portfolio performance which turned out to be a good year despite the damage done to economies by the Covid pandemic. Total return including dividends was up 19.3% which I consider a good result bearing in mind that the FTSE All-Share was only up 14.56% which I use as my benchmark (the latter figure does not include dividends though). But the FTSE All-Share is dominated by FTSE-100 companies – the dinosaurs of the financial world in many cases – of which I hold relatively few.

During the year, and in the previous year, I had moved to a more defensive portfolio position as I thought the market was somewhat overvalued although I retained a strong emphasis in technology stocks. Cash holdings increased as I sold out from a number of companies early in the year when over-optimism for a quick recovery from the pandemic seemed common. I did purchase more holdings in property companies where REITs and property investment trusts seemed to me to be on excessively high discounts and warehousing companies such SEGRO and Urban Logistics benefited from more internet retailing. Self-storage property company Safestore also contributed. Bigger holdings in property companies also helped total dividends received to increase, with good pay-outs from VCTs also making total dividends received to be the highest level for 4 years.

Smaller technology stocks were a very mixed bunch – Tracsis was up substantially despite the fact that I expected train companies to cut back expenditure as their passenger revenue must have fallen. Clearly it’s a sector more reliant on government subsidies than simple economics to make money. Other smaller winners were DotDigital, SDI and Judges Scientific but GB Group fell substantially. Diploma and Reach were other winners supported by takeovers at Ultra Electronics and Wey Education. I had no substantial individual company losses during the year which always helps overall portfolio performance. Perhaps I am getting better at avoiding the duds.

My investment trust and fund holdings all did well often because they have substantial US holdings. I failed to beat Terry Smith’s performance at Fundsmith for yet another year but Scottish Mortgage and Polar Capital Technology produced only moderate performances as all but mega-cap technology stocks fell out of favour.

What does the future hold? Inflation is rising as Governments pump money into the economy in response to the epidemic while interest rates are still at record low levels. It’s certainly no time to be holding bonds or other fixed interest stocks. It’s a return to the good old days when you could buy a house that was rapidly inflating in price when the mortgage cost was much lower than the inflation gain. So I expect house builders to continue to do well as there is still a shortage of housing in some parts of the country despite a few people returning home to the EU. Brexit turned out to be a damp squib so far as most UK people are concerned and I see no great change in that regard in the coming year.

A year ago I said “some things may permanently change as we have become used to doing more on-line shopping, working from home, travelling less and getting our education on-line”. Those are the trends that will continue I suggest. The movement to improve the environment and halt global warming which is requiring substantial changes to the UK and other economies continues to be a priority for the Government and many businesses although there is too much hot air spouted on the subject. One has to be very careful about enthusiasm for “hot” market sectors – they often turn out to be flashes in the pan.

It looks like we will need to learn to live with Covid-19 as variants arise which hopefully will be less virulent. You can expect to receive repeat vaccinations against Covid variants – I already have my fourth lined up. Life may gradually return to normal – at least I hope so.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Soporific Webinars, Property Market, Portfolio Performance, and It Helps to be Older.

I attended three on-line company meetings yesterday – AGMs and results presentations. I have to admit that I fell asleep watching one of them which shows how soporific many of these events are. It does not help when the presenters read from a script that they have rehearsed beforehand which causes them to drone on. There is much less spontaneity than in a physical meeting.

The other common failure is that they show presentation slides at the same time that are not easily readable. That would be OK if the slides just contained bullet points in large type or graphics that reinforced the points the speaker was making but they frequently contain masses of small font text that are barely readable on a small laptop screen.  If hybrid meetings are going to be the norm in future, then more attention needs to be paid to how to do them well.

One of the presentations was by Equals CEO Ian Strafford-Taylor who had gone to his office in the City on the day. Surprisingly he said he had not managed to get a seat on the tube and there were queues at sandwich shops. So it seems life might actually be returning to City offices.

Perhaps it was coincidence but the share price of Schroder REIT (SREI) rose by 2.6% on the day and has been rising steadily since it bottomed out last July. The trust holds a mixed portfolio of commercial property. This morning the trust gave an update on rent collection which said “The Company has collected 88% of rents due on the 25 March 2021 for the quarter ending June 2021, after allowing for agreed rent deferrals.  This is ahead of the equivalent date in the previous quarter.  The breakdown of collection rates between sectors is 98% for industrial, 96% for office, 83% relating to ancillary uses and 51% relating for retail and leisure.  The Company remains in active dialogue with tenants for all rents due to be paid and expects to recover a significant portion of the outstanding amount”.

Clearly the retail sector is still one in difficulties, but the discount to NAV of SREI shares as reported by the AIC is 26% so I think there is value there if one has the patience to wait some time.

I don’t know how readers portfolios are faring of late but mine seems to be zooming up in valuation – up over 60% since the low point of the start of the pandemic in March 2020 (that’s ignoring dividends received and cash movements). There is clearly a lot of enthusiasm among retail investors for stock market investment. Is the market becoming irrational and over-valued? I would not like to say. But as a dedicated trend follower I have had some difficulty in keeping up (I tend to buy more when share prices are rising and vice versa).

It was interesting to see a report from Interactive Investor (II) who published the chart below of the performance of their clients in the first quarter of the year. Clearly there is a benefit in being old when it comes to stock market investing!

They report “all age categories trailed the FTSE World Index, which was up 4.09%, while the FTSE All Share did even better after a poor 2020, up 5.19%”. They also say though that “the average interactive investor customer portfolio – in median terms – is up 32.09% over the year to end March 2021, ahead of the FTSE All Share”.

They explain these results by saying “The outperformance of the 65 plus age group could be in part due to lower cash weightings in a rising market, and their low exposure (in median average terms) to tech stocks like Apple, Tesla or Amazon, which had a shaky Q1. No tech stocks appeared in the top 10 holdings by value (in median average terms), amongst the over 65s”.

In a quarter in which the FCA warned that some younger investors are taking on board too much risk this does not seem to be an overall trend amongst Interactive Investor customers. They have a high weighting in investment trusts but less in individual technology stocks.

But as Alliance Trust (ATST) reported at their AGM yesterday, I have underperformed global stock market indices because I don’t have big holdings in the mega technology stocks such as Tesla or Apple. They are held by some investment trusts I hold but they tend to be under-weight in them like ATST. I am not unhappy to be under-weight in very large tech stocks which certainly look to be in bubble territory to me.

I hold the stocks mentioned above.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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Property Shares Spooked by Land Securities and Pets at Home Accounts Attacked

Land Securities Group (LAND) published their annual results yesterday. I don’t hold the stock but what they said seems to have spooked the whole property sector.

The company is a large holder of both retail and office property. For retail property, only 38% of rents due were collected within 10 days of the due date in March. For offices it was better at 89% but that is still down from the prior year at the same time. What possibly really scared people was that the company said they estimated that only 10% of its office space was actually occupied. There has clearly been a big trend to move staff to working from home, particularly from central London locations.

If companies realise they can operate with much less office space, the demand longer term may drop unless the office space can be repurposed. Every cloud has a silver lining so perhaps this would be one way to solve the housing shortage in London – just convert the unused office space to apartments. Or perhaps convert it to “competitive socialising” venues as Ten Entertainment (TEG) described their bowling alleys in their results this morning.

Will people revert to working in the office if the epidemic is over? This is the key question because property investment is a long-term game so it would be rash to make decisions on investing in property on short-term demand. I suggest home working will only have limited appeal for both staff and management. Not many staff have space for a “office” at home and keeping kids and pets at bay while working is not easy. It also makes staff motivation and management more difficult. But if the virus epidemic continues for a long time then there will be many fewer people wanting to commute into central London. Offices may move to locations to which people can drive, as happened in the 1960s and 70s.

On the subject of pets, the company Pets at Home Group (PETS) came under attack yesterday from Bonitas Research. They published a report that suggests the accounts of PETS were distorted by incorrect disclosures of loans to joint ventures. You can find the report on the web.

I don’t currently hold PETS shares, but I used to do so. I sold in November 2019. One reason I sold, other than thinking the profit I had made was very adequate, was that the accounts were particularly difficult to understand. The multiple joint ventures (mostly veterinary practices) which seemed to lose money was one concern. Making forecasts of future earnings and cash flow was difficult as clearly the strategy was to take over many of those ventures or wind them up.

Whether the claims by Bonitas are correct (they go so far as to say that the company lied about undisclosed trading loans) I would not like to say as it would require more research than I have time to spend. PETS has yet to publish a response to these allegations, at the time of writing.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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