TR Property Investment Trust plc (TRY) Earnings Call Transcript

Okay. For those of you who've been here before, and it's nice to see so many faces, the format is quite similar, but that's deliberate just to bring you up to speed with what's happened over the last 12 months and talk a little bit about what's happening right now, and it has been a busy week, literally something happening every day, which we'll sure we'll come back to in a moment. But the place to start, I had to think of a title here, be where the eyes of March is the best I could come up with. And just when we look back at the 12 months to the end of March '26, if any of you had run me sort of middle end of February, I'd have been quite happy with what was going on. We delivered these fantastic set of numbers across the top line in the first 11 months of the financial year. And then OMG, what happened in March? Well, the Orange man decided to really trash our performance and lots of other things. So very disappointing response. We took a lot of chips off the table. I took nearly GBP 100 million out of the market in the first fortnight of March. But essentially, that, in many respects, we are a long-term investor and the consequences were -- we couldn't avoid really what happened in the market entirely. Now of course, we've been here before and markets bounced very quickly, and we put that money back in April. And in fact, we had a plus 8% month in April. But it's worth just touching on what actually happened during the financial year. So when you see, as you all will as shareholders, the returns over the year to the end of March '26, whilst that looks a little bit disappointing, really, in some respects, it could have been a whole lot worse. But I think what we're going to come back to at the end of the presentation is that the reason the first 11 months were so good was really all about what I'm going to talk about in terms of how the fundamentals for commercial property and to some extent, residential have really improved dramatically, and we'll talk about that. And really, what we saw in the first 11 months of the financial year was the market getting behind that. And of course, that's not only what's going on in the underlying commercial property market, but how that is reflected in share prices. And we are very much in a sector that has been for a number of years now because we're very much at the value end of the equity trade or some would say the growth end of the bond trade, we'll also talk about that. We have been sort of slightly brushed aside in the rush to own all things tech and all things AI. And what we saw in the first 11 months of the financial year was a bit of money coming back into what was a very under-owned sector. And here we are a few months later, we're kind of back in that scenario, and we'll talk a bit more about that later on. In terms of the first sort of quarter of the financial year, we're okay in terms of those absolute numbers. From a relative point of view, I'm a little bit disappointed, but that has narrowed in the last week. We are actually a few basis points behind the benchmark at the moment, but we're in the first -- at the end of the first of the four lapse of the race as it were, but the numbers aren't unhappy. Dividend, and I think the Chairman has already mentioned this. But as far as we are concerned, whilst TR originally stood for Touche Remnant going way back, and now we then moved in 2004 to Thames River. So we said, well, that's why we moved -- kept the name Thames River. But of course, now we say that TR stands for total return, which is much more appropriate because that's what we are. We are -- the sector and the investment trust is a total return animal. Income is very important. and we all want to continue to maintain growth in the dividend. Now the great thing about investment trust structures, and again, you're all very familiar with it, the ability to retain earnings or to pay out of reserves, be it income or capital, allows the Board to ensure a smoothing of the dividend progression. And whilst the dividend only increased marginally over the year, of course, in terms of our earnings per share, they left. And that's because in the previous two years, we've had lower earnings and we were using reserves. So we had a situation where the Board were able to push the dividend up, confident that we'll be returning to in due course through to full cover. But even if we weren't, the point of the structure is that we are able to continue to pay that -- to increase the dividend every year. And then looking at sort of market performance, I'd like to go back to the end of 2021 because I think it's sort of useful to look at, and you saw this slide last year, the impacts that we suffered from that very dramatic change in the underlying cost of capital. And it really was our sort of annus horribilis 2022. We then bounced along various sort of periods of recovery. And then we look more recently, I've just shaded here that the March -- the month of March and the scale of the impact that we -- that I talked about on our first slide, followed by a bit of a recovery, and now we're going into the ups and downs of what's going on in the Middle East and Ukraine and politics, et cetera. So whilst that is minus 10% from the peak, you could equally look at it as plus 10% from the trough. So depending on whether we want to look glass half empty or half full. But the point being is that we're not uncomfortable with where things are at the moment. So I thought I'd just sort of run through why are we optimistic? And by the way, the trust is geared at the moment. So our maximum gearing we can have is about 20%. We're currently at about 17%, 17.5%. Bear in mind that in 2008, so the quarter -- Q2 2008, so the quarter before Lehman went bust, we were running with 20% cash. So, in terms of maximum pessimism, maximum optimism, I really am up here, and that might surprise you. But what it all comes back to is these first four points. The fundamentals are positive. What I mean by that is we -- it's just a function of supply and demand. And the key here is that the construction cost inflation has been so dramatic over the last three or four years. Roughly, we're talking 40% to 45% more now to build an office building than it cost four years ago. And there's been very low levels of construction, particularly speculative construction because the developers, those are all your friends at school who are always violently optimistic about everything. They probably went into property development if they could because you're building something which particularly if you haven't got a tenant, it's going to take you years to build it. Who knows when you're going to find a tenant or not, the definition of optimism. But of course, those developers need to find people to lend them the money to build the buildings. And prior to the global financial crisis, that was the banking community. We're very happy to lend. And of course, they lost a huge amount of money. And then since then, it's been very, very difficult to find capital to build speculatively. And that's in a way a great thing because it's resulted in there being far less speculative construction. If you've got a pre-let, you found a tenant, you build the building for them, that's all well and good. But -- so in a way, this is our perfect market. We like markets where there's very little supply, steady improvement in demand. And then when we come to -- essentially what you -- the conclusion to that is an undersupply of prime space in many markets. And really right here in the west end of London, whether we're talking about St. James's or whether we're talking about Bond Street or Oxford Street or the West End generally, rents have been climbing at literally 10% to 15% per annum for the last couple of years, very dramatic. Now you can go out into the suburbs and you'll find older buildings. It's very difficult. They can't find the tenants, et cetera. But for prime space, and it really applies to all markets, not just offices, we've been talking about shopping centers or industrial buildings, all markets. It's -- we are actually seeing decent rental growth, which is encouraging. Next point, despite upward movement in the shape of the curve. Now what I mean by this is literally just the cost of money. So at the short end, obviously, we're very tied to base rates. And then if we look at the 5- or 7- or 10-year that has been very sticky. We haven't really seen it come down, and that's because it's so much more tied to the prospects of inflation. And that's the real sort of issue for us at the moment. We're just not getting that longer-term cost of capital coming down because of this sort of insipid risk of inflation, particularly around the price of oil, et cetera. But encouragingly, margins, so you might be able to borrow the 5-year swap rate and then the bank will require a margin on top of that, and then they'll lend you that combined sum. Those -- that margin hasn't expanded. Now we watch this very carefully because it's a kind of sign of distress if there are fewer banks out there willing to lend money, then that margin will get wider because there's only a few of them, so they can all -- well, we'll give them -- we'll try it and see whether the customer is prepared to pay. But if there's lots of banks and lots of other lenders, then it's super competitive and that margin remains tight. And that's the world we're living in. There's another -- it's like a little sort of canary in the coal mine. It's quite chirpy at the moment. It's feathers are all nice and fluffed off and it's feeding. I think I'll drop that analogy won't roll that one out again. I want to take that one out of the recording, I think. But anyway, just checking you all awake. Right. And then the penultimate point, we're going to spend a bit of time on. So this is real estate equities because us significant discounts. The point here is, so the fundamentals are fine, but the fact of the matter is the little world of listed real estate companies, and we are about 1.5% of the all share or the MSCI or the S&P 500, whichever, we're a very small part of the listed market. We're just sort of bit forgotten at the moment because everybody is still in love with other parts of the market. So we look very cheap. And what that results in, of course, is M&A activity, and we'll come back to that a bit later on. So standing here a couple of years ago, I said, look, one of the problems we've got is a lot of our wealth managers, a lot of -- you folks will have money with wealth managers. And a lot of them are consolidated. There are natural buyers of stocks, and they, therefore, want larger companies. We want larger companies because they're more efficient, particularly for real estate. And really, what we've seen here is that standing alone was no longer an option, and we've seen either shrinkage by way of wind up or we've seen merger. We haven't got time to go through all of these, but all of the top ones have either merged or been taken private or being wound up. And then at the bottom, there are three that are very much in play at the moment. We're big shareholders in Picton and Phoenix Spreeis, not in Schroder European. And we can talk about those as well. Right, performance. It's always astonishing when a benchmark delivers, as you saw, sort of 8%, amazing that even in our little world of 100-odd property companies, we can get just in the property space, we can get this amazing difference in performance. So, Merlin in Spain, I'm not going to go through all of these, just to highlight, this business has got big exposure to data centers, and that's really caught the imagination of investors. I'm sure you want to talk about that later, particularly in relation of SEGRO or the right time before I mentioned SEGRO, that's good. And then at the other end of the scale, Unite Student, where in all the years I've been doing this, I've never seen a company buy another company and then they bought a business called Empiric Student Property and then announced a profit warning in the same week. So the Chairman stopped taking my calls because I was essentially start to show to him for how could he do that? And anyway, the share price is the outcome. Happy to talk about any of those later on. Right. What did we get right and what did we get wrong? So I just wanted to show you, if it's a dark shaded line, it means it's a stock that we had a long position in and it outperformed the benchmark. If it's a shaded line, if it's a lightly shaded line like this, later on here, that means that we didn't own it or we were underweight relative to the benchmark, and it outperformed the benchmark. On the left-hand side here, so big yellow, we had a position, and it underperformed the benchmark. So that was a negative contributor. And then these names at some point during the year, we were probably underweight or didn't own the stock, and that contributed to negative performance. But again, this is all on the website, so you can look at it in your -- at your leisure. So a couple of slides on what we've been doing. I focus just on -- for this calendar year, just on Q1 and Q2. I'm very happy to talk about any of these. If the arrow is going up, it means we bought more of them. If the arrow is green and red, it means we probably traded through those. for different reasons. And if the arrow is down, it means we sold. We talked about Unite, very disappointed, need to get out of that. LondonMetric, we are very fond of. We just took some profits there. And the same with Klepierre has been a fantastic performer. Residential, we've talked over the years about Vonovia and TAG. We don't really own Vonovia, but we do own TAG, which is mostly -- has about 25% of its assets in Poland, which is going great guns. And then the one to focus on is I-RES. I-RES is Irish residential. So the Dublin government back in 2016 realized that they had massive rent inflation because lots of tech companies had hired lots of smart, bright, young folks were paying them lots of money, and they literally -- they had nowhere to live. Dublin is a relatively small city, and rents were going through the roof. So the government said, right, we're going to fix the rents. You can't miss landlord, Miss. landlord, you can't increase your rent by more than 4% per annum. So anybody who was in a flat was like, oh, goody, my rent can only go up by 4% per annum. For the developers, they're like, well, I'm not going to build anything. I'll just stop. And this is the problem with when you interrupt Mr. Market, you try and regulate something. So anyway, the good news is that the Irish have come to their senses. And this year, we thought this might be coming. So we bought an awful lot of shares in advance. They have changed the rules. And they've now said that if you're an existing tenant on an existing lease, then you still have the 4% per annum cap -- but if you leave your flat because you've been relocated back to Seattle or whatever and the flats now empty under a new lease, that can be an open market rent. So every year, the rent can be moved up to the open market. And of course, that's going to lead to probably a 10% to 12% improvement in earnings each of the next three years for this company. So we're pretty encouraged by that. So that's that one. And then, again, not going to run through all of these too much, but Q2, you can see we bought back into Klepierre. So we've been very busy. Logistea is a Swedish logistics business. A lot of these names will be familiar to you. And here, you can see that Big Yellow was actually a selling Q2. This is where we thought that there was some public announcement, not formal, but informal press speculation that original managers of Big Yellow, the owners of Big Yellow had decided to try and sell the company. And they weren't able to reach agreement with supposed to be a private equity house. But Big Yellow is a business that we helped IPO back in 1999. My predecessor is in the audience, so that's great. So, Chris, it's very much Chris' idea. So we've been long term -- we haven't always held Big Yellow. So it's been -- we've been in and out of stock over many years. And we were, in a way, surprised that the founders didn't manage to do a deal, but we think they probably will at some point in the future. So we'll be back in it. Okay. So a summary of what we've been up to. Again, these are slides that I use for when speaking to our institutional shareholders, and they want to know over the year, what sectors have you bought more of, what have you bought less of? Again, we can run through any of those. You can see that in the case of self-storage, whilst I sold some Big Yellow in Q2, over the year, we actually added to the position is a good example. Industrials, we won't surprise you. Spanish diversified, that's our friends at Merlin. Student accommodation, you can see going down. Nordic residential, that's an area where we came out of a business in Helsinki, which was the right thing to do. And then our relative positioning compared to the wider market, again, very happy to talk to anybody about any of these particular positions. Geography, never a focus particularly. It's very much an output rather than an input, but it's useful for everyone to know where we are. To remind you on currencies, we run the currency in line with the benchmark. So for example, if Switzerland was -- it's -- we have 14% exposure, but it's about 16% or 17% of the benchmark. And therefore, we actually are underweight Swiss francs, so we buy some forwards to compensate. So when you buy a share in TR property, you can work out exactly what you're getting currency-wise because it always matches the benchmark, not where my positions are because the positions are moving around all the time. But it means -- but as you know, you are getting lots of exposure to other currencies outside of sterling. Okay. Physical property, there we finally got it up to 6% of assets. Why is it so low? And it was about 5% when we were all sitting around here a year ago. And the answer quite simply is that we saw such great value in the equity market, leaving aside what happened in March. Actually, we found it really hard to find -- to buy physical real estate at net asset value when we can buy shares at such big discounts to net asset value. However, we did manage to buy one building, which is a little office building in Cambridge. We bought it is actually on the right on the edge of Cambridge Airport. Now Cambridge Airport was owned by an aeronautical business called Marshalls, who've been there since 1928 or something. And they do all sorts of different commercial plane airline refurbishments, et cetera, reconditioning, and they had closed the site and sold the land for housing and commercial development. But they are still in this office building, and they've got another nine years to go, and we bought the building off a yield of 10%. So we bought the building at exactly half the price that the BMW Pension Fund, who bought it eight years ago paid for it. And the reason that we're totally happy about it is we formed a joint venture with a local business called Mantle, and Mantle are a serviced office operator. So our idea is to persuade Marshalls to leave. And if they don't want to leave, that's fine. They can continue to pay the rent for another nine years, we'll be clipping a coupon of 10%. But if they do want to leave, then they have to pay us some to lapse. And we think they'll probably go because they're no longer involved in the rest of this. So why would they stay. But they haven't got their head around that yet. And then we will put in place our service, our flexible office provider, and we've agreed a profit share with them. But for any of you who have been up to Cambridge recently, I mean, it's absolutely booming. It's -- rents are rising fast. So we're really pleased to buy it. The only disappointing fact is that the cost was GBP 6.5 million. As I said to the Board, it would have been great if it had been double that. But anyway, we're out there always looking. George, who's been -- as you -- many of you have met George, he's been with me for 20 years. He's actually on a sabbatical. He's got -- he's having two months off. Otherwise, he'd be here to answer any more questions about this. But we're out there busy digging for deals all the time. And then at our industrial estate in Bicester, again, very much this Oxford, Cambridge arc is an area of great economic growth. And we've been busy here, increasing rents, doing new leases, rent reviews. We've put solar panels on a whole lot of roofs, and we've now got -- we've got some tenants paying us GBP 7.70. So I won't tell you who they are, but they're about to get some letters saying your rent is going to double. So that's going to ruin their summer. But anyway, if they don't want to stay, then we will find new tenants, that will be great. Okay. Last slide, I think I've banged on quite long enough. I thought the first line is sort of important in as much as we're always looking -- history may not repeat itself, but it certainly rhymes. And I think March '26, very dramatic in terms of share price move kind of similar to March '22 in the beginning of Ukraine war. But I think the big difference is really important is to focus on the fact that in March '26, rates and yields were much higher. March '22 was so difficult because we were coming off zero interest rates. absolutely not the case in '26, and it may really explain why we haven't seen too dramatic a correction. The AI narrative is at the forefront of everybody's minds for obvious reasons. And we think this sector very much falls into this halo group, this heavy asset, low obsolescence. And what we're seeing at the moment actually is that a lot of these businesses that are involved in the AI rollout as it were, are actually taking more space rather than less. So that's quite interesting. And then the last two points, private equity have been a very big buyer of commercial property throughout the cycle. And for a lot of these businesses, they're going to be looking for an off-ramp. Do they sell their portfolios to other private equity business? Or do they -- maybe do they list do they list them? So we're kind of fingers crossed and there might be some IPOs coming down the pipe. And then I wrote this slide a week ago. And at the time, the live situation, SEGRO and Prologis, that has now moved on literally as of the last 24 hours where the Board of SEGRO have announced that they are minded to recommend the bid from Prologis. Now this is the fourth offer that Prologis has made. Just to give you some numbers, the bid, there's a bit of dividend in there. But in round terms, it's at about a 13% premium to the net asset value, but it is a 31% premium to the share price that SEGRO was trading at before Prologis announced their interest. Gosh, it's only been a couple of weeks, but it feels like a bit of a roller coaster. It's our second largest position, SEGRO. It's about 6.7%, 6.8% of the fund. But that actually is about in line with the benchmark. So we're not -- we weren't particularly long of it. And the interesting thing is the reason that we were underweight and we bought a lot of it in -- back in February and March when the price was -- or sorry, March and April when the price was very low, is that for quite a while, we've preferred Tritax Big Box, better management, better assets, higher earnings yield, plus some other companies in Europe that I've talked about over the years. But fortunately, we -- I just felt that SEGRO was too cheap, and it was -- and we didn't expect Prologis to come along, but we weren't underweight, and that was good. But what's, of course, of interest to Prologis is they think that some of these assets have been undermanaged. And that was one of the reasons for us not owning it. So rather ironic that the reason we didn't own it was why Prologis are buying it. But fortunately, we invested since the end of January, nearly GBP 60 million in SEGRO. So I'm -- at least we didn't get that one wrong. We didn't get it right, but we didn't get it wrong. Okay. Ladies and gentlemen, thank you very much. That's a bit of a canter through.

Very happy to take some questions now, but I will also be around after sandwiches, which is not something we've done for some years. But then we will have some questions now, and then I will be around after. So we take a few off the floor. Sorry, microphone there.

I basically got two questions about the debt levels. During the year, I think in February, your loan -- your euro loan note matured. And this has been replaced by bank loans, variable bank loans. I'm not sure what the interest you're paying on that is probably confidential, but it's obviously going to be significantly higher than the 1.92% was paying. Can you just make -- give an indication of how that will affect the viability of your leveraging?

It's a very good question. And absolutely, we've been incredibly fortunate and Jo Elliott our Finance Director, did a very, very -- has done over many, many years, a very good job of managing the debt. He's handed over to Gavin, but we'll talk about that in a bit more in a moment. And essentially, like anybody with a fixed rate mortgage, some of our debt is floating, some of our debt is fixed, and that was a particularly attractive debt package. And yes, it essentially -- it came to the end, we paid it back. Now we would chose to replace it with RCF with revolving credit facility, short-term debt while we wait to see what happens to the shape of the curve and whether we pick our moment to go back and take longer-term debt. But the answer is when that debt package came to an end, we had to repay it, that was not a moment to immediately lock in 4.5% or 5% debt. We'll keep that floating, which is fine. We've got plenty of covenant capacity to do that. And then at some point, we may well then choose to lock in another longer-term facility in due course. And we have -- we definitely have banks that want to lend to us and institutions that also want to lend longer term as well.

Level mean that you're likely to reduce leverage in?

It is -- we have taken into account the additional cost of the interest cost is part of our total return. So, in simple terms, I'm prepared to pay a bit more for my debt because I'm confident that the shares that I'm buying in the property companies I'm buying, those shares prices are going to go up, and therefore, I'm prepared to accept it costing me more to borrow money, but in the total return will ultimately be more positive, just accepting that it's a bit like your mortgage. It's just gone up, but you still want to -- you don't want to downsize your house and pay back the mortgage, you want to stay in the same house and you're prepared to accept a bit more debt because you think the house price is going to go up.

Okay. The second question is, during the year, your contracts for difference in terms of the liability went from GBP 132 million, similar to previous years to GBP 88 million. But during the year, you also made a capital gain on those contracts. Now I know in 2023, you made a very large capital loss of GBP 45 million on the contracts for difference. So was this change in anticipation of what could happen? Or is it a change in strategy? I mean you made a reference in the speech that presently, it's not the same as in 2022 in terms of interest rates. But what's your strategy going forward?

Yes, it's a good question. So the it's going to sound a bit odd, but essentially, contracts for difference are just part of our leverage -- tools in our leverage armory. So we can borrow money from the bank and then use that money to buy shares, simple, in a normal way. Alternatively, we can use contracts for difference, which essentially provide me the same thing in a different way because we're just paying the margin on the shares that we're essentially borrowing. What's neat about contracts for difference is that we use them particularly when we buy U.K. shares and French property company shares because by buying through contracts for difference, you avoid the transfer tax, essentially the stamp duty. So in the U.K., that's 0.5% and the same with France for large companies. So we often use CfDs. So -- but you're absolutely right, the cost of the CfD is not dissimilar to the bank debt cost over a long period of time. So the point for me is I have to always judge how long I think I'm going to hold the position. So what we tend to end up with is particularly where we've got a large position where we never trade the whole of, say, Unibail-Rodamco, we might have GBP 60 million invested or euros invested. We'll hold some of that CfD and some of that physical which may have bank debt on this part, but the CfD, I'm trading -- I might be trading it more in and out that I don't want to incur the stamp duty cost. But the way you should think about the balance sheet on the leverage side of the balance sheet, it's a mixture of long-term debt, which is our MetLife facility that expires in 2031. Obviously, we paid back the other one, the 1.92%. RCFs, so short-term borrowing, 1-year rolling bank debt. And then the CfDs are just another -- another part of the debt stack. But I can certainly take this offline, and we can have a further more detailed conversation about it.

So it's slightly more in the past in terms of [indiscernible]

We have strict limits as to how much CfDs we can use, the percentage of CfD. So I'm not -- we are very much within our risk tolerances. I'm very happy -- I think if I -- best if I take this, you and I have a conversation after...

Did you reduce them by GBP 50 million just in March or was it throughout the year?

No, it was throughout the year, but it was particularly of -- in March, the capital we took out of the portfolio in March was a mixture of physical and reduction in CfDs. It wasn't deliberately structured to reduce CfD exposure. We very much -- I think we -- the conversation is moving on to risk rather than cost of debt. So that's -- I'll be around at the end.

Okay. Do you know what the present value is in terms of liability?