PORTFOLIO UPDATE, 30 September 2020

Today we announce an update on portfolio performance and the special measures in place in response to the Covid-19 crisis.

To ensure that all clients have the opportunity to consider this announcement, as usual, the Resale Market will be suspended for 3 working days, re-opening at 11am on Monday, 5 October 2020.

Next interim announcement (further details below) and close period:
30 October 2020; market closed from 11am that day until 11am, 4 November 2020

Next quarterly announcement and close period:
18 December 2020; market closed from 11am that day until 11am, 23 December 2020

Today’s announcements:

1. Residential and student accommodation portfolio performance
2. Recommencing dividends for 11 properties
3. Enhanced financial disclosure: net cash surplus or deficit for all properties
4. Interim announcement, 30 October: actual financial results for all properties
5. Portfolio revaluations delayed to 31 March 2021
6. 5-year anniversary processes recommencing 1 October 2020
7. Potential sale of single flats within blocks, subject to shareholder votes
8. Resale Market and PPX update
9. Update on development loans

Since our last update on 31 July, markets have been relatively volatile, with the FTSE 100 trading most recently around 5,900, 23% below the 2020 YTD high of 7,675.  The Covid-19 crisis has been joined by the possibility of a no-deal Brexit, as sources of uncertainty.  Listed property companies, known as REITs and typically invested in commercial property, have continued to suffer the impact of tenant rent arrears and a weakening business outlook, with the FTSE REIT index 24% below its 2020 YTD high point.  8 of the 10 largest UK commercial property funds remain closed to investor withdrawals.

Residential property continues to demonstrate resilience in the face of the Covid-19 crisis, but current market activity owes much to the short term impacts of a backlog of transactions during lockdown and the temporary stamp duty holiday.  Residential property transactions are up strongly since the Spring lockdown.  House price data released today from Nationwide shows that prices rose strongly in September to produce an increase of 5% for the 12 months to 30 September 2020.

As widely reported in the national press, universities are once again facing severe disruption due to Covid-19 outbreaks and restrictions.  Students arriving for the new academic year are finding a large proportion of teaching taking place online and significant restrictions on student life.  Student accommodation bookings have suffered as a result, and for what bookings there are, there is the potential for tenant departures, loss of contracted rent and refunds if the crisis escalates.  Uncertainty over the academic year ahead remains extremely high.

1. Residential and student accommodation portfolio performance

Rent arrears in our residential portfolio remain higher than in normal times, but are otherwise stable.  With the furlough scheme coming to an end and the longer-term impact of the crisis still to be revealed, our outlook on rent arrears and the overall performance of the residential portfolio remains necessarily cautious.  Across all properties, we are focused on intensive management of operating costs and cash preservation.

Mortgage interest payments will re-commence from October for the majority of the residential portfolio, and we have secured a further 3-month holiday for 8 specific properties.  For those properties restarting mortgage payments, some have had the previous 6 months’ holiday rolled-up into the principal, allowing dividends to restart (where otherwise appropriate), and others are required by the lender to repay the deferral before any dividends can be distributed.  In the Investment Case section for each property, we have described the mortgage position.

Our student accommodation portfolio has been severely affected by the crisis.  Contracted occupancy stands at an average of 62%, but this ranges from 100% to 27% for individual properties.  There have typically been reductions in the rental achieved per room compared with last year and (depending on the severity of the crisis in the months ahead) there remains the possibility that contracted rent may need to be refunded.  With such an uncertain revenue picture, combined with numerous fixed costs of operation, these student accommodation blocks face a critical period of cash preservation.  As for residential properties, in the Investment Case section for each property, we have described the occupancy and mortgage positions.

2. Recommencing dividends for 11 properties

As a result of the ongoing crisis and other factors described above, we have taken a cautious approach to restarting dividends, only declaring dividends for those properties where there is a high level of confidence that the dividend is sustainable in the medium term.

Prior to the crisis, all dividends were quoted before the deduction of the AUM fee; we have now changed that policy, and all dividends are quoted after the deduction of the AUM fee, a reduction in any quoted dividend of 1.2% p.a.

Those clients with larger portfolios, receive a rebate that reduces the net AUM fee paid on investments in excess of £25,000 to 0.7%, hence effectively receiving a higher overall yield than the dividends they receive.

The following 11 properties will re-commence paying a monthly dividend from 5 October 2020:

Property Dividend yield p.a. (after AUM fee)
1 Fairholme Road, Croydon 2.00%
2 Amhurst Walk, Thamesmead 2.25%
3 Compass Court, Eastbourne 2.10%
4 London Road, Brighton 2.80%
5 Barton Court, Warrington 2.00%
6 Stokes Mill, Stalybridge 3.80%
7 Molyneux Court, Liverpool 2.90%
8 Cubbington Road, Leamington Spa 3.15%
9 Pitt Street, Newcastle 4.50%
10 Pierpoint Street, Worcester 4.75%
11 Ramsay Place, Aberdeen 5.00%
Average 3.20%

Further discussion of the performance of each property with a dividend can be found in that property’s Investment Case.

That leaves the majority of properties not yet paying dividends. Specific reasons can be found in each property’s Investment Case. Typical reasons include:

  • Property has accumulated an historic deficit due to operating performance (net rent) falling below its historic dividend payout or because works have been required
  • Property’s mortgage provider requires repayment of mortgage interest holiday prior to dividends restarting
  • Property will begin its 5-year anniversary process within the next 3-6 months, requiring vacant possession and bringing additional costs

Whilst property dividends remain suspended, all net rental income for each property accumulates within that property’s account, strengthening its financial position.

As discussed in previous announcements, at the start of the crisis, reserves across the portfolio had reduced to levels that needed strengthening – although we had been reducing dividends on weaker performing properties each quarter since Jan-19, given the extent of the crisis, the average dividend payout level pre-crisis was higher than would have been sustainable.  Given the extraordinary levels of economic and property market uncertainty, we will only declare a dividend once a property has reached a strong enough financial position to be resilient to the ongoing crisis.

At the next quarterly announcement, on 18 December 2020, we will announce any further properties that are able to restart paying a dividend.

3. Enhanced financial disclosures for all properties: net cash surplus or deficit

Today marks a significant enhancement in the financial disclosure that we make for every property.  The historical net cash surplus or deficit is now reported in the Financials >> Share Valuation section for each property and will be updated every 6 months (i.e. at 31 March and 30 September each year).  In the Investment Case section of every property, there is an explanation of that property’s surplus or deficit.

With 109 individual property investments, the portfolio has a range of surpluses and deficits.  There are 46 properties in surplus and 63 properties in deficit.  Of those in deficit, 14 have a significant deficit of greater than 3% of the latest property valuation.  Overall, the portfolio as a whole has a surplus of less than 0.1% of property value.

At the start of the crisis, the portfolio as a whole was in deficit – despite weaker operating performance over that period, the dividend suspensions and mortgage interest holidays have resulted in the portfolio moving into surplus.

The SPV central fund continues to be a source of financial stability for the portfolio, providing additional funding to any property that requires it.  Where unexpected costs or voids arise, individual properties are able to borrow (interest free) from the central fund to cover the shortfall.  Clients are never asked to contribute to funding shortages on their property holdings.  Prior to the crisis, for properties that had borrowed from the central fund, their dividend was reduced to create a surplus to repay the central fund over a longer period; in light of the crisis, our approach is now more prudent and properties need to substantially repay deficits before their dividends restart.

A minority of properties with significant surpluses have made their full contribution of 1% of their purchase price to the SPV central fund.  As a reminder, when these properties are ultimately sold, they will have this money returned in the form of a contribution to their sales costs (e.g. sales agents, legal fees).  Another minority of properties with significant deficits have not made any contribution to the SPV central fund and are not eligible for any return contribution to their sales costs at disposal.  The majority of properties have modest surpluses or deficits, and include a mix of full, partial or no contribution to the fund.  The central fund is well capitalised to deal with any reasonable shortfalls across the portfolio.

4. Interim announcement, 30 October: actual financial results for all properties

In addition to today’s release of the net cash surplus/deficit for every property, on 30 October we will make an interim announcement, reporting actual financial results for every property.  These financial results will include rental income, property operating costs, capital works, mortgage interest costs, fees paid to Property Partner, dividends, etc.  The results will give a complete picture of each property’s net income and, thereafter, will be updated every 6 months (i.e. at 31 March and 30 September each year).

5. Portfolio revaluations delayed to 31 March 2021

Property revaluations for the entire portfolio were scheduled to be announced today, 30 September.  These revaluations, conducted by independent, RICS-certified valuers, are required to take into account comparable transactions for each property over the previous 6 months and longer.  Following discussions with the valuers, it was clear that these valuations would have a severely compromised set of comparable transactions, due to the short term impacts of lockdown, the backlog created by lockdown, the stamp duty holiday, etc.  For student accommodation, the difficulty is even greater, with both the previous academic year’s income heavily disrupted in the final term and the current year’s still highly uncertain.

As such, the next round of portfolio revaluations has been postponed until 31 March 2021; those revaluations will include all residential and student accommodation properties.  This delay has saved the property portfolio approximately £35,000 at a time when cash preservation is a priority.

Although no properties have been revalued, the Latest Share Valuations of all properties will change today, for these reasons:

  • Amortisation of purchase costs will be charged for the last 6 months (as happens every 6 months)
  • Mortgage values will increase to reflect the 6 months of deferred interest for mortgage holidays
  • To include each property’s net cash surplus or deficit (as described in section 3 above)

The combined effect across the portfolio of the first two items, is to decrease Latest Share Valuations by approximately 2%.  The impact of the third item on individual properties will range from positive (for surpluses) to negative (for deficits), but on the portfolio as a whole, it will increase Latest Share Valuations by 0.1%, reflecting the net surplus of the portfolio.

For all properties, these values can be tracked on individual property pages in the Financials >> Share Valuation section.

6. 5-year anniversary processes recommencing 1 October 2020

As announced on 31 July, 5-year anniversary processes will restart from tomorrow, 1 October.

In accordance with that announcement, there is a 6-month backlog which we will work through in sequential order and the dates previously announced, remain unchanged.  Shareholders in each property that reaches its allotted date will receive an email notification on that date.

Investors can view the 5-year anniversary date on each property’s page, above the Investment Case. Depending on market conditions and the speed at which we can work through the backlog, all 5-year anniversary process dates remain subject to review.  Read more about the 5-year anniversary process here

7. Potential sale of single flats within blocks, subject to shareholder votes

We are encouraged by the current strong levels of transactions and pricing in the residential property market.  In addition to the potential disposals that may result from the 5-year anniversary processes, we believe that there is a market opportunity to make targeted disposals from the portfolio at attractive prices.

We have identified 20 properties within the portfolio that would benefit from the disposal of one flat within the block (i.e. not the disposal of an entire property/block within an SPV).  If a flat can be successfully sold, the proceeds will be used, first and foremost, to reduce the mortgage on that block.  Mortgage interest costs for all 20 properties identified are higher than their potential dividend, so the sale of a flat will bring forward the restart of a property’s dividend and increase the potential level of that dividend.

We have commenced the process of marketing a vacant flat in each of these 20 blocks.  If we attract a reasonable offer for a flat, we will immediately notify the shareholders in that property and conduct a shareholder vote (as we have done previously).  We will only proceed with the sale of a flat, once we have a shareholder mandate in favour of that sale.

8. Resale Market and PPX update

Since our previous announcement on 31 July, there has been relative price stability, with the PPX holding steady at around 81.  That was until the last 2 weeks, when the PPX has drifted toward 79, following negative sentiment about new Covid-19 restrictions and the potential for a poor outcome on Brexit.

Review the trends of the PPX, and Independent Share and Property Valuation Indices here.  Note that the independent valuation indices are based on 31 March 2020 valuations, which do not take account of the crisis.

9. Update on development loans

The period since our last announcement has seen a welcome return to both construction activity and sales of completed properties.  During September, we were pleased to announce the repayment of the Garratt Lane, Wandsworth loan to investors, earning them interest of 9.75% p.a.

There is the prospect of continued progress in the quarter ahead toward repayment of outstanding loans.  However, the disruption caused by the crisis is ongoing and most loans remain likely to overrun their pre-crisis timetable.  We continue to be reassured by the work that Proseed Capital is doing with borrowers and the senior lenders to get projects back on track under difficult conditions.

You can find the latest update on each outstanding loan here.

Finally, updates on the situation at all properties affected by fire safety issues can be found here.

If you have questions about these announcements, please email support@propertypartner.co.

Thank you for your continued support.

The team at Property Partner

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