Property Income Trust for Charities - Investor Update
We are very aware that many of the charities invested into PITCH rely on the monthly income distributions to support their charitable objectives and we, therefore, feel it is important to give some forward guidance on the outlook for distributions from PITCH over the next Quarter. We also provide further commentary on other implications from the Covid-19 pandemic.
It has been a tumultuous and unprecedented few weeks for the UK economy. The impact of social distancing measures and the enforced closure of non-essential shops, restaurants, hotels, leisure and educational facilities has placed unprecedented cashflow pressure on many businesses. This has required the Government to provide a range of assistance both financial and legislative. The Coronavirus Act, which received Royal Assent on the March rent payment date (25 March), effectively removes the threat of eviction from commercial tenants that refuse to pay rent. In many instances, this has now given tenants the confidence to withhold payment or seek rental concessions in the form of rent-free periods, rent reductions or deferrals.
The impact of the current crisis has hit some property sectors harder than others. Many occupiers of retail, restaurant and hotel properties have been subject to enforced closures, where understandably, we have seen a higher proportion of requests for rent concessions. Other sectors, however, are proving more resilient based on their ability to continue to generate revenue whether it be through remote working or the sale and delivery of essential goods for instance. This applies to the office, warehouse and food store sectors. These trends underline the importance of portfolio positioning during this crisis as well as the credit worthiness of the individual tenants.
Rent Collection and Approach to Tenant Management
This economic environment has presented a challenging set of circumstances for an income focussed, ethically minded fund such as PITCH. On one hand rests our fiduciary duty to maximise income returns to our investors however, on the other is the need to support our tenants where there is a genuine case for doing so, in recognition of the extraordinary short term impact that many of them face. Where requests for rent concessions have been sought, we are acting responsibly and adopting a firm but fair approach based on tenant needs, prioritising monthly payments in the first instance, followed by rent deferrals, to ensure that the short term impact on distributions can be recovered at a later date.
Notwithstanding the impact of late payments and concessions, in some cases we are at risk of a loss of income. This is the case in relation PITCH’s indirect holding in the Unite Student Accommodation Fund (USAF), where the Manager has announced a full refund to its student tenants for the remaining academic year meaning that there is unlikely to be a dividend for Q2 or Q3 2020. This amounts to circa 4% of PITCH’s portfolio income. In anticipation of this, we have served a formal redemption notice in this vehicle with the aim of being repaid at the earliest opportunity to minimise loss of income and avoid, so far as possible, the expected capital value loss in this sector.
For the direct portfolio, we can report that we have now collected circa 70% of all gross rents due for payment on the March quarter before allowing for interest and property expenses. Allowing for those on monthly payment plans, rent collection improves to 79% should the May and June payments be received as expected. It is important to stress that this does not represent the final figure as we still await payment from a handful of smaller tenants with several others having switched to monthly payments or being deferred to later in the year or 2021.
At this stage, our best estimate is that the pence per unit (ppu) distributions in Q2 will be circa 40% lower than we would normally expect for this quarter based on contracted tenancies. This takes account of the loss of income for the USAF holding during this period as well as a reversal for previous accruals. However, depending on tenants’ ability to trade through this period and make good the rent concessions we are agreeing, over a 12 month period we should be able to make good the shortfall in income with the exception of the USAF distributions.
We need to caution, however, that depending on the timing of the release from lock down and a resumption of business activity, we expect there will be a higher proportion of rent concession requests for the June quarter (Q3 distributions) as the impact on the economy intensifies. At this stage it is too early to forecast what impact this will have on distributions.
Impact on Borrowings
We are able to report no impact on any of the Fund’s borrowing facilities from the current shortfall of rental receipts. Based on the March valuation the loan to value stands at a modest 11%.
Suspension of Dealings
As communicated in our investor letter dated 19 March, PITCH remains suspended for dealing in line with FCA best practice guidelines due to valuers expressing ‘material uncertainty’ over the ability to value. As reiterated in our earlier communication, in the case of PITCH, this does not arise for liquidity reasons. PITCH is currently holding circa £83m in cash allowing for redemptions held and a return of new subscription monies. Unsurprisingly, valuations are under pressure and we expect Q1 and Q2 capital values to see material declines across all sectors, particularly retail (excl. food stores) with offices, industrials and some alternatives proving more robust.
In line with FCA guidance, despite PITCH being closed, we will continue to produce a monthly NAV based on external valuations prepared by Cushman & Wakefield. This will be accompanied by additional disclosures covering such items as cash levels, debt reporting and valuations. Neither subscriptions nor redemptions will be possible until such time as the Fund’s valuers can remove the qualification wording from valuation reports.
We hope that the above provides you with a helpful summary of PITCH’s income forecasts for the current quarter and beyond. We acknowledge that for many charities the reduction in income distributions from PITCH over the coming months will be unwelcome, however, we believe given the underlying sector positioning of the Fund and quality of the majority of our tenants, we are hopeful of returning to more normal levels of distributions later in the year as and when social distancing measures can be permanently eased.
Please be assured, the PITCH management team is working very hard to maximise the income from the Fund and minimise value loss where possible through careful asset management.
As ever please do not hesitate to get in touch with either of us or one of the team should you have any questions. In the meantime, have a healthy and safe Easter weekend.
With kind regards, James and Simon
Head of Business Development and Marketing
The Property Income Trust for Charities
A fund managed by Mayfair Capital
+44 207 291 6664 Direct Line
The Property Income Trust for Charities
A fund managed by Mayfair Capital
+44 207 291 6668 Direct Line
MAYFAIR CAPITAL INVESTMENT MANAGEMENT LIMITED55
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