4th June 2021
Forgive us for returning to a holding we discussed in these pages in mid-April: our Berlin residential play Phoenix Spree Deutschland (PSDL). Daniel ended that note by stating:
“…we have become more engaged with management and the board to work towards a strategy that would narrow the persistent 30% discount of the past 2 years… We remain confident that our patience and efforts will be rewarded further and that the shares will continue to rerate at a time when other assets perhaps have less potential to rise further”.
This week the Board of Phoenix Spree Deutschland announced a radical and very shareholder-friendly capital allocation policy:
“The Company will, with immediate effect, make a material allocation of capital to the buyback programme funded through a combination of existing cash balances, refinancing, condominium sale proceeds and the disposal of non-core assets. The Board believes this allocation can be achieved without compromising the organic growth prospects of the company.”
We have been incredibly impressed with the conduct of the manager of the trust, QSix, throughout the past few years. Not only did they manage to generate a near 9% NAV return during a period in which rents were frozen, but they have also shown admirable judgement in weighing up how to allocate capital in their discussions with us. Historically, their asset management skills have been superb – managing to optimise rental growth within a regimented system of allowable increases in Berlin. Now that the rent freeze has been over-turned and they can return to their original business model, they have many potentially very profitable uses for their capital. They could buy buildings, convert attic spaces in existing buildings, develop spare land, spruce up the existing stock or, buy their own shares.
Capital allocation policy must weigh up the various competing likely returns on each expenditure, and the risks around generating those returns. In addition, the Board must also be cognisant of maintaining good liquidity in the investment companies’ shares – and shrinking the company by buying back shares can be seen as counter-productive, leading to a persistent discount.
We have remained engaged with QSix and the Board throughout and are very pleased with the Board’s decision. Buying shares, especially at a discount as wide as PSDL’s, carries an internal rate of return that can be estimated with a reasonable degree of certainty. It is very hard for other options to compete. Both the Board and QSix realise that by conducting such an accretive policy (every share bought back at a discount increases NAV per share for remaining shareholders), they are sending a strong signal. Here is a Board, working with a manager that is itself a very significant holder of the shares, which genuinely cares about shareholder returns. This activity should hopefully not only narrow the discount, but also send the investment company back to a premium to net asset value – where it traded for much of its early life. The potential liquidity that the company has at its disposal to buy back shares is significant.
Once the discount has been eliminated*, the trust can re-grow again by issuing equity. There is also every good reason for these shares to trade at a premium. The portfolio is a scarce collection of top quality Berlin assets – there is no other listed vehicle that comes close to the concentrated and high quality nature of this portfolio. The published NAV is under-stated (when apartments are sold as condominiums, it is generally at a 20% premium to NAV). The management team are among the best we know (across any asset class). The Board have shown consideration for shareholders and are clearly determined to act in their best interests. Finally, the rent freeze has been overturned, meaning QSix can return to achieving double-digit NAV returns for shareholders.
Phoenix Spree Deutschland remains a top holding across our three Funds and illustrates in one holding what you get from a Hawksmoor Fund: exposure to idiosyncratic asset classes (hard to find in our peers), run by best-in-class managers, with a large margin of safety, plus proactive value-enhancing engagement with Boards and management teams.
*NB: different data providers quote different NAVs, the discount to NAV we refer to, and which is the primary measure for the Board, is EPRA NTA.
Ben Conway – Head of Fund Management
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