REG - TR Property Inv. - Annual Financial Report

TR Property Investment TrustAnnouncement

02/06/2023 07:00

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RNS Number : 4112B  TR Property Investment Trust PLC  02 June 2023

TR PROPERTY INVESTMENT TRUST PLC

LONDON STOCK EXCHANGE ANNOUNCEMENT

Results for the year ended 31 March 2023

LEI: 549300BPGCCN3ETPQD32

Information disclosed in accordance with Disclosure Guidance and Transparency
Rule 4.1

 

TR Property Investment Trust plc, announces its full year results for the year
ended 31 March 2023

 

Chairman David Watson commented

"Markets have had to absorb huge increases in the cost of capital and real
estate equities have suffered consequential price adjustments. However, this
is an unusual cycle where both interest rates and rents are rising. In many of
our markets property fundamentals are sound and we see few signs of
over-supply."

 

Manager Marcus Phayre-Mudge commented

 "For a sector where returns are anchored by income, these levels of
volatility and multiple directional shifts are almost unparalleled. The whole
period has been dominated by the ebbs and flows around interest rate
expectations and real estate fundamentals have taken the proverbial back seat.
However, looking forward, we anticipate a renewed focus on those sectors
offering rental growth."

 

                                             Year ended  Year ended
                                             31 March    31 March
                                             2023        2022        Change
 Balance Sheet
 Net asset value per share                   305.13p     492.43p     -38.0%
 Shareholders' funds (£'000)                 968,346     1,562,739   -38.0%
 Shares in issue at the end of the year (m)  317.4       317.4       +0.0%
 Net debt(1,6)                               12.3%       10.2%
 Share Price
 Share price                                 279.00p     456.50p     -38.9%
 Market capitalisation                       £885m       £1,449m     -38.9%

 

                                                      Year ended  Year ended
                                                      31 March    31 March
                                                      2023        2022        Change
 Revenue
 Revenue earnings per share                           17.22p      13.69p      +25.8%
 Dividends(2)
 Interim dividend per share                           5.65p       5.30p       +6.6%
 Final dividend per share                             9.85p       9.20p       +7.1%
 Total dividend per share                             15.50p      14.50p      +6.9%
 Performance: Assets and Benchmark
 Net Asset Value total return(3,6)                    -35.5%      +21.4%
 Benchmark total return(6)                            -34.0%      +12.2%
 Share price total return(4,6)                        -36.2%      +19.9%
 Ongoing Charges(5,6)
 Including performance fee                            0.73%       2.19%
 Excluding performance fee                            0.73%       0.60%
 Excluding performance fee and direct property costs  0.67%       0.58%

 

1.    Net debt is the total value of loan notes, loans (including notional
exposure to CFDs and Total Return Swap) less cash as a proportion of net asset
value.

2.    Dividends per share are the dividends in respect of the financial
year ended 31 March 2023. An interim dividend of 5.65p was paid on 12 January
2023. A final dividend of 9.85p (2022: 9.20p) will be paid on 1 August 2023 to
shareholders on the register on 30 June 2023. The shares will be quoted
ex-dividend on 29 June 2023.

3.    The NAV Total Return for the year is calculated by reinvesting the
dividends in the assets of the Company from the relevant ex-dividend date.
Dividends are deemed to be reinvested on the ex-dividend date as this is the
protocol used by the Company's benchmark and other indices.

4.    The Share Price Total Return is calculated by reinvesting the
dividends in the shares of the Company from the relevant ex-dividend date.

5.    Ongoing Charges are calculated in accordance with the AIC
methodology. The Ongoing Charges ratios provided in the Company's Key
Information Document are calculated in line with the PRIIPs regulation which
is different to the AIC methodolgy.

6.    Considered to be an Alternative Performance Measure.

 

Chairman's statement

 

Market Backdrop

This has been a very difficult year for the property market, for property
shares and for the Company. Net asset value total return was -35.5%, slightly
worse than our benchmark at -34.0%. The share price total return was -36.2% as
the discount between the NAV and the share price widened slightly, reflecting
weaker investor sentiment as a whole. Although the change in the second half
was modest (first half NAV total return of -33.6% March to September 2022) we
have experienced some very dramatic price action in the intervening six
months.

 

Macro-economic forces continued to dominate. The drivers and trajectory of
inflation remained everyone's focus. Central bankers appeared as unsure of the
consequences of their actions as market participants. Volatility remained
elevated. Whilst our total return figures are clearly very poor, the autumnal
rally in property stocks, somewhat punctured (in the UK) by political events
in November, did resume in earnest in January. This three month rally, based
squarely on a change in the expected trajectory of interest rates, gave us, at
last, a taste of a more optimistic attitude towards our asset class. The last
few weeks of the financial year saw market sentiment damaged by the failure of
two regional banks in the US and the final take out of Credit Suisse. This
raised knee-jerk concerns of bank contagion which here feels sensationalist
given the enhanced levels of regulatory oversight and controls on European
banks post the global financial crisis.

 

The investment management team have a long track record of alpha generation
through dynamic stock selection. It is fair to say that the investment
dynamics of the last 12 months have not been their preferred context. The
dramatic price falls and bear market rallies have been largely
undiscriminating between the good and the bad. Forced sellers were interested
in volume not price. Small caps, as usual, struggled in these conditions. This
macro-driven environment is hopefully, finally, abating as investors appear
increasingly interested in differentiating between individual companies'
prospects following the significant correction.

 

Our investment universe has now seen a number of companies who have suspended
or reduced dividends. These were, in the main, the likely suspects and it
would be a surprise to us if many others now emerge given the economic cycle.
One of the core attractions of real estate investing is the potential of
indexed income and this is showing through and remains our focus.

 

Revenue Results and Dividend

Earnings per share increased by 26% from 13.69p per share to 17.22p. This is
an all-time high. Although company earnings did in general recover to
pre-Covid-19 levels, our headline earnings were further flattered by changes
in the timing of some dividend payments. More detail of this is set out in the
Manager's report.

 

The Board is pleased to announce a final dividend of 9.85p taking the full
year dividend to 15.50p, representing a 6.9% increase. In determining the
dividend the Board has been very sensitive to investor appetite for income but
has also been conscious of the underlying income growth and the potential
impact of interest and exchange rates on future earnings.

 

Revenue Outlook

Following a record level of earnings in 2022/23, the Board expect to report a
reduction in net income for the year to 2023/24. This is not only as a result
of the non-recurrence of certain items which enhanced the current year
earnings, but also because of the number of companies that have announced
dividend cuts or suspensions. All companies have had to adjust to the change
in the price of debt. For some the impact has been immediate, while for others
it will be somewhat delayed as they continue to benefit from historic fixed
rates. However, on the income side of the equation, index-linked rents will
benefit. Companies need to balance the pluses and minuses and some have
reacted quickly and cautiously to protect their balance sheets. The medium to
longer-term outlook for interest rates is difficult to predict so it could be
a while before companies feel confident about the longer-term outlook.

 

Net Debt and Currencies

Gearing at 12.3% is an almost identical figure to that at the half year.
Inevitably these numbers are just snapshots in time; the level of gearing has
varied in response to the market volatility and as investment opportunities
have occurred.

 

Sterling weakened over the year by just over 4%. This marginally enhanced our
income account as non-sterling dividends were worth more in sterling terms.

 

As our balance sheet is denominated in sterling a weaker pound served to help
the reported value of non-sterling assets. The balance sheet exposure remains
materially in line with the benchmark as we hedge exposure to match the
benchmark.

 

 

 

 

 

 

 

Discount and Share Repurchases

The discount of the share price to the NAV widened slightly over the year from
-7.3% to -8.6%. However, the spread over the year has been much wider,
swinging between close to -1% and over -10%. This volatility is indicative of
the rapid changes in sentiment towards the sector. The average over the year
under review was -5.8%, close to the 10-year average of -4.9% and an
improvement on the -6.6% average since the invasion of Ukraine.

 

In light of the transient nature of the discount volatility, no share
buy-backs or issues were made during the year.

 

Board Changes

I reported at the half year that we had commenced the search for a new
Director who would broaden and strengthen the Board and add diversity of age,
experience and ethnicity. In January this year we were delighted to announce
the appointment of Busola Sodeinde to the Board as an independent
Non-Executive Director and we have greatly appreciated her early insight and
perspective on a wide range of issues.

 

We also announced my intention to step down from the Board with effect from
the conclusion of the forthcoming AGM. As announced, Kate Bolsover will
succeed me as Chairman and Tim Gillbanks will succeed Kate as Senior
Independent Director.

 

Environmental, Social and Governance ('ESG')

ESG reports within annual accounts are becoming longer and contain more and
more detail. This is wholly appropriate for an operating company and we
welcome the additional disclosure. As an investment trust company and
primarily an investor in companies, we have to think about what ESG should
mean for us.

 

Our ESG approach covers three areas. Firstly, the governance and policies
which apply directly to the investment trust as a Company under the direct
control of the Board. Secondly, ESG considerations as part of the investment
process for our equity portfolio adopted by our Manager. Although our Manager
cannot have any direct control over ESG policies in underlying investee
companies, it can, and does, use its influence carefully through corporate
voting and engagement with the companies in which we invest. Thirdly, our
Manager does have control over our direct property portfolio and here we
continue to drive for greater energy efficiency and environmental care in all
that we do.

 

Our Responsible Investment Report within the Annual Report sets out our
approach in each of these areas with some case study examples. This is of
course an area of active evolution.

 

Outlook

Macro considerations continue to dominate. Markets have had to absorb a huge
adjustment in the cost of capital and real estate equities have certainly
borne their share of price adjustments. However, this is an unusual cycle
where both rates and rents are rising. In many of our areas of focus, real
estate market fundamentals are sound and we see few signs of over-supply. Our
central assumption is that the interest rate cycle will peak this year but
that inflation will remain above central banks' targets. Listed property
companies are generally more conservatively geared than their private
counterparts and this should stand them in good stead. The sector has been hit
hard and many of our companies are trading at large discounts to asset values
that have also been recalibrated. As in previous cycles, if the sector

is undervalued then private capital will be quick to step in. Just after the
year end, Industrials REIT, one of the Company's 10 largest holdings,
announced a recommended bid for cash at a 40% premium to the undisturbed share
price. More recently in early May, Civitas, the social housing landlord
announced a cash bid from an Asian conglomerate at a similar premium. These
businesses are chalk and cheese but both have proved attractive to very
different groups of investors. These events remind us that, for many, real
estate is seen as a crucial part of the investment jigsaw particularly in
these inflationary times.

 

David Watson

Chairman

1 June 2023

 

Manager's report

 

Performance

The Company's net asset value ('NAV') total return for the 12 months to 31
March 2023 was -35.5%, whilst the benchmark, FTSE EPRA Nareit Developed Europe
TR (in GBP), fell -34.0%. These figures are clearly disappointing but not
materially different from those reported at the half year, where the NAV had
fallen -33.6% in the first six months of the financial year. Equally important
to note is that these figures are snapshots in very volatile times. To
illustrate the point, the first four months of the second half of the
financial year (i.e. October to January) saw our universe rally +14.5% only to
then give up all of those gains in the subsequent nine weeks. The end result
was a finish to the year which was marginally worse than where we were at the
half year stage.

 

In the half year review, I wrote that shareholders will no doubt be concerned
that given the scale of the correction, the direction of travel was obvious
and more protective action should have been taken. It always looks clear in
hindsight but as we walk through the year in the next few paragraphs, the
dramatic swings in sentiment will help explain some of the difficulties we
faced in trying to rotate the portfolio into the headwinds, avoid the rip
currents but then also catch the spring tides of sentiment recovery

 

The first quarter of the financial year saw the sector fall 24% as investors
really focused on the impact of rising interest rates. However, you could
still have made money over a four-week period (in May and early June) and this
highlights the sense of sentiment rather than facts driving markets in
mid-2022. Everyone became central bank-focused whilst real estate fundamentals
were ignored. July saw a strong reversal (+9.5%) as bond markets responded to
the theme that rising interest rates were having the required deflationary
effect. However, the summer break was followed by hawkish statements from the
US Federal Reserve at Jackson Hole and our benchmark fell -30% between
mid-August and mid‑October as investors began to believe the 'higher for
longer' mantra. This severe bout of pessimism was then followed by a +25%
rally in pan-European property stocks between mid-October and the end of
January. The tail end of the financial year saw this recovery then ebb away
with the sector falling 13% in the last two months of the financial year.

 

For a 'value' sector where returns are driven - year in, year out - by income,
these levels of volatility and multiple directional shifts are almost
unparalleled. What is happening? Essentially, the whole period has been
dominated by the ebbs and flows around interest rate expectations and bond
market behaviour. Real estate fundamentals have taken the proverbial back
seat. A longstanding real estate equity market observer with over 30 years'
experience recently wrote to clients 'I can't recall a period of time when
capital values have fallen so sharply and yet occupier demand in most sectors
has remained pretty robust'. I have reproduced the statement verbatim as it
neatly encapsulates the environment we find ourselves in. In other words,
yields are rising but so are rents, this is atypical. It is now clear, that
through 2022, I placed too much emphasis on this quality of earnings (and
indeed earnings growth) in many of our companies. The market paid little heed,
choosing to focus on the impact of rising yields/capitalisation rates on asset
values.

 

The speed at which central banks responded, as inflation gathered pace, took
many participants by surprise. The rising cost of debt affected all property
stocks, but it had the greatest impact on two particular cohorts of companies.
Those companies which had successfully utilised unsecured bond market
financing now discovered that this source of (re)financing was effectively
shut. German residential businesses, particularly the larger ones, Vonovia,
LEG and the more diversified Aroundtown (part owner of Grand City Properties),
are all seeing their cost of debt rise dramatically as the expiry of existing
bonds require refinancing. The other heavily impacted group were those with
higher loan to value compounded by high levels of floating rate debt. The
impact on earnings for this group has been dramatic and the majority of
Swedish companies fall into this category. Both these cohorts share a couple
of similar outcomes; firstly, those companies which have reduced or suspended
dividends are disproportionately represented and secondly, these two groups
have experienced the greatest volatility within our universe. To illustrate
the point, Swedish property companies collectively fell 40.5% in the year to
31 March 2023 however, within that period there were three sharp bear market
rallies of +17% (May), +39% (July to mid-August) and +53% (mid-October to the
end of January). These groups were highly susceptible to changes in sentiment
towards the outlook for rates and margin on new (or refinanced) debt
instruments.

 

Previously, I have written about the merits of the market fundamentals of
German residential. The vast supply/demand imbalance and the persistent
widening of the gap between regulated rents and open market values remains in
place. What has been most frustrating is that our largest relative position in
that area is Phoenix Spree Deutschland, which has no refinancing requirements
until 2026 and is a market minnow (portfolio value less than €750m) where
all sales, however few, will make a difference performed in line with its
larger cousins.

 

Collectively the market capitalisation of the German residential businesses
reduced by 57%. Meanwhile, the underlying asset values have corrected less
than 10% in the year and top line earnings have grown with vacancy levels
stable and the 'mietspegiel' (the rent table) continuing to increase rents,
albeit at a sub-inflationary rate. The asset class offers consistently low
vacancy, steady rental growth and the opportunity to move to market rents
through refurbishment or sales to owner-occupiers. As a result, yields
steadily tightened as the cost of finance fell. By the beginning of 2022,
capitalisation rates were below 3%, fully reflecting the stability and low
risk profile of the income. At such low capitalisation rates, a modest
reversal upwards of 100bps has a very dramatic effect on valuation.

 

 

 

Much the same effect was felt in the valuation of the other low yielding
sector - industrial/logistics. This sector had enjoyed a surge in investor
demand as strong rental growth fuelled the attractiveness of the asset class
and we saw capitalisation rates tighten dramatically over the last three
years. Again, the impact of the abrupt rise in the cost of debt led to a quick
reversal in yields. However, unlike regulated residential rents in Germany,
which deliver sub-inflationary growth, we are confident that strong rental
growth will persist in industrial/ logistics property given market
fundamentals.

 

Offices

Offices continue to be the sector most under scrutiny and rightly so. The
repercussions and evolution of the working from home ('WFH') regime are still
being worked through by tenants and landlords. Much has already been written
on the topic and firm conclusions are hard to pin down given the speed of
change. However, we are confident that since the half year we have seen more
data to support our current thesis. Offices remain crucial infrastructure for
knowledge-based businesses - physical interaction is a vital part of business
life. However, the amount of space required has reduced whilst crucially the
demand for better quality space has risen. This demand for better quality
working environment is augmented by the requirement for better energy
efficiency and green credentials. The result is a historically wide market
bifurcation between best in class, well located, energy efficient buildings
and the rest. Offices account for approximately 15% of our benchmark and well
over 50% of that exposure is to London and Paris, hence our focus on those
markets in this commentary.

 

Gecina, our largest European office exposure in their Q1 2023 results
highlighted that their prime inner Paris assets recorded an eye-catching 30%
reversion, whilst their outer ring assets saw negative reversion. Overall
rental growth was positive at 7% but that statistic highlights the gulf
between the growth achieved in central assets and the rest. Covivio, which
owns offices in Paris, Milan and several German cities reported the same
phenomenon, with central Milan recording solid demand and rental growth.
Central London office vacancy is elevated at 8%, however the divide between
West End (3.7%) and the City (11.9%) is almost as stark as it has ever been.
The situation in Docklands is even more dire with a number of major financial
institutions who have announced either a reduction in their space requirements
(including HSBC, Citi and JPMorgan) or wholesale relocation (e.g. Clifford
Chance). In the case of the latter, the firm is also cutting its space
requirements by 40%. One should be careful not to read single statistic across
to the wider market as that particular firm has had excess space in Canary
Wharf for several years. This increasing vacancy in financial services-focused
districts such as Canary Wharf, La Defense and further afield Lower Manhattan
is a reflection of both WFH but also the lack of headcount growth. This is a
particular problem in London where post Brexit, global financial services
businesses continue to increase their footprint in Paris, Frankfurt and Dublin
at the expense of London.

 

This bifurcation of 'best and the rest' can be clearly seen in recent
valuation in the specialist London office landlords. Great Portland reported
in their H1 2023 results a divergence in performance based on their buildings'
EPC (energy efficiency) ratings. Those at the highest levels (A&B) saw
value declines of 2.5% whilst C&D rated were -4.2%. Derwent London
produced data based on values per foot. The most valuable (>£1,500 per ft)
saw capital drift of -3.5% and rental growth of +2%, whilst the least
(<£1,000 per ft) saw value falls of -11.8% and rental growth of just 0.3%.

 

Even though the best in class continues to enjoy steady rental growth, this is
partly due to its scarcity. The bulk of all office markets are made up of much
more average product and take up levels in the post pandemic world have been
weak. Paris Centre West (the core) saw available supply fall year on year
(-19%) whilst it rose in all other markets. The further out, the greater the
supply, with La Defense just +4% whilst the Inner Rim (+35%).

 

All of this has fed through into negative sentiment towards all offices except
the best quality in the best locations. MSCI/IPD's office sector capital
decline in H2 2022 was -15.7%, underperforming retail which fell 14.5%.
Central London initial yield has moved 80bps from 4.8% (December 2021) to 5.6%
(January 2023). As discussed many times, the UK's independent valuer community
have always attempted to mark-to-market rather than the Continental approach
which is more 'mark-to-model'. The latter approach results in a smoother
correction of values but can equally lead to the criticism that valuations are
woefully historic when markets are correcting fast. As a result, we feel that
highlighting the modest moves in Continental European valuations in H2 2022
would be misleading. They will catch up over the course of 2023 and beyond.

 

Retail

It feels as though this much maligned asset class has finally passed through
the worst of the impact of the shift to online retailing, the way we search
for products (and pricing) as well as the increasing demand for
entertainment/leisure ahead of more 'stuff'. The huge reduction in values has
been felt more acutely in the UK. Alongside the differences between the UK and
Continental European shopping malls, it is also crucial to highlight the
sub-sectors within retail as they have, largely, performed very differently
over the last few years.

 

The worst performing group remains the larger malls which are, quite simply,
too big with an excess of floor space, often a shuttered department store (or
two) and a service charge with a chunky non-recoverable element (due to
voids). None of this is new information I hear you say. Agreed. However, the
update is that we have now seen capitulation by landlords (and lenders), rents
have re-rated (often halving) and vacant space beginning to be repurposed for
other uses. Malls must become community hubs with a range of (lower value)
uses such as fitness, medical uses, nurseries, day care etc. Landsec
successfully acquired the 50% of the St David's Centre in Cardiff which they
did not own. The seller was the administrator of Intu and Landsec acquired the
outstanding loans on the asset. The price equated to a yield of over 9% on a
rent roll which has dropped materially over the last decade. We are confident
that at the right rents (and yields) those centres which can reinvent
themselves such as this dominant city centre asset will deliver acceptable
returns.

 

The strongest sub-sector remains retail warehousing and outlet malls. For
different reasons both offer retailers sales channels which complement online.
In the case of the former, it is the convenience and pricing of edge of and
out of town retail parks. Free home delivery will become unsustainable from
both a profit and an ESG perspective. Click and collect and free returns to
store will drive demand for these super convenient locations. The Company is a
large holder of Ediston Property which has announced a strategic review given
the subscale size of the business. We are hopeful that this will provide
further evidence of supportive valuations in the sector. Outlets help
retailers offload lines without damaging full price/premium offerings. The
success of the likes of Bicester Village (where Hammerson have a
non-controlling stake) and Gunwharf Quay in Portsmouth (owned by Landsec) are
proof of the concept and we remain confident about their prospects.

 

The combining of retail, leisure and food continues, particularly in tourist
destinations. BNP have highlighted the pick-up in post Covid footfall in the
most upmarket locations such as Regent St, Champs Elysees, Portal de Angel
(Barcelona), Via del Corso (Rome) and Kaufingerstrasse (Munich) with footfall
increasing on average by 1/3 and, in some cases, more than 65% (Paris and
Munich).

 

Retail investment has been resilient, particularly in Continental Europe where
investors see affordable rents and higher yields than other sectors. Whilst
investment levels are unsurprisingly below the 2012 to 2022 decade average,
they did increase year on year to €40.1bn (+2.6%) according to BNP. In the
UK, retail warehousing continued to dominate volumes (+60%) over 2021 and
2022. This figure was lower across Europe and highlights the continued lack of
large shopping centre transactions in the UK.

 

Industrial and Logistics

UK logistics take-up in Q1 2023 was 8.6m sq ft, a slowing when compared to a
quarterly average of 12.0m sq ft in 2022 and 13.8m sq ft in 2021 but still
ahead of the quarterly average of 8.3m sq ft in the pre-Covid decade. Vacancy
remains at 3% and rents continue to rise. Against this comfortable backdrop we
saw yields rise by 175bps for prime distribution units between June 2022 and
March 2023. Such was the impact of the cost of money, whilst market
fundamentals are deemed less relevant. Even an asset with strong rental growth
prospects cannot have a capitalisation rate 200bps below the risk-free rate.
However, that pricing adjustment has largely been completed in our view. We
are beginning to see stability in asset prices.

 

In Continental Europe the picture was very similar. Savills report 32m sq
metres taken up in 2022 across the 13 largest markets, just 6% below the
record year of 2021 and ahead of the 5-year average in virtually all markets.
Higher construction and finance costs led to reduced speculative construction
maintaining the intense supply-demand imbalance in so many markets. Over
€50bn was invested in 2022, again below the record of 2021 but well ahead of
the 5-year average. Yield expansion (c 100bps) was much less than in the UK
but again we expect upward pressure to ease as fundamentals drive capital back
into the sector.

 

We have long been cheerleaders for multi-let industrials (MLI), generally
terraces of smaller units, management intensive, but often located in dense
urban locations. Very little new stock has been built over the last few
decades with alternative (multi-storey) uses being far more valuable. Rents
remain low in many parts of the country making new development unviable. The
tenant rosters have evolved hugely in the last 20 years, undergoing
'gentrification' from being the domain of light industrial 'metal bashers' to
a much broader swathe of uses, many born out of internet connectivity and the
ability to access customers directly. Our largest exposure was through
Industrials REIT, where we owned 11% of the company. Just after the year end
(3 April) Blackstone announced an agreed cash bid at a 40% premium to the
undisturbed share price. The private equity behemoth already has substantial
exposure to this sub-sector but it is a timely reminder that if quality assets
are left undervalued then private capital will acquire them. Our other MLI
exposure is through Sirius (65% Germany, 35% UK) and diversified names such
as Picton and London Metric (which acquired Mucklow in 2021 where we owned
5%). The healthy supply-demand imbalance makes it a sub-sector we are keen to
maintain exposure to.

 

Residential

The shortage of private sector rental accommodation remains acute, yet the
listed companies focused on this sector were amongst the poorest performers in
the financial year. This group of companies (mostly in Germany and Sweden)
highlighted how management teams were lured into increased leverage given the
stability of the underlying income streams and occupancy levels. However, very
low yielding assets struggle to provide positive cashflows when interest rates
rise.

At the asset level, rental growth has remained well below current inflation
rates given the backward-looking nature of regulated rents. We fully expect to
see these rents rise at historically fast rates as they factor in some of the
dramatic inflation datapoints. The serious shortage of housing underpins
long-term values. The fly in the ointment is the cost of improving the energy
efficiency of this housing stock through both insulation and the type of
heating. In open market regimes such as the UK and Finland, the cost of these
improvements will be passed through to rent prices. In regulated markets where
only a proportion of the capital expenditure can currently be rentalised, this
remains an impediment to rental growth.

 

 

 

Within open market regimes such as the UK we have seen strong rental growth
through the combination of a shortage of rental stock (amateur landlords
leaving the market due to higher regulation and lower tax efficiency), high
levels of employment/wage inflation and market timing (where buyers decide to
continue to temporarily rent awaiting price corrections).

 

Alternatives

Purpose built student accommodation continues to fare well, with rising
numbers of students across the UK and Europe. The traditional accommodation
alternative of private rented houses (HMOs - Houses in Multiple Occupation)
are reducing as regulation pushes up licensing costs and (correctly) impedes
overcrowding and sub-standard accommodation. Unite, our largest student
accommodation stock was one of the few companies to see positive capital value
appreciation in 2022 with 4% annualised growth. It has recently increased its
rental growth outlook for academic year 2023/24 from 5% to 6‑7%.
Self-storage continues to confound the sceptics. Rate growth and occupancy
have begun to normalise post the 'Covid boom' but remain encouragingly
positive. Safestore, our largest holding in the sector, enjoyed like-for-like
rental growth of 10.7% in the year to October 2022.

 

Hotels particularly leisure and tourist focused have also enjoyed strong
growth as consumers continue to make up for lost opportunities to travel in
2020 and 2021. Recent STR data highlights London hotels across the quality
spectrum showing RevPAR growth of +22% year on year. UK hotels ex London was
also strong at +11% year on year and 25% versus 2019.

 

Healthcare was the poorest performer of the alternatives group. Profitability
of private care providers is being constantly squeezed through wage and cost
inflation. Continental European healthcare operators have been rocked by the
scandal at Orpea. The level of state support, both direct and indirect, are
the crucial figures required by investors. Even then, the rate of rental
growth can be quite pedestrian as seen at Primary Health Properties and
Assura.

 

Debt and Equity Markets

Both debt and equity markets were very subdued during the year. The total
capital raised in 2022 was €14bn compared to €32bn in 2021 and €21bn in
2020. Over €9bn of the total raised in 2022 was debt in the first quarter.
To illustrate the change in pricing over the last year, we need only review
the most prolific issuer, Vonovia, Europe's largest property company. In March
2022, it issued 4, 6 and 8 year maturities totalling €2.5bn priced at
1.375%, 1.875% and 2.375% respectively. By November, new 2027 and 2030
maturities were costing 4.75% and 5.0%.

 

Short-dated leverage risked the vicious cycle of increased interest costs
resulting in lower earnings, so risking credit downgrades leading to even
higher cost of debt. Leverage needed to be reduced to defend earnings; if
asset sales weren't possible then equity (even when trading at deep discounts
to asset values) needed to be raised through rights issues.

 

At the half year, I detailed the capital raising by TAG Immobilien, who had
over stretched themselves with the acquisition of a Polish housebuilder. They
raised €200m at a 27% discount to the theoretical ex-rights price to help
pay off the bridging loan from the acquisition. In November, VGP, a Belgium
logistics developer raised €302m. This was more front‑footed with the
raise diluting NTA by 10% in a one for four share issuance. The business is
overly dependent on selling assets into Allianz private funds and this capital
makes them less dependent on one customer. The CEO and CFO own 49% of the
equity and 'stood their corner' which reassured investors. In Sweden, Catena,
another logistics developer raised SEK 1.4bn (£135m) as its share price
hovered close to NTA and, whilst small, it was unusual as it was an
accelerated bookbuild and not a rights issue. Balder raised SEK 1.8bn which it
used to repay a hybrid bond and strengthen its overall balance sheet.

 

The only merger and acquisition activity in the 12 months to 31 March (the
privatisation of Industrials REIT was announced on 3 April) were two mergers,
both widely expected but the timing less sure. The joining of Shaftesbury and
Capco finally happened after a tortuously long period of negotiation, capped
off by a CMA review on whether the combined entity could be a price setter.
The most disappointing aspect for shareholders (we do not own either company)
was that the deal results in the repayment of much of Shaftesbury's cheap debt
due to a change of control provision. When coupled with further increases in
debt costs next year and some extraordinarily high advisor fees (given it was
an agreed transaction) there will be precious little earnings benefit from the
anticipated synergies. The other merger was between LXI and Secure Income REIT
on a NAV for NAV basis. It was a much more straightforward affair. We were a
large shareholder in SIR and benefited immediately as the 12% discount closed
to NAV. The managers of SIR were also large shareholders in the company and
their excellent timing in previous property cycles was once again on display.
They even sold the management company which had a contract to run SIR for the
next three years.

 

Investment Activity - property shares

Portfolio turnover (purchases and sales divided by two) totalled £477m in the
year, considerably less than the £549m in the previous year. With average net
assets over the year of £1.18bn, turnover was 40% of net assets, which was
higher than the previous year's figure of 36% and reflects the volatility in
the year.

 

In the half year report, I recorded that each rally then trended down to a new
low and therefore virtually all buys looked poor and all sells looked clever.
The second half of the year saw the largest and longest recovery from October
to the end of January, followed by the most dramatic correction back to the
October lows, this new low point virtually coinciding with the year end.
Throughout the year, the renewed bouts of negative sentiment towards the
sector were based on either a change in the outlook for interest rates (and
the concern that central banks' behaviour would become more hawkish) or
renewed speculation of a failure in the credit transmission mechanism.
Essentially, investor sentiment was driven by the expectation of the change in
the price and availability of debt.

 

In hindsight, maintaining our long-standing discipline of buying (or adding)
to companies where we felt confident in the resilience of earnings driven by
market fundamentals just wasn't enough.

 

As would be expected, we have carefully analysed all of our companies' balance
sheet capacity (in terms of the quantum of leverage, cost and duration of
debt). In many cases, the market had quickly adjusted the earnings
expectations but what became apparent as the year progressed was that we were
being overly rational about these revised earnings forecasts. The market was
not interested in supply and demand at the property/occupational market level
or whether there were still profits to be achieved from the development
pipeline.

 

The ability of the market pendulum to (over) swing between exuberance (greed)
and melancholy (fear) was very much in evidence and we battled to react
accordingly.

 

A good example of this was our collective underweight to Swedish property
companies. Whilst this call was our largest contributor to positive relative
performance over the year, the volatility in the group resulted in multiple
phases of repositioning. Whilst the broad statement that Swedish property
companies are amongst the most leveraged in our investment universe is true,
some are obviously more exposed than others. It was therefore crucial to
understand which company would suffer the fastest earnings degradation from
rising interest rates but also to assess when the market had over reacted.
Those most at risk were those exposed to bond markets rather than bank lending
or had complex hybrid instruments dreamt up by bankers when money was cheap.
The scale of share price volatility is best explained in a handful of figures.
EPRA Sweden fell -42% in the first quarter only to recover +33% in the next
six weeks followed by another 40% drop to mid-October and then the long
recovery (+36%) to the end of January, followed by a renewed bout of nerves
sending the sector down almost to the October lows. These figures are the
collective impact of 18 companies. For the most leveraged (SBB, Castellum,
Corem and Balder) the volatility was far greater. Underlying property market
fundamentals do not drive this level of price action, this was caused by
changes in the market outlook for the cost/availability of debt impacting on a
tiny market segment (free float capitalisation of just £20bn).

 

Our exposure to German residential was the poorest asset allocation decision
of the year. I remained convinced, for too long, that the market fundamentals
of virtually full occupancy and (sub-market) regulated rents would underpin
investor sentiment. The fact that even at prices a year ago all of these names
were trading below the reinstatement cost of the underlying assets mattered
not a jot. The market focused exclusively on the impact of the cost of debt.
During the year we reduced exposure in the larger names (Vonovia, LEG) but
maintained the holding in Phoenix Spree, the small Berlin focused vehicle. It
is an externally managed fund which has an annually renewed contract with
QSix, the manager. Its assets are all prime Berlin, where open-market rents
continue to grow. The share price total return in the year was -50%. I remain
convinced that once prices stabilise the smaller companies will benefit
disproportionately from the impact of portfolio sales. With a market cap of
just £190m and the share price at half the asset value, it is an excellent
example of a portfolio of assets which are no longer benefiting from being
held in a listed company.

 

With the price of money rising so rapidly in the year, it was the lowest
yielding assets which saw the most aggressive repricing and so it was with
German (and Swedish) residential. The compression in yields in the previous
five years was a rational response to the combination of strong market
conditions, (high occupancy and rental growth) combined with very low cost of
borrowing. This strong yield compression (and capital value growth) was even
greater in the industrial/ logistics sector. The structural tailwinds have
been discussed, ad nauseum, in previous reports. For many markets these
persist but capitalisation rates had simply been driven too low with
insatiable investor appetite for assets with income growth. The reversal
(yield expansion) described earlier was dramatic and the sector was hit very
hard. Again, our smaller companies suffered disproportionately as they fell
alongside larger names on the way down but often failed to catch the bounce in
any recovery. We are confident that these conservatively managed businesses
with the right amount of leverage and quality portfolios will perform well.
However, if the stock market continues to undervalue them, then no one should
be surprised when more privatisations occur. In the industrial group in the
UK, I would include Industrials REIT, Picton Property and CT Property Trust.
Whilst in Europe the list would include Argan, Sirius and Catena.

 

With the lowest yielding (highest growth) names suffering from capitalisation
rates rising above the new cost of debt, it was the highest yielding sectors
which suffered the least from this devaluation. Retail property has clearly
been out of favour for many years as the weakening in tenant demand for
physical retail space continued. In Continental Europe, we focused on
Eurocommercial and Klepierre given their high earnings yield but crucially
their secure balance sheets. We avoided Unibail-Rodamco and Wereldhave. Here
you have two companies at either ends of the asset quality spectrum but both
suffered from weak balance sheets and the need to de-leverage. Unibail
announced 2 years ago its intention to sell its US portfolio whilst Wereldhave
has continued to sell assets whenever it can. European retail as a subset
outperformed the full benchmark and our stock selection also added to
performance with Unibail -27.5% and Klepierre -2.5% over the year.

 

 

 

UK retail is now a small part of the listed universe. For most investors the
only way to gain exposure is through the diversified portfolios of Landsec and
British Land. The bulk of our exposure is through Ediston Property which owns
only retail warehouses. However, its market cap at £140m is too small for the
listed market and we applaud the announcement from the board that they are
carrying out a strategic review for the future of the company. We remain
hopeful that a merger with another listed company is a viable option which
will ensure the assets remain in the listed space. The company was a relative
outperformer in the year (-18%) as were virtually all the high yielding retail
names. Hammerson remains a play on corporate reconstruction rather than a
bellwether for retail property. We believe they are on the right path and we
opened a holding in the year. The crown jewels are the minority ownerships in
the premium outlet malls controlled by Value Retail. Investors will need to
remain patient as the breakup will take time, but value is reappearing.

 

Investors' attitudes towards office property has been highlighted earlier. We
fully subscribe to the bifurcation of returns between the best and the rest.
Smaller European cities have also performed better with lower WFH and higher
occupancy levels. We have sought greater exposure to those cities through
Arima (Madrid), Wihlborgs (Malmo, Lund) and Fabege (Stockholm). Core CBD
exposure in the largest cities has been through Gecina (Paris), Great Portland
and Landsec (London). We have also added to the short lease, flexible offering
business model through Workspace (London) and Sirius (primarily German
flexspace). Both of these names had a poor year with total returns of -35% and
-32% respectively but we found recently published operational data reassuring.
Landsec (-16%) was a top performer as it continued to reduce leverage through
sales of newly completed prime offices in Central London. We are strong
advocates of capital recycling and expect to see more sales from non-core
assets such as hotels and leisure.

 

In the alternatives space, our overweight to self-storage was entirely through
Safestore (-27%) rather than Big Yellow (‑21%). Safestore has outperformed
on a three-year and five-year view but clearly not in this last period. In
fact, we find it hard to choose between these two very well managed companies.
Both own irreplaceable estates with core holdings in densely populated areas.
Demand for space has been remarkably stable given the economic backdrop. Unite
(-16%), the student accommodation provider, was another relative winner in
the year. The combination of increased earnings guidance and solid market
evidence on modest yield movement continues to support the asset class. Both
these asset types have intensive operational requirements and we are confident
that the market undervalues the platform through the traditional asset value
model. This was certainly the case with Industrials REIT where Blackstone paid
a premium for the operating business alongside the assets.

 

Revenue and Revenue Outlook

As noted in the Chairman's Statement, the current year's income benefited from
a number of non-recurring items. Eurocommercial and Swiss Prime both changed
their pattern of distributions during the year effectively resulting in an
additional half year payment from each of these companies. The Argan annual
dividend which generally goes ex-dividend on or around the last business day
in March therefore moves between March and April. In the year to 31 March
2023, we received dividends in April 2022 and March 2023, resulting in two
full year payments. If the dividend due around 31 March 2024 falls back into
next April, there will be no income recorded from this company in the year to
March 2024. We have no control over these timings and there are several
companies where dividends go ex‑div around the year end. Each of three
holdings noted above are approximately 2.5% of the portfolio so this has had a
significant impact. Without these (and the small enhancement due to foreign
exchange movements), we estimate the earnings would have been around 1.13p
lower than reported. The dividend for the year to March 2023 is therefore
covered.

 

The dividend for the previous two years was partly paid out of revenue
reserves as the effects of COVID forced revenue down. In 2022/23, the
earnings, adjusted for the one‑offs set out above, are just over 10% higher
than the last reported period before COVID-19 (being the year to 31 March
2019). The full year dividend to 31 March 2023 is almost 15% ahead of the
pre-COVID dividend as the Board recognises the importance of a growing
dividend to our shareholders.

 

Looking ahead to the 2023-24 financial year, at this stage, we expect to
report a fall in earnings. This is partly explained by the one-off adjustments
highlighted above. However, the additional impact is from the number of the
German residential and Swedish companies that have announced dividend
suspensions and/or cuts as they work to reduce their gearing levels in the
face of rising debt costs. The residential names in particular are making
progress with their disposal programmes so we expect to see their dividends
resuming, although possibly at a lower level, in the not too distant future.

 

The impact of higher interest rates will feed through to earnings as fixed or
capped debt structures come up for refinancing. The impact of this of course
depends on the duration of such debt packages and this varies hugely across
our companies. It is encouraging to note that for most of them, the majority
of their debt is fixed (or capped) until 2026 and beyond.

 

On a more encouraging note, top line revenue is benefiting from inflation. All
of our European companies and a significant number of our UK names benefit
from rents linked to some form of indexation. It varies widely across
countries and sectors but is clearly an important part of our revenue growth
trajectory.

 

Although the revenue for the forthcoming year is likely to be under some
pressure given all these competing factors, we are optimistic that growth will
return over the medium term. Market fundamentals continue to drive organic
rental growth in so many of our sectors. In the meantime, the Company still
has plentiful revenue reserves to maintain dividend levels over short term
income falls, as was seen through the COVID-19 pandemic.

 

Gearing and Debt

Gearing began the year at 10.2%, increased to 12.0% by the half year and
finished the year at 12.2%. This does not represent the changes in gearing
seen throughout the period as gearing has been actively changed in response to
the very variable market conditions throughout the year and has ranged between
10% and 16%.

 

The cost of our debt has increased through the year as our revolving credit
facilities and CFD financing are linked to SONIA (or other currency
equivalents). However, an important part of our debt book are the EUR 50m and
GBP 15m loan notes both at fixed rates of interest. The combination of the
fixed and floating rate debt gives us a high degree of flexibility with some
price stability at lower levels of gearing. Generally, where higher levels of
gearing are appropriate (so drawing on the floating rate financing) the market
conditions are such that returns are not too sensitive to the pricing.

 

Physical Portfolio

In the year to the end of March the physical property portfolio produced a
total return of -13.7%, made up of a capital return of -17.5% and an income
return of 3.8%. The MSCI Monthly UK Property Index returned -14.7% over the
same period, made up of an income return of 5.0% and a capital fall of 18.8%.

 

During the year we sold the residential element of the Colonnades development
for £5m on a new 999 year lease at a peppercorn rent. The value of this
element is determined by the outstanding lease extensions remaining on the
individual flats. During the Company's ownership we completed lease extensions
over 75% of the flats and received more than £12.5m in premiums. In addition,
the sale facilitated the simplification of the leasehold structure of the
asset. The Company has retained the freehold of the island site as well as all
the commercial elements. The locality continues to improve with the
redevelopment of the old Whiteleys shopping centre nearing completion. This is
an important next phase in the further gentrification of Bayswater.

 

It was a busy 12 months for asset management at Ferrier Street, Wandsworth.
The strategy remains to let the estate on a short-term basis, retaining the
flexibility for either a refurbishment of the existing or a more comprehensive
redevelopment under the planning permission secured in June 2022. During the
year the Company concluded 10 new leases (five renewals and five new lettings)
covering over 60% of the estate. This secured over £500,000 of rent with the
average rent on new lettings exceeding £30 per sq. ft. The attractiveness of
the estate continues to benefit from the further reduction in supply of
London industrial space, whilst the depth of demand from occupiers has
increased. The diversity of our occupiers reflect this broad based demand and
range from photographic studios to food production and even a plant nursery.

 

Outlook

Inflationary pressures persist. Central banks appear resolutely determined to
remain hawkish with another round of base rate increases in May. Whilst a
relatively blunt instrument, there are signs that the medicine of increased
interest rates is having the required effect with reduced retail sales growth.
Energy has been a major driver of cost inflation and the spot price of gas has
fallen back to pre-invasion prices. This will soon begin to feed into lower
headline inflation figures and also reduce the likelihood of a recession. We
expect wage inflation, driven by high employment levels, to persist, resulting
in inflation remaining ahead of central banks' target rates.

 

Against this backdrop real estate fundamentals, in our preferred sectors,
remain solid with little signs of over-supply and stable demand. Economic
growth is likely to be at best anaemic, for a while, and speculative
development will remain subdued. Income, often index-linked, will remain the
key valuation underpin. We will maintain our focus on the most judiciously
leveraged, avoiding those with large near-term refinancing requirements. With
such a large number of well financed listed companies, we also expect
opportunities to gather assets from those struggling to refinance in a world
where debt availability is getting more restricted.

 

The sector has a long tail of micro-cap companies and we continue to encourage
boards to explore the opportunities for consolidation where it improves share
liquidity and reduces costs. Otherwise, we will continue to see the steady
stream of privatisations as these smaller companies are attractive bite sized
morsels for large private real estate owners. Whilst the Company has often
benefited from these premium bids (and continues to hold a wide range of small
caps) we also believe that growing the number of larger companies is in the
best interests of the sector and investors.

 

As we go to print at the beginning of June, we are pleased to report an
all-paper bid by London Metric (market cap. £1,700m) for CT Property Trust
(£180m). The Company owns 10% of CT Property Trust and the price rose 25% on
the announcement.

 

Marcus Phayre-Mudge

Fund Manager

1 June 2023

 

Principal and emerging risks

 

In delivering long-term returns to shareholders, the Board must also identify
and monitor the risks that have been taken in order to achieve those returns.
It has included below details of the principal and emerging risks facing the
Company and the appropriate measures taken in order to mitigate those risks as
far as practicable.

 

The ongoing conflict in Ukraine has impacted energy and commodity supplies
creating inflationary pressures and prompting central banks to raise interest
rates in response. Interest rates have risen more quickly and to higher levels
than was initially anticipated. This has brought challenges not seen for many
years and particularly impacted the property sector.

 

The legacy of COVID-19 has seen ongoing changes and challenges in the
workplace in terms of resourcing and changes in working practices.

 

 Risk identified                                                                  Board monitoring and mitigation
 Share price performs poorly in comparison to the underlying NAV

 The shares of the Company are listed on the London Stock Exchange and the
 share price is determined by supply and demand. The shares may trade at a

 discount or premium to the Company's underlying NAV and this discount or
 premium may fluctuate over time.

                                                                                The Board monitors the level of discount or premium at which the shares are
                                                                                  trading over the short and longer term.

                                                                                  The Board encourages engagement with the shareholders. The Board receives
                                                                                  reports at each meeting on the activity of the Company's brokers, PR agent and
                                                                                  meetings and events attended by the Fund Manager.

                                                                                  The Company's shares are available through the Columbia Threadneedle savings
                                                                                  schemes and the Company participates in the active marketing of those schemes.
                                                                                  The shares are also widely available on open architecture platforms and can
                                                                                  be held directly through the Company's registrar.

                                                                                  The Board takes the powers to issue and to buy back shares at each AGM.
 Poor investment performance of the portfolio relative to the benchmark

 The Company's portfolio is actively managed. In addition to investment
 securities, the Company also invests in commercial property and accordingly,

 the portfolio may not follow or outperform the return of the benchmark.

                                                                                  The Manager's objective is to outperform the benchmark. The Board regularly
                                                                                  reviews the Company's long-term strategy and investment guidelines and the
                                                                                  Manager's relative positions against those.

                                                                                  The Management Engagement Committee reviews the Manager's performance
                                                                                  annually. The Board has the powers to change the Manager if deemed
                                                                                  appropriate.
 Market risk

 Both share prices and exchange rates may move rapidly and can adversely impact
 the value of the Company's portfolio. Although the portfolio is diversified

 across a number of geographical regions, the investment mandate is focused on    The Board receives and considers a regular report from the Manager detailing
 a single sector and therefore the portfolio will be sensitive towards the        asset allocation, investment decisions, currency exposures, gearing levels and
 property sector, as well as global equity markets more generally.                rationale in relation to the prevailing market conditions.

 Property companies are subject to many factors which can adversely affect        The report considers the impact of a range of current issues and sets out the
 their investment performance. They include the general economic and financial    Manager's response in positioning the portfolio and the ongoing implications
 environment in which their tenants operate, interest rates, availability of      for the property market, valuations overall and by each sector.
 investment and development finance and regulations issued by governments and

 authorities.

 Rising interest rates have an impact on both capital values and distributions
 of property companies. Higher interest rates depress capital values as
 investors demand a margin over an increased risk-free rate of return.

 Although the UK has now exited the European Union, the structure of its
 relationship with Continental Europe continues to evolve and there could be an
 impact on occupation across each sector.

 The COVID-19 global pandemic has changed the way we live and work and
 uncertainty remains regarding the impact on economies and property markets
 around the world both in the short and longer term.

 The invasion of Ukraine by Russia in February 2022 created further market
 volatility and uncertainty which remains. Inflation and interest rates are at
 elevated levels not seen in over 10 years.

 Any strengthening or weakening of sterling will have a direct impact as a
 proportion of our balance sheet is held in non‑GBP denominated currencies.
 The currency exposure is maintained in line with the benchmark and will change
 over time. As at 31 March 2023, 66.4% of the Company's exposure was to
 currencies other than sterling.
 The Company is unable to maintain dividend growth

 Lower earnings in the underlying portfolio putting pressure on the Company's
 ability to grow the dividend could result from a number of factors:

                                                                                The Board receives and considers regular income forecasts.
 •    Although most companies negatively impacted by COVID-19 returned to

 paying dividends during the year, with many at pre-covid levels, rising
 interest rates have posed a new threat. The effect on dividends has (in

 general) not been felt through the financial year that we are reporting on but   Income forecast sensitivity to changes in FX rates is also monitored.
 the increased debt costs will have an impact on earnings and hence

 distributions in future;

 •    prolonged vacancies in the direct property portfolio and lease or           The Company has substantial revenue reserves which are drawn upon when
 rental renegotiations as a result of longer-term changes following COVID-19;     required.

 •    strengthening of sterling reducing the value of overseas dividend
 receipts in sterling terms. The Company saw a material increase in the level

 of earnings in the years leading up to the COVID-19 pandemic. A significant      The Board continues to monitor the impact of interest rates, Brexit and
 factor in this was the weakening of sterling following the UK's decision to      COVID-19 and the long-term implications for income generation.
 leave the EU ('Brexit'). Although this has now passed, the value of sterling

 may continue to fluctuate in the near or medium term as the longer-term
 implications of Brexit and COVID-19 and the impact on the UK and European
 economies become clearer. The invasion of Ukraine by Russia has also increased
 market uncertainty. The longer-term implications will differ across the
 European economies. This could lead to currency volatility. Strengthening of
 sterling would lead to a fall in earnings;

 •    adverse changes in the tax treatment of dividends or other income
 received by the Company;

 •    changes in the timing of dividend receipts from investee companies;

 •    legacy impact of COVID-19 on working practices and resulting changes
 in workspace demand; and

 •    negative outlook leading to a reduction in gearing levels in order
 to protect capital has an adverse effect on earnings.

 Accounting and operational risks

 Disruption or failure of systems and processes underpinning the services         Third-party service providers produce periodic reports to the Board on their
 provided by third parties and the risk that those suppliers provide a sub-       control environments and business continuation provisions on a regular basis.
 standard service.

                                                                                The Management Engagement Committee considers the performance of each of the
                                                                                  service providers on a regular basis and considers their ongoing appointment

                                                                                and terms and conditions.

                                                                                  The Custodian and Depositary are responsible for the safeguarding of assets.
                                                                                  In the event of a loss of assets the Depositary must return assets of an
                                                                                  identical type or corresponding value unless it is able to demonstrate that
                                                                                  the loss was the result of an event beyond its reasonable control.
 Loss of Investment Trust Status

 The Company has been accepted by HM Revenue & Customs as an investment           The Investment Manager monitors the investment portfolio, income and proposed
 trust company, subject to continuing to meet the relevant eligibility            dividend levels to ensure that the provisions of CTA 2010 are not breached.
 conditions. As such the Company is exempt from capital gains tax on the          The results are reported to the Board at each meeting.
 profits realised from the sale of investments.

                                                                                Income forecasts are reviewed by the Company's tax advisor through the year
 Any breach of the relevant eligibility conditions could lead to the Company      who also reports to the Board on the year-end tax position and on CTA 2010
 losing investment trust status and being subject to corporation tax on capital   compliance.
 gains realised within the Company's portfolio.

 Legal, regulatory and reporting risks

 Failure to comply with the London Stock Exchange Listing Rules and Disclosure    The Board receives regular regulatory updates from the Manager, Company
 Guidance and Transparency Rules; failure to meet the requirements of the         Secretary, legal advisers and the Auditor. The Board considers those reports
 Alternative Investment Fund Managers Regulations, the provisions of the          and recommendations and takes action accordingly.
 Companies Act 2006 and other UK, European and overseas legislation affecting

 UK companies.

                                                                                  The Board receives an annual report and update from the Depositary.

 Failure to meet the required accounting standards or make appropriate            Internal checklists and review procedures are in place at service providers.
 disclosures in the Half Year and Annual Reports.
 Inappropriate use of gearing

 Gearing, either through the use of bank debt or derivatives,                     The Board receives regular reports from the Manager on

 may be utilised from time to time. Whilst the use of                             the levels of gearing in the portfolio. These are considered

 gearing is intended to enhance the NAV total return, it will                     against the gearing limits set out in the Board's Investment

 have the opposite effect when the return of the Company's                        Guidelines and also in the context of current market

 investment portfolio is negative or where the cost of debt                       conditions and sentiment. The cost of debt is monitored

 is higher than the return from the portfolio.                                    and a balance sought between term, cost and flexibility.
 Other Financial risks

 The Company's investment activities expose it to a variety of financial risks
 which include counterparty credit risk, liquidity risk and the valuation of

 financial instruments.                                                           Details of these risks together with the policies for managing them are found
                                                                                  in the Notes to the Financial Statements.
 Personnel changes at Investment Manager

 Loss of portfolio manager or other key staff.                                    The Chairman conducts regular meetings with the Fund Management team.

                                                                                  The fee basis protects the core infrastructure and depth and quality of
                                                                                  resources. The fee structure incentivises outperformance and is fundamental in
                                                                                  the ability to retain key staff.

 

 

Statement of Directors' responsibilities in relation to the Group financial
statements

 

The Directors are responsible for preparing the Annual Report and the Group
and Parent Company financial statements in accordance with applicable law and
regulations.

 

Company law requires the Directors to prepare Group and Parent Company
financial statements for each financial year. Directors are required to
prepare the Group financial statements in accordance with UK-adopted
international accounting standards and applicable law and have elected to
prepare the Parent Company financial statements on the same basis.

 

Under company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Group and Parent Company and of the Group's profit or loss for
that period. In preparing each of the Group and Parent Company financial
statements, the Directors are required to:

 

•    select suitable accounting policies and apply them consistently;

 

•    make judgements and estimates that are reasonable, relevant and
reliable;

 

•    state whether they have been prepared in accordance with
international accounting standards in conformity with the requirements of
UK-adopted international accounting standards.

 

•    assess the Group and Parent Company's ability to continue as a going
concern, disclosing, as applicable, matters related to going concern; and

 

•    use the going concern basis of accounting unless they either intend
to liquidate the Group or the Parent Company or to cease operations or have no
realistic alternative but to do so.

 

The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Parent Company's transactions and disclose
with reasonable accuracy at any time the financial position of the Parent
Company and enable them to ensure that its financial statements comply with
the Companies Act 2006. They are responsible for such internal control as they
determine is necessary to enable the preparation of financial statements that
are free from material misstatement, whether due to fraud or error, and have
general responsibility for taking such steps as are reasonably open to them to
safeguard the assets of the Group and to prevent and detect fraud and other
irregularities.

 

Under applicable law and regulations, the Directors are also responsible for
preparing a Strategic Report, Directors' Report, Directors' Remuneration
Report and Corporate Governance Statement.

 

The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website.
Legislation in the UK governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.

 

In accordance with Disclosure Guidance and Transparency Rule 4.1.14R, the
financial statements will form part of the annual financial report prepared
using the single electronic reporting format under the TD ESEF Regulation. The
Auditor's report on these financial statements provides no assurance over the
ESEF format.

 

Responsibility statement of the Directors in respect of the annual financial
report

Each of the Directors confirms that to the best of their knowledge:

 

•    the financial statements, prepared in accordance with the applicable
set of accounting standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Group and Parent
Company and the undertakings included in the consolidation taken as a whole;
and

 

•    the strategic report includes a fair review of the development and
performance of the business and the position of the issuer and the
undertakings included in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that they face.

 

The Directors consider that the Annual Report and Accounts, taken as a whole,
is fair, balanced and understandable and provides the information necessary
for shareholders to assess the Group's position and performance, business
model and strategy.

 

By order of the Board

 

David Watson

Chairman

1 June 2023

Group statement of comprehensive income

for the year ended 31 March 2023

 

                                                                         Year ended 31 March 2023         Year ended 31 March 2022
                                                                         Revenue    Capital               Revenue    Capital
                                                                         Return     Return     Total      Return     Return     Total
                                                                  Notes  £'000      £'000      £'000      £'000      £'000      £'000
 Income
 Investment income                                                2      52,077     -          52,077     44,170     -          44,170
 Other operating income                                                  255        12         267        5          -          5
 Gross rental income                                                     3,513      -          3,513      2,773      -          2,773
 Service charge income                                                   946        -          946        1,103      -          1,103
 (Losses)/gains on investments held at fair value                        -          (549,430)  (549,430)  -          249,038    249,038
 Net movement on foreign exchange; investments and loan notes            -          (2,780)    (2,780)    -          1,136      1,136
 Net movement on foreign exchange; cash and cash equivalents             -          2,016      2,016      -          637        637
 Net returns on contracts for difference                                 9,462      (45,556)   (36,094)   5,701      16,361     22,062
 Total Income                                                            66,253     (595,738)  (529,485)  53,752     267,172    320,924
 Expenses
 Management and performance fees                                         (1,560)    (4,680)    (6,240)    (1,663)    (29,477)   (31,140)
 Direct property expenses, rent payable and service charge costs         (1,660)    -          (1,660)    (1,435)    -          (1,435)
 Other administrative expenses                                           (1,163)    (542)      (1,705)    (1,621)    (608)      (2,229)
 Total operating expenses                                                (4,383)    (5,222)    (9,605)    (4,719)    (30,085)   (34,804)
 Operating profit/(loss)                                                 61,870     (600,960)  (539,090)  49,033     237,087    286,120
 Finance costs                                                           (1,146)    (3,438)    (4,584)    (629)      (1,886)    (2,515)
 Profit/(loss) from operations before tax                                60,724     (604,398)  (543,674)  48,404     235,201    283,605
 Taxation                                                                (6,087)    2,495      (3,592)    (4,967)    3,049      (1,918)
 Total comprehensive income                                              54,637     (601,903)  (547,266)  43,437     238,250    281,687
 Earnings/(loss) per Ordinary share                               3      17.22p     (189.67)p  (172.45)p  13.69p     75.07p     88.76p

 

The Total column of this statement represents the Group's Statement of
Comprehensive Income, prepared in accordance with UK-adopted international
accounting standards. The Revenue Return and Capital Return columns are
supplementary to this and are prepared under guidance published by the
Association of Investment Companies. All items in the above statement derive
from continuing operations.

 

The Group does not have any other income or expense that is not included in
the above statement therefore "Total comprehensive income" is also the profit
and loss for the year.

 

All income is attributable to the shareholders of the parent company.

 

 

 

Group and Company statement of changes in equity

 

Group

                                                   Share    Capital
                                          Share    Premium  Redemption  Retained
                                          Capital  Account  Reserve     Earnings   Total
 For the year ended 31 March 2023  Notes  £'000    £'000    £'000       £'000      £'000
 At 31 March 2022                         79,338   43,162   43,971      1,396,268  1,562,739
 Total comprehensive income               -        -        -           (547,266)  (547,266)
 Dividends paid                    5      -        -        -           (47,127)   (47,127)
 At 31 March 2023                         79,338   43,162   43,971      801,875    968,346

 

Company

                                                   Share    Capital
                                          Share    Premium  Redemption  Retained
                                          Capital  Account  Reserve     Earnings   Total
 For the year ended 31 March 2023  Notes  £'000    £'000    £'000       £'000      £'000
 At 31 March 2022                         79,338   43,162   43,971      1,396,268  1,562,739
 Total comprehensive income               -        -        -           (547,266)  (547,266)
 Dividends paid                    5      -        -        -           (47,127)   (47,127)
 At 31 March 2023                         79,338   43,162   43,971      801,875    968,346

 

Group

                                                   Share    Capital
                                          Share    Premium  Redemption  Retained
                                          Capital  Account  Reserve     Earnings   Total
 For the year ended 31 March 2022  Notes  £'000    £'000    £'000       £'000      £'000
 At 31 March 2021                         79,338   43,162   43,971      1,159,962  1,326,433
 Total comprehensive income               -        -        -           281,687    281,687
 Dividends paid                           -        -        -           (45,381)   (45,381)
 At 31 March 2022                         79,338   43,162   43,971      1,396,268  1,562,739

 

Company

                                                   Share    Capital
                                          Share    Premium  Redemption  Retained
                                          Capital  Account  Reserve     Earnings   Total
 For the year ended 31 March 2022  Notes  £'000    £'000    £'000       £'000      £'000
 At 31 March 2021                         79,338   43,162   43,971      1,159,962  1,326,433
 Total comprehensive income               -        -        -           281,687    281,687
 Dividends paid                           -        -        -           (45,381)   (45,381)
 At 31 March 2022                         79,338   43,162   43,971      1,396,268  1,562,739

 

 

Group and company balance sheets

as at 31 March 2023

 

                                                            Group      Company    Group      Company
                                                            2023       2023       2022       2022
                                                     Notes  £'000      £'000      £'000      £'000
 Non-current assets
 Investments held at fair value                             948,672    948,672    1,506,436  1,506,436
 Investments in subsidiaries                                -          36,292     -          36,297
 Investments held for sale                                  -          -          48,980     48,980
                                                            948,672    984,964    1,555,416  1,591,713
 Deferred taxation asset                                    903        903        903        903
                                                            949,575    985,867    1,556,319  1,592,616
 Current assets
 Debtors                                                    65,287     65,293     97,673     97,208
 Cash and cash equivalents                                  36,071     36,069     32,109     32,107
                                                            101,358    101,362    129,782    129,315
 Current liabilities                                        (23,654)   (59,950)   (66,109)   (101,939)
 Net current assets                                         77,704     41,412     63,673     27,376
 Total assets plus net current assets/(liabilities)         1,027,279  1,027,279  1,619,992  1,619,992
 Non-current liabilities                                    (58,933)   (58,933)   (57,253)   (57,253)
 Net assets                                                 968,346    968,346    1,562,739  1,562,739
 Capital and reserves
 Called up share capital                                    79,338     79,338     79,338     79,338
 Share premium account                                      43,162     43,162     43,162     43,162
 Capital redemption reserve                                 43,971     43,971     43,971     43,971
 Retained earnings                                          801,875    801,875    1,396,268  1,396,268
 Equity shareholders' funds                                 968,346    968,346    1,562,739  1,562,739
 Net Asset Value per:
 Ordinary share                                      4      305.13p    305.13p    492.43p    492.43p

 

 

Notes to the financial statements

 

1      Accounting policies

The financial statements for the year ended 31 March 2023 have been prepared
on a going concern basis, in accordance with UK-adopted International
accounting standards and in conformity with the requirements of the Companies
Act 2006. The financial statements have also been prepared in accordance with
the Statement of Recommended Practice, "Financial Statements of Investment
Trust Companies and Venture Capital Trusts," ('SORP'), to the extent that it
is consistent with UK-adopted international accounting standards.

 

In assessing Going Concern the Board has made a detailed assessment of the
ability of the Company and the Group to meet its liabilities as they fall due,
including stress and liquidity tests which considered the effects of
substantial falls in investment valuations, revenues received and market
liquidity as the global economy continues to suffer disruption due to
inflationary pressures, the war in Ukraine and the after-effects of the
COVID-19 pandemic.

 

In light of the testing carried out, the liquidity of the level 1 assets held
by the Company and the significant net asset value, and the net current asset
position of the Group and Parent Company, the Directors are satisfied that the
Company and Group have adequate financial resources to continue in operation
for at least the next 12 months following the signing of the financial
statements and therefore it is appropriate to adopt the going concern basis of
accounting.

 

The Group and Company financial statements are expressed in sterling, which is
their functional and presentational currency. Sterling is the functional
currency because it is the currency of the primary economic environment in
which the Group operates. Values are rounded to the nearest thousand pounds
(£'000) except where otherwise indicated.

 

2      Investment income

                                             2023    2022
                                             £'000   £'000
 Dividends from UK listed investments        3,084   3,101
 Dividends from overseas listed investments  30,891  21,349
 Scrip dividends from listed investments     6,325   10,693
 Property income distributions               11,777  9,027
                                             52,077  44,170

 

3      Earnings/(loss) per Ordinary share

 

The earnings per Ordinary share can be analysed between revenue and capital,
as below.

 

                                                             Year ended     Year ended
                                                             31 March 2023  31 March 2022
                                                             £'000          £'000
 Net revenue profit                                          54,637         43,437
 Net capital profit                                          (601,903)      238,250
 Net total profit                                            (547,266)      281,687
 Weighted average number of shares in issue during the year  317,350,980    317,350,980

                                                             pence          pence
 Revenue earnings per share                                  17.22          13.69
 Capital earnings per share                                  (189.67)       75.07
 Earnings per share                                          (172.45)       88.76

 

The Group has no securities in issue that could dilute the return per share.
Therefore the basic and diluted return per share are the same.

 

4   Net Asset Value Per Ordinary Share

Net asset value per Ordinary share is based on the net assets attributable to
Ordinary shares of £968,346,000 (2022: £1,562,739,000) and on 317,350,980
(2022: 317,350,980) Ordinary shares in issue at the year end.

 

5.  Dividends

An interim dividend of 5.65p was paid on 12 January 2023. A final dividend of
9.85p (2022: 9.20p) will be paid on 1 August 2023 to shareholders on the
register on 30 June 2023. The shares will be quoted ex-dividend on 29 June
2023.

 

 

 

 

 

 

 

6.  Annual Report and Accounts

This statement was approved by the Board on 1 June 2023. The financial
information set out above does not constitute the Company's statutory accounts
for the years ended 31 March 2023 or 2022. The statutory accounts for the
financial year ended 31 March 2023 have been approved and audited and received
an audit report which was unqualified and did not include a reference to any
matters to which the auditors drew attention by way of emphasis without
qualifying the report. The statutory accounts for the financial year ended 31
March 2022 received an audit report which was unqualified and did not include
a reference to any matters to which the auditors drew attention by way of
emphasis without qualifying the report.

 

The Annual Report and Accounts will be posted to shareholders on or around 12
June 2023.

 

Columbia Threadneedle Investment Business Limited

Company Secretary,

1 June 2023

 

For further information, please contact:

Jonathan Latter

For and on behalf of

Columbia Threadneedle Investment Business Limited

020 3530 6283

 

Neither the contents of the Company's website nor the contents of any website
accessible from hyperlinks on the Company's website (or any other website) is
incorporated into, or forms part of, this announcement.

ENDS

A copy of the Annual Report and Accounts will be submitted to the National
Storage Mechanism and will shortly be available for inspection
at data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism)

The Annual Report and Accounts will also be available shortly on the Company's
website at www.trproperty.com (http://www.trproperty.com) where up to date
information on the Company, including daily NAV and share prices, factsheets
and portfolio information can also be found.

 

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