REG - TR Property Inv. - Annual Financial Report

TR Property Investment TrustAnnouncement

10/06/2024 07:00

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RNS Number : 6850R  TR Property Investment Trust PLC  10 June 2024

TR PROPERTY INVESTMENT TRUST PLC

LONDON STOCK EXCHANGE ANNOUNCEMENT

Annual Results for the year ended 31 March 2024

LEI: 549300BPGCCN3ETPQD32

10 June 2024

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 2024.

 

Chairman Kate Bolsover commented

"We are pleased to announce a modest increase in our dividend. There is no
denying that commercial real estate became unfashionable when interest rates
began to rise. But as TR Property's renewed outperformance shows, investors
are beginning to differentiate between the less desirable elements of the
sector and the companies that our Manager seeks out - that is, companies that
own quality assets and have strong balance sheets."

 

Manager Marcus Phayre-Mudge commented

 "Our central case is that more benign European inflation is drawing closer.
But crucially, our optimism is not dependent on near-term cuts to interest
rates. The companies we own are positioned to prosper even if rates remain at
current levels and the spike in M&A activity this past year is recognition
of this. Acquirers have rushed in to take advantage where public markets have
left quality assets languishing at significant discounts."

                                             Year ended                                          Year ended

                                             31 March 2024                                       31 March 2023     Change
 Balance Sheet
 Net asset value per share                   351.10p                                             305.13p           +15.2%
 Shareholders' funds (£'000)                 1,115,503                                           968,346           +15.2%
 Shares in issue at the end of the year (m)  317.4                                               317.4             0.0%
 Net debt(1)                                 10.8%                                               12.3%
 Share Price
 Share price                                 325.00p                                             279.00p           -38.9%
 Market capitalisation                       £1,031m                                             £885m             -38.9%
                                                                         Year ended     Year ended

                                                                         31 March 2024  31 March 2023     Change
 Revenue
 Revenue earnings per share                                              12.04p         17.22p            +25.8%
 Dividends(2)
 Interim dividend per share                                              5.65p          5.65p             0.0%
 Final dividend per share                                                10.05p         9.85p             +2.0%
 Total dividend per share                                                15.70p         15.50p            +1.3%
 Performance: Assets and Benchmark
 Net Asset Value total return(3)                                         +21.1%         -35.5%
 Benchmark total return                                                  +15.4%         -34.0%
 Share price total return(4)                                             +22.9%         -36.2%
 Ongoing Charges(5)
 Including performance fee                                               1.81%          0.73%
 Excluding performance fee                                               0.82%          0.73%
 Excluding performance fee and direct property costs                     0.78%          0.67%

 

1.      Net debt is the total value of loan notes, loans (including
notional exposure to contracts for difference ('CFDs')) 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 2024. An interim dividend of 5.65p was paid on 11 January
2024 (2023: 5.65p). A final dividend of 10.05p (2023: 9.85p) will be paid on 1
August 2024 to shareholders on the register on 28 June 2024. The shares will
be quoted ex-dividend on 27 June 2024.

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 methodology.

 Chairman's statement

 

Market backdrop

Investor behaviour continues to be governed by the trajectory of bond yields
and inflation. This is particularly acute in leveraged asset classes such as
real estate. Compared to the two previous years, when we witnessed seemingly
relentless incremental increases in base rates, this period was marked by a
more positive shift in sentiment, as investors began to sense a peak in the
interest rate cycle. Nevertheless, our manager had to navigate a series of
false dawns as markets rallied on expectations of more dovish central bank
behaviour - before this more buoyant mood was proved to be premature. Whilst
the second half of the year under review saw much greater volatility in share
prices, we also sense increasing engagement from investors in our corner of
the equity market, as the weakening of inflationary pressures becomes
increasingly evident - particularly across Europe.

 

Given all that has happened in the last year, I am pleased to report the
Company's net asset value ('NAV') total return was +21.1%, ahead of the
benchmark total return of +15.4%. Of greater importance to shareholders is the
share price total return. This, at +22.9%, exceeded the NAV total return given
that the discount at which the shares traded was tighter at the end of the
year than at the beginning. These encouraging results reflect a strong second
half of the financial year, with the first half recording an NAV total return
of just +3.3%. In the half year report I highlighted that the vast majority of
our companies had made great strides to improve their balance sheets and debt
books over the last two years. This was always going to be a key building
block in the sector's recovery. We have subsequently seen a strong reporting
season (February and March 2024) as improving market fundamentals overlaid on
strengthened balance sheets resulted in healthy earnings growth. Those
companies which suspended dividends to protect their cashflows have nearly all
returned (or announced the return) to paying dividends. There remain a handful
of businesses in financial intensive care, but our manager continues to avoid
these, even where sentiment and rumour can lead to dramatic (but often
temporary) share price performance.

 

Our sector continues to see heightened levels of merger and acquisition
('M&A') activity. Our involvement in three successful transactions (two
privatisations and one merger) took place in the first half and were reviewed
in the half year report. They were important valuation underpins. The second
half of the year saw a lot of activity around more potential mergers. In the
case of the all paper offer by Tritax Big Box for UK Commercial Property REIT
('UKCM'), our manager voted against the transaction on governance issues.

 

Revenue Results Outlook and Dividend

For the full year, earnings at 12.04p were just over 30% lower than the
earnings recorded for the previous financial year. A fall in earnings for the
year to March 2024 was flagged in the 2023 Annual Report. Interim earnings
were 39% behind the prior year and whilst our expectations for the second half
were slightly exceeded, the pattern did not change.

 

Whilst the prior year had been inflated by a number of one-off items (all
highlighted in the previous annual report), the mix of dividend suspensions
and reductions across our German residential, and to a lesser extent,
Scandinavian holdings, has hit the income account hard. In addition, rising
interest rates increased our own debt costs, despite the reduction in the
absolute amount of debt. Added to these income headwinds, we also experienced
an increase in the headline rate of UK corporation tax.

 

Over the year, significant progress has been made by those companies which had
suspended or reduced dividends. Their balance sheets have strengthened through
cash retention, asset sales and debt restructuring, with many announcing that
they will resume distributions at some stage in the forthcoming year. Although
their actions have been detrimental to our revenue account in the short term,
their decisive and conservative action has been reflected positively in
capital returns. Some will be a little slower than others to resume
distributions, a handful still have to announce when their distributions will
recommence.

 

We anticipate that underlying income will take some time to recover but with
strong revenue reserves built up, the Board is able to support the Company's
dividend. In determining our dividend, we always aim to balance investor
appetite for income against the Company's cashflow in a given period. This
approach entails the building up of reserves during fruitful years, allowing
us to cover the dividend during dips in income. Against this background, we
are pleased to announce a very modest increase in the final dividend to
10.05p, bringing the full year dividend to 15.70p, an increase of 1.3%.

 

Net Debt and Currencies

Gearing reduced in the second half and ended the year at 10.8%. The cost of
our debt remains higher than for some time and the reduction seen at the
year-end is more a reflection of this, than on the manager's outlook.

 

Sterling staged a couple of rallies through the year, over the summer period
and then again in the first quarter of 2024. This had a small negative impact
on our non-sterling earnings.

 

 

 

 

 

Discount and Share Repurchases

The discount improved by more than 1% over the year, closing at 7.5% (opening
at 8.6%) enhancing the share price return over the NAV return for the year.
The average discount for the year was 7.7%. A discount of over 10% was seen
very briefly in July and again in October, when market sentiment was at its
worst. It narrowed to 2.6% in late February as investors began to feel
optimistic about an early interest rate cut. However, this proved premature
and the Company's discount widened again into the year end. The average
discount for the year remained wider than the five year average (5.8%) which
is not particularly surprising as for the most part, the sector remained
unloved.

 

Environmental, Social and Governance

Our Responsible Investment Report is set out in the Annual Report. With the
impending changes in disclosure regarding sustainability (SDR), we have worked
with our manager to consider how best to set out our credentials and
priorities in this area.

 

The Company has not set out to be an investment fund with any ESG or
sustainability characteristics, however, as a long-term investor, governance
and sustainability considerations are embedded in our Manager's investment
process. Accordingly, we will continue to put strong corporate governance at
the heart of our decision-making process. Many of the environmental targets
which our investee companies follow are being driven by their regulatory
framework and we expect our companies wholeheartedly to embrace these
improvements through refurbishment and development. We also endeavour to
"practice what we preach" in our direct property holdings, where we exercise
direct control over these issues. Property is of course a socially important
investment area. People live, work, and play in the properties which we or our
investee companies manage and own. This means that we are adding value and
engaging with all of society in all that we do.

 

Our Managers actively engage with management and regulators on matters of
corporate governance and there is one recent situation highlighted below which
demonstrates this. We consider this one of our key responsibilities in
managing the assets which you have invested with us.

 

Our manager closely followed the all paper takeover of UKCM by Tritax Big Box.
The Company owns shares in both companies. Throughout the process, he remained
concerned about poor governance and the lack of transparency on certain
commercial aspects of the transaction. He was not alone. The chairman of UKCM
also dissented from recommending the transaction. A most unusual and
noteworthy situation. Whilst the dominance of one shareholder (Phoenix Life
owned 43% of UKCM) ultimately drove the transaction, we engaged extensively
with all parties including the Takeover Panel before voting against. The
Company has large positions in many smaller property companies and our manager
engages extensively with boards. Holding boards to account, as guardians of
the interests of all shareholders, is an important part of our governance
regime.

 

Outlook

Our manager's central case is that we are now closer (than in previous
reports) to the peak of this interest rate cycle in Europe. The multiple
'false dawns' (where shares prices rallied in anticipation of interest rate
cuts, only to fall back) have weighed on sentiment and many investors remain
on the sidelines awaiting hard evidence of base rates falling. Also
importantly, the manager's positive viewpoint is not predicated on substantial
reductions in interest rates. What is being looked for is stability in the
monetary environment with lenders returning and margins normalising.

 

You will read in the manager's report of sound fundamentals in many real
estate sub sectors particularly for high quality assets. I reiterate, the
companies we are invested in have those two key ingredients - quality of
assets and depth of balance sheet. The sector continues to trade at attractive
discounts to asset value and the year in question brought more examples of
good portfolios being taken private as public markets continued to undervalue
them - again, covered in more detail in the following pages.

 

We expect the reduction in our physical property exposure to be temporary. The
timing of the rotation of the capital released by the March sale of the
Colonnades into equities has proved beneficial. Equity markets are a forward
looking discounting mechanism and property share prices have responded to the
expectation of a

lowering in the cost of capital.

 

The team continues to hunt for the next property purchase. In the meantime,
the outlook for well financed property equities remains encouraging.

 

Kate Bolsover

Chairman

7 June 2024

 

 

 

Manager's report

 

Performance

The Company's net asset value ('NAV') total return for the 12 months to 31
March 2024 was +21.1%, whilst the benchmark, the FTSE EPRA/NAREIT Developed
Europe TR (in GBP) returned +15.4%. These are pleasing results - both in
absolute terms and relative to the benchmark.

 

There were three clear phases of market performance over the year under
review. The first phase (April to October) saw pan European real estate
equities travelling in a tight (12%) trading range; the market behaviour
analogy is that of a ping pong ball in a horizontal tube. Equity pricing
remains dominated by macroeconomic considerations and more expressly, the
outlook for base rates, the shape of the interest rate curve and bond market
yields. Over this first phase, we saw bulls and bears evenly matched. In late
October, the outlook changed in response to central bankers' more positive
comments about the success of monetary policy tightening and the deceleration
of inflation. Markets began to price in an expectation of a large number of
base rate cuts and this supercharged our sector. Between 27 October and the
end of the calendar year, our benchmark gained 31%. This illustrated not only
how far investors view our sector as a play on interest rates but also how
'under-owned' the sector was. As investors returned from the Christmas break,
expectations about the speed of base rate cuts began to weaken. The number of
anticipated cuts reduced and the expected commencement date drifted out of the
short term. This led to a correction of over 12% between the beginning of
January and the end of February. As we headed into the last month of the
financial year, the dovish commentary from the central banks was reiterated.
We saw the first interest rate cut from the Swiss National Bank whilst the
Bank of England laid the groundwork for potential cuts, given the inflation
data. Meanwhile, the ECB also highlighted the month-on-month slowing of
inflation, helped by lower energy costs.

 

Though the financial year ended positively, it is abundantly clear that the
performance of real estate equities remains - at least in the short term -
heavily dependent on interest rate expectations. The renewed bout of
nervousness (around the path of interest rate reductions) in January and
February reminds us of the sector's sensitivity. However, and quite crucially,
the underlying market fundamentals in so many of our subsectors are positive
and the rest of this report will focus on why we look to the future with
confidence.

 

If investors focus solely on the macro then they will undoubtably miss out on
the micro. Where market fundamentals are sound (i.e. rental growth is in
evidence) we have seen value appearing in a large number of well-financed
companies, particularly where share prices trade at deep discounts to asset
values. We were not alone in seeing such opportunities and the year under
review saw a large amount of M&A activity, particularly in the UK. The new
financial year was only just underway when on 3 April 2023, Industrials REIT
announced that it had received a cash offer from Blackstone at a 40% premium
to the previous closing price. Importantly, this was also a 17% premium to the
last published NAV. The Company was the largest shareholder (11.2% of the
issued capital) and we had been long term supporters of the management team
and their strategy. They had been at the forefront of bringing property
management into the digital era. It is a textbook example of where the
value-adding skills are not priced correctly by public markets. The sale was
bittersweet: whilst the positive impact on the Company's valuation was
welcome, it meant the loss of a well-run business, exposed to one of our most
favoured sub-sectors -multi let industrial.

 

Alongside the sale of Industrials REIT to Blackstone, we saw another US
behemoth, this time a $36bn market cap REIT, Realty Income, acquire all of
Ediston Property's assets for cash. Ediston had switched from being a
diversified investor to one focused entirely on retail warehousing. Alongside
multi-let industrial and wider logistics property we are positive about value
growth in this sector, hence our exposure. We had steadily built the position
and owned over 16% of the company at the date of the announcement. This is
another example of undervaluation by European public markets, with a more
highly rated US REIT able to take advantage. Realty Income is valued on an
earnings basis rather than a discount/premium to asset value - and it has
successfully raised equity on multiple occasions to take advantage of
depressed asset prices.

 

The next deal of note was a little different, with LondonMetric Property
(market cap £4bn) using its more highly rated paper to acquire CT Property
Trust ('CTPT'). We owned 10% of CTPT and have been a longstanding investor in
LondonMetric so we were happy to support the deal which also saw a 25% gain in
the CTPT share price on the announcement. Given this was an all-paper
acquisition, this gain reflected the difference in the valuation of the
respective companies. As we have seen on so many occasions, small companies
continue to suffer wider discounting. I have written many times on the need
for amalgamation and it remains a pressing requirement amongst our smaller
companies. Ironically the latest tie-up to complete was not between two small
caps but between two of the larger names, LondonMetric and LXI REIT. LXI was
an externally managed REIT specialising in long income assets and itself was
the product of the merger with Secure Income REIT in 2022. Like LondonMetric's
deal for CTPT, this was also an all paper 'NAV for NAV' deal but with some
adjustments to reflect the cancellation of an egregiously long management
contract term for LXI (five years which resulted in a break payment of £30m
to AlTi, the departing manager). LondonMetric, our 5th largest holding, has
performed well through both these mergers and with a market cap close to £4bn
is now larger than British Land (where the former's CEO cut his teeth 20 years
earlier).

 

 

 

Not all the year's corporate activity followed the expected path. An agreed
merger between two small companies we did not own, Custodian REIT (market cap
£330m) and Aberdeen Property Income (£185m), failed to get the necessary
shareholder support. We think this is a shame as the alternative - a managed
sale of the assets - rarely produces a satisfactory outcome, due to the time
taken and the price achieved for a given portfolio's 'tail' of weakest assets.

 

Meanwhile, the recently completed takeover of UKCM by Tritax Big Box has been
flagged in the Chairman's Statement and is further reviewed under the
Responsible Investment section of the Annual Report. The all-paper offer
valued UKCM at a 12% discount to its last published NAV based on the
respective share prices at the date of conversion. Given the quality of the
assets and the very attractive debt book (LTV of 25%, 3.2% fixed price debt)
we remain disappointed that a more comprehensive strategic review and
marketing exercise was not undertaken, given the last published NAV of 78.7p.
However, our average UKCM entry price of 57.5p (purchases between August 2023
and January 2024) and the share price of 72.0p on 2 May (the EGM date) offers
some comfort, in that it shows our prediction of M&A activity involving
this company was correct.

 

Performance Attribution

Reviewing our performance attribution, it is no surprise that our exposure to
much of this M&A activity was a key contributor to performance. Whilst the
Industrials REIT transaction was the largest driver of relative performance,
our general overweight to this sector was also key. Our exposure to a number
of logistics focused names, particularly the more fleet of foot smaller
Continental European names such as Argan (total return +26.4%) and Catena
(total return +39.2%) which have significant, value-adding development
pipelines relative to their size. Our overweight's towards European retail,
such as Klepierre, were also important contributors. We remain positive about
businesses with high earnings if we feel confident about the sustainability of
that revenue. In the UK the performance of the diversified group (which
includes LondonMetric and LXI) saw returns driven by these two names (now
amalgamated). This group also included Regional REIT, not a stock which the
Company has ever held, which was the poorest performer (total return -54.5%)
across our universe. A poster child for too much leverage in a sector facing
huge challenges (regional offices) and an imminent debt maturity which will
result in some form of comprehensive refinancing. Given the general negativity
towards offices, it may come as a surprise that amongst our top 10 performers
was Sirius (total return 35.3%) which owns business space in Germany and the
UK. It is a good example of investors staying loyal to a stock if management
can show robust earnings and a path to growth. In this case strong capital
recycling and generative acquisitions continue to drive returns. Similar to
Industrials REIT, we think this is another case of asset management skills
being undervalued by the market.

 

In the residential space, it was very much a case of one step forward and one
step back from a relative valuation perspective. This highly interest rate
sensitive sector had a terrible 2022 and first half of 2023 but enjoyed
periods of strong returns thereafter, particularly the last quarter of the
calendar year. In Scandinavia, our positioning was correct, owning Balder in
Sweden (total return +85.1%) and not owning Kojamo in Finland (total return
+1.2%). The bulk of the listed residential focused companies are still German.
Whilst our largest absolute position, Vonovia, produced a total return of
+65.7% we were generally at benchmark weight or slightly under. Large caps,
such as Vonovia, are very much viewed as bund proxies and the much
anticipated, potential rate cuts drove share prices upwards, particularly in
the last quarter of the calendar year. However, our largest relative position
was Phoenix Spree Deutschland, a micro-cap (market cap £133m) which produced
a very disappointing -18.6% total return and entirely missed the rate driven
rally. Berlin apartments are an attractive long-term store of value given the
supply/demand disequilibrium. Ironically where these apartments have the right
to be sold on a long leasehold basis (as opposed to short letting on a
regulated rent basis) they are more valuable empty than let; 75% of Phoenix's
portfolio has this valuable permit. This offers a crucial long-term valuation
underpin. Phoenix's board have highlighted a reinvigorated sales process and
we expect the company to continue to reduce its leverage through sales. It is
externally managed and the contract has a continuation vote in July 2025.
Management is therefore fully incentivised to deliver.

 

Healthcare was the largest sector underweight, both in Europe and the UK. The
former is dominated by elderly care where a number of operators have
experienced financial difficulties. In the UK, the largest names are in the
primary care sector and here the issue is not one of covenant risk (the tenant
is directly or indirectly the NHS) but the lack of rental growth. Assura
delivered a total return of -6.8% and PHP slightly better at -0.5%.

 

Offices remain the most challenging sector and there is more detail later in
the report. We had no exposure to the London developers (Derwent London, GPE
and Helical) which all produced negative returns in the year. We preferred
Workspace (total return 23.7%) which provides serviced offices and workspace
across the capital and, following the 2021 acquisition of McKay Securities,
further into the South East. The majority of our office exposure is to
European cities particularly Paris (through Gecina), Madrid (through Arima)
and Malmo/Gothenburg (through Wihlborgs). Paris CBD continues to benefit from
a shortage of prime office space with lower levels of remote working than
London. As I have commented on previously, smaller cities with shorter average
commute times, have experienced much higher levels of office occupancy and
this is reflected in rent stability. Arima (market cap €176m) develops and
refurbishes prime offices in the Madrid CBD and has had a successful year in
both selling (8% of the portfolio) and leasing (the largest refurbishment).
However, the size of the company means that it is too small for institutional
ownership. The total return of -21.4% made it our worst performer over the
period. Arima has a modest buyback programme which it will need to accelerate
or face shareholder activism. The shares trade at a 40% discount to the last
published NAV.

 

 

 

Offices

Sentiment towards the office sector remains extremely negative. The subsector
is caught in a perfect storm of weakening occupancy fundamentals (with the
true impact of 'working from home' still filtering through many markets) and
growing capital expenditure requirements (to meet the needs of an increasingly
demanding occupier base and green agenda). Low transaction volumes had
hampered pricing visibility which compounds the issue, as investors struggled
to envisage the valuation inflection point.

 

Dramatically increased construction costs alongside an unstable rate outlook
have resulted in both development and standing assets in the sector being
viewed as simply uninvestable by large parts of the international investor
base. The largest cohort of global real estate investors originate in the US
and their home market has been particularly badly hit. Cushman & Wakefield
reported that the vacancy rate in Manhattan hit an extraordinarily high 23% in
March 2024.

 

Our view on European offices is more sanguine, though a level of pessimism is
certainly warranted. Savills estimates that average vacancy across Europe is
c.8.4% (+60bp year-on-year). Whilst all London office markets collectively
report c.9% vacancy, averages are a dangerous metric, with large variations
across the capital. The listed players are much more exposed to the West End
where vacancies are c.4% than the City at c.12% and have little or no exposure
to Docklands where vacancy has hit 17%.

 

Rental growth, which might be assumed to be weakening dramatically given
softening occupier demand, has also in fact remained remarkably robust, as
demonstrated by Great Portland Estate's (GPE's) upgrade of its prime office
ERV guidance at its September 2023 interim results from a range of +3-6% to an
increased top end of +3-8%. We put this unusual phenomenon down to the ongoing
bifurcation in the sector - the growing separation between "the best and the
rest". We are therefore selectively overweight certain office names, such as
Gecina, where we believe the company has best in class assets and is exposed
to strong submarkets. Given the wider risks to the sector this is not,
however, enough to make a compelling equity case on its own; Gecina's balance
sheet is also solid, while the outlook for its earnings is strong given
indexation and reversion capture to come. Without these elements, and absent
other catalysts, we struggle to see how some office players will close their
discounts, which explains our underweights in Stockholm offices (at its fourth
quarter 2023 results Fabege demonstrated negative lease renegotiations of -3%)
and London offices. GPE's earnings are set to drop dramatically in the coming
years as debt refinanced at market rates wipes out underlying rental growth.

 

In certain places we believe overly-bearish views of offices has led to
mis-pricing and created opportunities, however these are rare. In each
instance they require the wider equity case to have other attractive features.
Once such stock is Picton where we believe the market's focus on its offices
(29% of the portfolio) has led to the shares being materially oversold (c.30%
discount to net tangible assets). Given our comfort with the very high quality
of the remainder of the portfolio (59% industrial), the strong balance sheet
(28% LTV with no near term refinancing needs) and management actions to
extract maximum value from its offices (such as the sale of Angel Gate for
£30m after securing residential planning consents on the asset) we believe it
is only a matter of time before the market realises the attractions of the
stock.

 

Retail

The difference in investor sentiment between offices and retail continues to
feed through the IPD/MSCI data. For the 12 months to March 2024, London
offices fell 13.5% and Inner South East fell 20.7%. UK wide retail was down
just 6.8% with shopping centres just 4.7% similar to retail warehousing at
4.9%. Essentially, rental values in retail property have broadly completed
their rebasing. Tenants have right-sized their portfolios for an omni-channel
engagement with customers; and fewer (generally larger) stores but also an
understanding that the physical presence is very much part of the customer
experience.

 

Convenience remains critical for the consumer ('time is money') and the
easy-to-access edge of town retail parks and shopping centres are seeing
improving footfall data. They are beginning to show rental resilience and
yield stabilisation. UK shopping centres collectively saw a positive total
return of +4.2%. The last time we saw a positive capital return from this
sub-sector was 2015. Whilst we have modest exposure to retail in the UK
(following the sale of Ediston to Realty Income), we do have considerable
exposure in Europe through Klepierre and Eurocommercial. These businesses
offer not only high levels of occupancy but crucially stable occupancy cost
ratios which combines all the tenant's overheads (rent, rates and service
charge). Controlling an inflating service charge has been particularly
difficult in the last year or so and these companies have done a good job at
maintaining affordability for their tenants.

 

In the half year report I referenced outlet malls as a sub-sector seeing
strong recovery and this has been illustrated by Hammerson's receipts from
Bicester Village and its European malls where it owns minority positions in a
complex ownership structure. The company has identified these assets as
non-core but with only partial ownership its hard to see who the buyer will
be. Elsewhere, owners such as Landsec at Gunwharf Quays (Portsmouth) have
enjoyed robust sales growth. Despite the recent increases in the cost of
living, UK retail sales (year on year to February 2024) have shown modest
growth with grocery the top performer (4.4% annualised). Wage inflation has
helped underpin consumer confidence, alongside job growth and stubbornly high
numbers of job vacancies providing security to workers.

 

 

 

Industrial/Logistics

UK take up in 2023 was 21m sq ft, 36% lower than the record year of 2022.
Whilst this looks worrying, it is still above the pre-pandemic trendline
(2013-2019). Grade A availability in big box logistics is 30% higher than a
year ago at 36m sq ft, pushing vacancy up to 7.1%. Encouragingly the fourth
quarter of 2023 was the busiest quarter of the year. As always, the devil is
in the detail with some markets in a better position than others: East
Midlands, for example, has only 12 months' supply. This increase in vacancy
has slowed rental growth. It remains healthy at 7.8% but is less than half the
pandemic (2021) spike of 17.8%. Large regional variations persist with London
recorded just 3% rental growth as the very high absolute rents point to an
affordability ceiling.

 

According to JLL, Continental European take-up in 2023 was 24.5m sq metres,
26% down on the previous year and below the records of 2021/2. However, it is
still the fourth highest volume on record and greater than the average across
2016-2019. The conclusion we have drawn is that the structural tailwinds
(highlighted in many previous reports) are still supportive, but the
supercharged pandemic induced period has reverted to more normal growth.
Manufacturing driven take-up remains very robust as businesses continue to
de-risk their global supply chains through diversification of sources and
near-shoring. Vacancy has crept up to 4% from the 2.9% record low recorded in
Q2 2022 but this figure remains a healthy one ensuring rental growth
continues. Weighted European average prime rental softened to 7.8% in 2023,
well below the record in 2022 but still above the 5.9% average (2018-2022). In
addition, 70% of the existing stock is more than 10 years old and unlikely to
comply with energy performance and ESG standards. This offers more opportunity
for developers.

 

The sector continues to be the top of investors' buy lists but given the
rental growth outlook, yields remain below the cost of borrowing. The rapid
rise in interest rates has cooled demand and whilst turnover was a healthy
€26.3bn it was down 40% on the previous year. The Nordics and Spain saw
volumes decline significantly whilst Germany, somewhat surprisingly was a
bright spot equalling the 2018-2022 average.

 

We remain confident that the adjustment to sellers' expectation is well
underway as transaction volumes fall. Given the positive underlying market
outlook we expect buyers to view those price adjustments as entry points
rather than expecting the knife to drop further. At 4.9% the average European
prime logistics yield has returned to late 2017 yield, an attractive entry
point in our view.

 

Residential

Unlike the rest of Europe, the UK (ex Scotland) and Finland have no
residential rent controls. This has led to dramatic rental increases
particularly in locations with acute supply shortages. Both the 'build to
rent' UK listed companies, Grainger (multi family housing) and PRS REIT
(single family housing) have seen like-for-like rental growth of 8% and 11%
respectively. Private landlords are discouraged through the loss of tax
breaks, high regulation and stiffer eviction criteria. In addition, tenants
prefer the certainty of an institutional/corporate landlord. Interesting
analysis from Savills and Experian highlights that tenants will relocate
further from their previous accommodation if moving into new 'build-to-rent'
('BTR') as opposed to another privately owned home.

 

Between 2011 and 2019, BTR investment averaged £2.5bn per annum. Since 2019
this has steadily increased and reached £4.5bn in 2022 and 2023. The total UK
BTR stock is now over 100,000 units built with another 165,000 in construction
or planning. This total of 265,000 has been growing at 4% per quarter for
several years. However, that rate of growth is rapidly diminishing with a
dramatic reduction (31%) in the detailed planning application stage versus a
year ago.

 

Helsinki has been a textbook case of over development in one market. Lessons
for investors can be observed, particularly for smaller regional cities (on a
par with Helsinki) where BTR is focused on flats rather than suburban family
housing. Temporary market saturation will occur.

 

In the remainder of Europe, we continue to see various forms of rent
restrictions (Germany being the most draconian) which leads to disequilibrium
driven by under development. With build costs mounting and rental increases
based on historic inflation, returns from development remain less than
appetising. Whilst regulated rents are an intended social good, they
inexorably lead to their own inequality with long waiting lists and
inefficient use of accommodation, with many under occupied units. Our own
assessment of the value of Phoenix Spree's portfolio highlights the value-add
opportunity of selling vacant apartments. Our investment thesis is also
supported by the 6% increase in regulated rents.

 

Alternatives

The largest constituents of this group in our listed universe are purpose
built student accommodation ('PBSA'), self storage and healthcare (generally
split into primary and elderly/nursing). Over the last year, the clear winner
was PBSA, followed by self storage and then healthcare. PBSA continues to
benefit from growth, both domestic and foreign. The demographic dip (fewer
students turning 18 years old) has now passed. Unite (the largest listed
provider in Europe) reaffirmed their guidance of 7% rental growth for this
year. We participated in their offensive capital raise in July. A large amount
of PBSA is owned by private equity firms such as Blackstone and Brookfield. We
would expect these types of investors to consider public markets as a
potential exit route for their PBSA portfolios.

 

 

Self storage has had a poorer period of performance. Essentially the post
pandemic slowdown on both occupancy and rate growth has materialised. Whilst
this was foreseen (the pandemic rates of growth were unsustainable) and we
reduced exposure (we owned Safestore but not Big Yellow or Shurgard in the
year) the negative share price response has been greater than expected as the
cost of living and inflationary pressures added to reduction in
(discretionary) spend in this sector. The more positive point was that we were
underweight the group relative to the benchmark. Last month, the UK's Self
Storage Association (together with Cushman & Wakefield) reported a sector
revenue milestone of +£1bn, however occupancy was at 77%, the lowest since
2019.

 

The poorest performer was healthcare. I have commented on this area earlier in
the report, but the figures are quite stark particularly for the Continental
European companies which have suffered from concerns around operator
affordability and oversupply of beds in some submarkets. Ironically, whilst
the listed companies have suffered poor returns given these operational
headwinds coupled with balance sheet issues, the asset class has enjoyed high
levels of investor interest as prices have corrected. Investors with longer
time horizons see the demographic opportunity (e.g. the Netherlands will see
the retired population increase by 25% by 2032). It is an important sector.
The European care home market was worth €115bn in 2022 with 40% in the
private sector. Highly fragmented, it offers higher yields than traditional
residential or PBSA due to regulation and operator risk through thinner
margins. Private equity backed operators dominate (half of the ten largest
providers are private equity owned) and this has led to affordability issues
where operators have taken on more debt whilst margins have been squeezed
through higher wage bills.

 

Debt and Equity Markets

Unsurprisingly, debt and equity markets remained subdued throughout the year
as margins continued to widen. EPRA analysis highlights the dramatic change in
volume and pricing. In 2021, total debt issuance by pan European listed
property companies was €20.9bn at a weighted coupon of 1.1%. In 2023, the
volume had dropped to €6.7bn and the average rate was 5.1%. The better news
is that across all real estate listed bonds only 10% require renewing in the
next 12 months.

 

It is important to note that these figures relate to new debt issuance. There
has of course been a large amount of restructuring, extending and
renegotiation, often leading to borrower protection through caps and swaps.

 

Equity raisings have also been few and far between: just €3.3bn in the first
nine months of the financial year. This was followed by an encouraging
acceleration in Q1 2024 with €1.4bn. All the accelerated book builds ('ABB')
were in businesses trading close (or at a premium) to NAV and were focused on
just three sectors. In the logistics/industrial space it was Catena and Sagax
in Sweden, Montea and WDP in Belgium, and Segro in the UK. At £900m (upscaled
from the original £800m) the Segro raise was the largest ABB in listed
property company history and the market took the raise very positively. Self
storage, with raises from Shurgard and Big Yellow, totalled £400m and post
the year end brought news that Shurgard had made an unexpected cash bid for
Lok n'Store (market cap £370m). The final sector trading at a premium is PBSA
and Unite raised £300m at a 2% discount to build out its development
pipeline.

 

In addition, there were a number of discounted rights issues which were in
most cases driven by a need to restructure the balance sheet. Much of this
work took Annual Report & Accounts 2024 13 place in 2022 and the first
quarter of 2023, so in the prior financial year. Sweden, as previously
reported, has suffered greatly from too much leverage, particularly short
duration debt. Most of these companies have had to suspend dividends and in
some instances also raise capital to shore up their balance sheets. Castellum
is one such culprit and had to carry out a SEK10 bn, deeply discounted, raise.
I have already mentioned the problems that European healthcare is facing and
it was the largest player Aedifica - whose share price had fallen from €100
per share in August 2022 to €60 per share by June 2023 - that also carried
out a deeply discounted capital raise at an ex-rights price of €52 per
share.

 

Investment Activity - property shares

Portfolio turnover (purchases and sales divided by two) totalled £460m in the
year, in line with the previous year in absolute terms (£477m). With average
net assets over the year of £1.0bn, turnover was 45% of net assets, higher
than the previous year's figure of 40%. This was a function volatility in the
year, the high level of M&A activity (where whole positions were
liquidated) and the significant amount of capital raised by companies we own.

 

I commented at the half year that when comparing our 10 largest overweight and
underweight positions (versus their respective positions in the benchmark) 15
out of 20 stocks were the same at the end of each reporting period. In
addition, two of the others were Industrials REIT and Ediston which were taken
private for cash. Given that our sector traded in a tight (12% peak to trough
and back again) range between April and October it is little surprise that I
did not reposition the portfolio aggressively. Stocks were not being rewarded
for their fundamental positioning for rental growth or development
opportunities. Instead, it was all about the direction of macro economics and
more particularly interest rates. The one area, in the first half of the year,
where we did make significant changes was Sweden. With stressed balance sheets
this group of stocks had suffered badly in both the first and second quarter
2023 correction. From the February peak to June low point, the Swedish
component of the benchmark had fallen 33%. We participated in the Castellum
deeply discounted capital raise as well as adding to Sagax (diversified but
with a focus on industrial), Pandox (hotels) and Catena (logistics). In the
last quarter of 2023, as the market got behind the expectation of more
interest rate cuts than previously forecast, we doubled our holding to the
most interest sensitive name, Balder. We continue to avoid others that have
impaired financial structures, such as SBB and Corem.

 

Alongside buying back into the more interest rate sensitive names in Sweden,
we also added to some of our German residential names. Again, this sub group
has a very high correlation to bond yields. Whilst we have a large position in
Phoenix Spree Deutschland, this tiny company (market cap £134m) is too small
to attract investors who are playing the change in the shape of the bund
curve. As a result, we need to own larger names such as Vonovia to capture
that sensitivity, hence maintaining the name as our largest absolute position.

 

I also highlighted in the half year report our continued increase in exposure
to European shopping centres where our longstanding positions in Klepierre and
Eurocommercial were augmented by buying Unibail. This subsector offers high
earnings yields and diversified income streams operating in multiple European
markets and in dominant locations. Whilst our industrial exposure dropped with
the sale of Industrials REIT, I continued to add to Argan, our preferred
French logistics names. It is an illiquid name given that the founding family
owns half the equity. Back in March 2023 the stock entered the FTSE EPRA
Nareit Europe Index and we sold 50% of our position into that liquidity event.
In the first half of the year, we slowly reacquired the stock at 10-15% lower
prices. This process continued in the second half and the position has doubled
over the year. Elsewhere we added substantially to three other small
industrial / logistics names: Catena in Sweden (tripled exposure), Montea (75%
increase) and Tritax Eurobox (doubled exposure). In the latter case, the
investment thesis is different to the others. Eurobox is an externally managed
portfolio of disparate logistics assets across Europe. The balance sheet is
stretched but there are buyers for the individual assets. This should be a
portfolio break up and is a very different proposition to our other positions
which are much stronger entities with articulated growth paths. We aim to
support the growth of all our companies but occasionally there are sound
reasons to drive share price returns through M&A activity.

 

Within the office sector, as highlighted earlier we remain very nervous,
particularly with the London developer names. We sold down most of the GPE
position in the first half and in the fourth quarter rally, we completed the
sale of the remainder alongside our holdings in Derwent London and Helical.
Workspace remains the only pure office play and other prime London office
exposure is through Landsec. The evolution of serviced and managed office
space, where tenants outsource all (or most) of their occupational
requirements, is certainly the market direction. Workspace is essentially a
service provider and we are pleased with the announcement of a new CEO. In
Europe, we have focused on the best quality assets through Gecina (Paris) and
Arima (Madrid) alongside smaller cities such as Wihlborgs (Malmo). Alongside
Workspace, the flexible office provider we maintained our holding in is
Sirius, which owns regional business space in Germany and the UK.

 

The reduction in self storage exposure has already been covered. The reduction
in European healthcare exposure was driven by perceived operator risk. In the
UK, our concerns were not covenant focused as Assura and PHP are directly or
indirectly funded by the NHS. The concern was the low level of topline growth
with the Valuation Office (essentially the Government's rent negotiator)
digging in its heels and holding rental growth below inflation, hence the
reduction in our Assura position.

 

Physical Property Portfolio

The physical property portfolio produced a total return of -0.7% made up of an
income return of +4.9% and a capital return of -5.6%. This compares to the
total return from the MSCI Monthly physical property index of +0.8% and a
capital return of -5.5%.

 

It was a busy year in the physical property portfolio with the sale of the
commercial part of the Colonnades for £33.5m, reflecting a net initial yield
of 6.6% and a capital value of £550psf. Shareholders will remember the
residential element was sold in 2022 for £5m.The Company owned the Colonnades
for 25 years, transforming it from an unloved, poorly configured parade of
shops into an important local centre with a 44,000 sq ft Waitrose and 16,000
sq ft of ancillary retail including a restaurant, gym and soft furnishings
store. The proceeds will be reinvested into direct property and we are
actively sourcing new opportunities.

 

At our industrial estate in Wandsworth, southwest London, we have commenced a
comprehensive refurbishment of the units on a phased basis. The aim is to
produce best in class, light industrial units which will be net zero carbon
'in-use'. The units will be completely flexible and will provide a wide range
of users with high quality, functional space with excellent sustainability
credentials. The proximity to central London, alongside excellent road and
rail communications, will hopefully enable us to achieve new market rental
levels for this type of space in the capital London.

 

In Gloucester we have let two more units to Infusion who occupy the other
three units on the estate. The tenant, a successful tea packaging business,
won a new contract which required an extra 25,000 sq ft. Through good tenant
communications we were able to surrender surplus space on the estate, relet to
Infusion and secure a 15% increase in the rents, setting a new record level
for the estate.

 

Revenue and Revenue Outlook

The fall in revenue for the year was anticipated when we reported last year
and flagged in last years' annual report and commented upon further at the
interim stage.

 

Progress has been made by companies reducing their debt and strengthening
their balance sheets, as a result we are seeing the German and Scandinavian
companies, which suspended their dividends, return to making distributions.
Some of these are not commencing immediately and quantum's are still not
certain. In many cases, initially at least, they will be at a lower level than
pre-suspension.

 

The tax rate for our revenue account increased for a number of reasons. First
and foremost, the headline rate of corporation tax increased from 19% to 25%.
Secondly, our income mix changed, weighting more to income which is taxable in
our revenue account. Finally, our average withholding tax rate also increased
as some of the jurisdictions where we saw reduced income were ones where
historically we had incurred lower rates of withholding tax.

 

It is prudent to assume this higher tax charge going forward and together with
lower distribution rates from some of our companies, we expect it to take time
for earnings to return to previous levels. We expect the recovery in earnings
to accelerate when interest rates are lowered but obviously the timing of this
is difficult to predict.

 

The Company has recorded excellent long-term growth in distributions to
shareholders of almost 8% per annum over 10 years. The Company has significant
revenue reserves. The board is happy to supplement the dividend from revenue
reserves although growth will be at a more subdued rate for a while.

 

Gearing and Debt

The gearing over the year reduced, although due to interest rate increases the
overall cost of debt increased. We are seeing increased margins being quoted
on some credit facility renewals and this has resulted in us reducing the
number of debt providers for the moment. However, we have a number of ways to
access gearing in addition to the traditional revolving credit facilities.
Fixed rate loan notes were taken out in 2016, Eur 50m (at 1.92%) maturing in
2026 and £15m (at 3.59%) maturing in 2031 and the use of Contracts for
Difference also introduces gearing. We are confident that we have access to
adequate levels of gearing to service any portfolio management requirements
whilst maintaining a high degree of flexibility.

 

Outlook

In the Half Year Report in November, I highlighted both the closure of many of
the remaining open-ended, daily dealing, direct property PAIFs (property
authorised investment funds) and the ongoing attraction of liquid exposure to
real estate through equities. In January, the manager of the largest remaining
PAIF announced conversion to a hybrid model, a mix of physical property and
property equities. Further vindication that real estate equities are the
solution to those seeking liquid exposure to the sector. However, liquidity
comes with market size and we welcome further consolidation in the sector,
creating fewer but larger companies which will hopefully lead to more investor
appetite. This has begun to happen but there remains more opportunity in the
sector.

 

The ebb and flow of investor sentiment towards our corner of the equity market
remains a frustrating feature. The focus must now turn to the underlying
demand and supply of good quality real estate which remains, in most sectors,
in a state of positive disequilibrium. Our portfolio positioning reflects our
strong belief in this rental growth. The number of sub-markets and geographies
where we see this organic growth is broadening. Those businesses with the
right capital structure are in a good place to take advantage of these
opportunities.

 

Post the year end, there has been yet another piece of M&A activity. Arima
(market cap €236m) is a specialist Madrid office investor /developer who has
bucked the trend with a string of letting transactions on new and refurbished
CBD buildings. The share price had failed to respond given the small market
cap and its focus on an unloved sub-sector, regardless of how well the
management team had performed. On May 16th the board announced a cash bid
(from a local property fund backed by a large Brazilian bank) at a 39% premium
to the previous closing price. We were the second largest shareholder (8.1% of
issued equity). Yet another example of the equity market undervaluing a well
managed, listed property company - a topic we have written about many times.
We will continue try and identify these opportunities given the Company's
ability to hold illiquid positions.

 

 

Marcus Phayre-Mudge

Fund Manager

7 June 2024

 

 

 

 

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.

 

In 2023 interest rates rose suddenly in response to inflationary pressures
created by the impact of increasing energy and commodity prices. Inflation has
been slow to reduce and therefore central banks have not yet been able to cut
interest rates. This has been challenging for the property sector which is
particularly sensitive to interest rates.

 

 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         The Board monitors the level of discount or premium at

 premium may fluctuate over time.                                                 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           The Manager's objective is to outperform the benchmark.
 securities, the Company also invests in commercial property and accordingly,

 the portfolio may not follow or outperform the return of 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 Board receives and considers a regular report from the Manager detailing
 the value of the Company's portfolio. Although the portfolio is diversified      asset allocation, investment decisions, currency exposures, gearing levels and
 across a number of geographical regions, the investment mandate is focused on    rationale in relation to the prevailing market conditions.
 a single sector and therefore the portfolio will be sensitive towards the

 property sector, as well as global equity markets more generally.                The report considers the impact of a range of current issues and sets out the

                                                                                Manager's response in positioning
 Property companies are subject to many factors which can adversely affect

 their investment performance. They include the general economic and financial    the portfolio and the ongoing implications for the property
 environment in which their tenants operate, interest rates, availability of

 investment and development finance and regulations issued by governments and     market, valuations overall and by each sector.
 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.

 Conflict in the Ukraine and Middle East together with political uncertainty
 more widely could impact economic growth, commodity prices, inflation and
 interest rate stability.

 An element of working from home has become part of working life following the
 COVID-19 pandemic. However, this is more pronounced in cities with longer
 commuting times and there has been, for the majority of workers a return to
 the office for a substantial part of the working week so the impact on
 occupation rates is reducing.

 Any strengthening or weakening of sterling will have a direct impact as a
 proportion of our balance sheet is held in non-sterling denominated
 currencies. The currency exposure

 is maintained in line with the benchmark and will change over time. As at 31
 March 2024, 67% 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.
 • Following interest rate increases through the year to 31 March 2023 some

 companies announced a reduction or suspension of dividends, in particular in     Income forecast sensitivity to changes in FX rates is also monitored.
 Germany and Scandinavia. Although in many cases dividends have recommenced for

 some companies the timing and level is uncertain;                                The Company has substantial revenue reserves which are drawn upon when

                                                                                required.
 • prolonged vacancies in the direct property portfolio and lease or rental

 renegotiations;                                                                  The Board continues to monitor the impact of interest rates, and a wide range

                                                                                of economic and geopolitical factors and the long-term implications for income
 • strengthening of sterling reducing the value of overseas dividend receipts     generation.
 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
 factor in this was the weakening of sterling following Brexit. Although this
 has now passed, the value of sterling may continue to fluctuate in the near or
 medium term due to a number of geopolitical and economic uncertainties. 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.

 Any breach of the relevant eligibility conditions could lead to the Company

 losing investment trust status and being subject to corporation tax on capital   Income forecasts are reviewed by the Company's tax advisor through the year
 gains realised within the Company's portfolio.                                   who also reports to the Board on the year-end tax position and on CTA 2010
                                                                                  compliance.
 Legal, regulatory and reporting risks

 Failure to comply with the London Stock Exchange Listing Rules and Disclosure    The Board receives regular regulatory updates from
 Guidance and Transparency Rules; failure to meet the requirements of the

 Alternative Investment Fund Managers Regulations, the provisions of the          the Manager, Company Secretary, legal advisers and
 Companies Act 2006 and other UK, European and overseas legislation affecting

 UK companies.                                                                    the Auditor. The Board considers those reports and

 Failure to meet the required accounting standards or make appropriate            recommendations and takes action accordingly.
 disclosures in the Half Year and Annual Reports.

                                                                                The Board receives an annual report and update from the

                                                                                  Depositary.

                                                                                  Internal checklists and review procedures are in place at

                                                                                  service providers.
 Inappropriate use of gearing

 Gearing, either through the use of bank debt or derivatives, may be utilised     The Board receives regular reports from the Manager on the levels of gearing
 from time to time. Whilst the use of gearing is intended to enhance the NAV      in the portfolio. These are considered against the gearing limits set out in
 total return, it will have the opposite effect when the return of the            the Board's Investment Guidelines and also in the context of current market
 Company's investment portfolio is negative or where the cost of debt is higher   conditions and sentiment. The cost of debt is monitored and a balance sought
 than the return from the portfolio.                                              between term, cost and flexibility.

 Other Financial risks

 The Company's investment activities expose it to a variety of financial risks    Details of these risks together with the policies for managing them are found
 which include counterparty credit risk, liquidity risk and the valuation of      in the Notes to the Financial Statements.
 financial instruments.

 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
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 that complies with that law and
those regulations.

 

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 ("DTR") 4.1.16R,
the financial statements will form part of the annual financial report
prepared under DTR 4.1.17R and 4.1.18R.  The auditor's report on these
financial statements provides no assurance over whether the annual financial
report has been prepared in accordance with those requirements.

 

 

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

 

Kate Bolsover

Chairman

7 June 2024

 

 

 

 

Group statement of comprehensive income

for the year ended 31 March 2024

 

                                                                         Year ended 31 March 2024         Year ended 31 March 2023
                                                                         Revenue    Capital               Revenue    Capital
                                                                         Return     Return     Total      Return     Return     Total
                                                                  Notes  £'000      £'000      £'000      £'000      £'000      £'000
 Income
 Investment income                                                2      39,956     -          39,956     52,077     -          52,077
 Rental income                                                           3,471      -          3,471      4,459      -          4,459
 Other operating income                                                  877        -          877        255        12         267
 Gains/(losses) on investments held at fair value                        -          160,791    160,791    -          (549,430)  (549,430)
 Net movement on foreign exchange; investments and loan notes            -          (1,195)    (1,195)    -          (2,780)    (2,780)
 Net movement on foreign exchange; cash and cash equivalents             -          (2,755)    (2,755)    -          2,016      2,016
 Net returns on contracts for difference                                 6,522      16,719     23,241     9,462      (45,556)   (36,094)
 Total Income                                                            50,826     173,560    224,386    66,253     (595,738)  (529,485)
 Expenses
 Management and performance fees                                         (1,513)    (14,622)   (16,135)   (1,560)    (4,680)    (6,240)
 Direct property expenses, rent payable and service charge costs         (673)      -          (673)      (1,660)    -          (1,660)
 Other administrative expenses                                           (1,336)    (575)      (1,911)    (1,163)    (542)      (1,705)
 Total operating expenses                                                (3,522)    (15,197)   (18,719)   (4,383)    (5,222)    (9,605)
 Operating profit/(loss)                                                 47,304     158,363    205,667    61,870     (600,960)  (539,090)
 Finance costs                                                           (1,771)    (5,315)    (7,086)    (1,146)    (3,438)    (4,584)
 Profit/(loss) from operations before tax                                45,533     153,048    198,581    60,724     (604,398)  (543,674)
 Taxation                                                                (7,322)    5,088      (2,234)    (6,087)    2,495      (3,592)
 Total comprehensive income                                              38,211     158,136    196,347    54,637     (601,903)  (547,266)
 Earnings/(loss) per Ordinary share                               3      12.04p     49.83p     61.87p     17.22p     (189.67)p  (172.45)p

 

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 2024  Notes  £'000    £'000    £'000       £'000     £'000
 At 31 March 2023                         79,338   43,162   43,971      801,875   968,346
 Total comprehensive income               -        -        -           196,347   196,347
 Dividends paid                    5      -        -        -           (49,190)  (49,190)
 At 31 March 2024                         79,338   43,162   43,971      949,032   1,115,503

 

Company

                                                   Share    Capital
                                          Share    Premium  Redemption  Retained
                                          Capital  Account  Reserve     Earnings  Total
 For the year ended 31 March 2024  Notes  £'000    £'000    £'000       £'000     £'000
 At 31 March 2023                         79,338   43,162   43,971      801,875   968,346
 Total comprehensive income               -        -        -           196,347   196,347
 Dividends paid                    5      -        -        -           (49,190)  (49,190)
 At 31 March 2024                         79,338   43,162   43,971      949,032   1,115,503

 

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                           -        -        -           (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                           -        -        -           (47,127)   (47,127)
 At 31 March 2023                         79,338   43,162   43,971      801,875    968,346

 

 

 

 

Group and company balance sheets

as at 31 March 2024

 

                                                            Group      Company    Group      Company
                                                            2024       2024       2023       2023
                                                     Notes  £'000      £'000      £'000      £'000
 Non-current assets
 Investments held at fair value                             1,112,107  1,112,107  948,672    948,672
 Investments in subsidiaries                                -          36,276     -          36,292
 Investments held for sale                                  -          -          -          -
                                                            1,112,107  1,148,383  948,672    984,964
 Deferred taxation asset                                    903        903        903        903
                                                            1,113,010  1,149,286  949,575    985,867
 Current assets
 Debtors                                                    58,212     58,217     65,287     65,293
 Cash and cash equivalents                                  19,145     19,143     36,071     36,069
                                                            77,357     77,360     101,358    101,362
 Current liabilities                                        (17,116)   (53,395)   (23,654)   (59,950)
 Net current assets                                         60,241     23,965     77,704     41,412
 Total assets plus net current assets/(liabilities)         1,173,251  1,173,251  1,027,279  1,027,279
 Non-current liabilities                                    (57,748)   (57,748)   (58,933)   (58,933)
 Net assets                                                 1,115,503  1,115,503  968,346    968,346
 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                                          949,032    949,032    801,875    801,875
 Equity shareholders' funds                                 1,115,503  1,115,503  968,346    968,346
 Net Asset Value per:
 Ordinary share                                      4      351.50p    351.50p    305.13p    305.13p

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes to the financial statements

 

1.   Accounting policies

The financial statements for the year ended 31 March 2024 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.

 

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.

 

Going concern

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
political and inflationary pressures, the war in Ukraine and the conflict in
the Middle East.

 

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.

 

2.   Investment income

                                                                 2024     2023

                                                                 £'000    £'000
 Dividend from UK listed investments                             2,029    2,457
 Dividends from UK unlisted investments                          577      627
 Scrip dividends from UK listed investments                      914      1,474
 Property income distributions from UK listed investments        13,031   9,988
 Dividends from overseas listed investments                      17,897   30,891
 Script dividends from overseas listed investments               5,014    4,851
 Property income distributions from overseas listed investments  494      1,789
 Total equity investment income                                  39,956   52,077

 

3.   Earnings/(loss) per Ordinary share

 

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

                                      2024      2024      2024     2023      2023       2023

                                      Revenue   Capital   Total    Revenue   Capital    Total
 Total comprehensive income (£'000)   38,211    158,136   196,347  54,637    (601,903)  (547,266)
 Earnings per share - pence           12.04     49.83     61.87    17.22     (189.67)   (172.45)

 

Both revenue and capital earnings per share are based on a weighted average of
317,350,980 Ordinary shares in issue during the year (2023: 317,350,980).

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 £1,115,503,000 (2023: £968,346,000) and on 317,350,980
(2023: 317,350,980) Ordinary shares in issue at the year end.

 

5.   Dividends

An interim dividend of 5.65p (2023: 5.65p) was paid on 11 January 2024. The
Directors have proposed a final dividend of 10.05p (2023: 9.85p) payable on 1
August 2024 to all shareholders on the register at close of business on 28
June 2024. The shares will be quoted ex-dividend on 27 June 2024.

 

 

6.   Annual Report and Accounts

This statement was approved by the Board on 7 June 2024. The financial
information set out above does not constitute the Company's statutory accounts
for the years ended 31 March 2024 or 2023 but is derived from those accounts.
Statutory accounts for 2023 have been delivered to the Registrar of Companies,
and those for 2024 will be delivered in due course. The auditor has reported
on those accounts; their reports were (i) unqualified, (ii) did not include a
reference to any matters to which the auditor drew attention by way of
emphasis without qualifying their report and (iii) did not contain a statement
under section 498 (2) or (3) of the Companies Act 2006.

 

The Annual Report and Accounts will be posted to shareholders on or around 18
June 2024.

 

Columbia Threadneedle Investment Business Limited,

Company Secretary

7 June 2024

 

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.

Columbia Threadneedle Investment Business Limited

ENDS

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

The Annual Report and Accounts will also shortly be available 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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