TR PROPERTY INVESTMENT TRUST
PLC
LONDON STOCK EXCHANGE
ANNOUNCEMENT
Annual Results for the year
ended 31 March 2024
The
following replaces the TR Property Investment Trust plc 'Annual
Financial Report' announcement released today at 07.00 under RNS No
6850R.
As
previously released the announcement contained elements of draft
text and draft figures.
The
full amended text is shown below.
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 debt1
|
10.8%
|
12.3%
|
|
Share Price
|
|
|
|
Share price
|
325.00p
|
279.00p
|
+16.5%
|
Market capitalisation
|
£1,031m
|
£885m
|
+16.5%
|
|
Year ended
|
Year
ended
|
|
|
31 March
2024
|
31 March
2023
|
Change
|
Revenue
|
|
|
|
Revenue earnings per
share
|
12.04p
|
17.22p
|
-30.1%
|
Dividends2
|
|
|
|
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
return3
|
+21.1%
|
-35.5%
|
|
Benchmark total return
|
+15.4%
|
-34.0%
|
|
Share price total
return4
|
+22.9%
|
-36.2%
|
|
Ongoing Charges5
|
|
|
|
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
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Board monitoring and
mitigation
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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.
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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 a single sector and therefore the portfolio will be sensitive
towards the property sector, as well as global equity markets more
generally.
Property companies are subject to
many factors which can adversely affect their investment
performance. They include the general economic and financial
environment in which their tenants operate, interest rates,
availability of 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.
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.
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The Board receives and considers a
regular report from the Manager detailing asset allocation,
investment decisions, currency exposures, gearing levels and
rationale in relation to the prevailing market
conditions.
The report considers the impact of a
range of current issues and sets out the Manager's response in
positioning
the portfolio and the ongoing
implications for the property
market, valuations overall and by
each sector.
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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:
• Following interest rate increases
through the year to 31 March 2023 some companies announced a
reduction or suspension of dividends, in particular in Germany and
Scandinavia. Although in many cases dividends have recommenced for
some companies the timing and level is uncertain;
• prolonged vacancies in the direct
property portfolio and lease or rental renegotiations;
• 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 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.
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The Board receives and considers
regular income forecasts.
Income forecast sensitivity to
changes in FX rates is also monitored.
The Company has substantial revenue
reserves which are drawn upon when required.
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
generation.
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Accounting and operational risks
Disruption or failure of systems and
processes underpinning the services provided by third parties and
the risk that those suppliers provide a sub- standard
service.
|
Third-party service providers
produce periodic reports to the Board on their control environments
and business continuation provisions on a regular basis.
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.
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Loss of Investment Trust status
The Company has been accepted by HM
Revenue & Customs as an investment trust company, subject to
continuing to meet the relevant eligibility conditions. As such the
Company is exempt from capital gains tax on the 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 gains
realised within the Company's portfolio.
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The Investment Manager monitors the
investment portfolio, income and proposed dividend levels to ensure
that the provisions of CTA 2010 are not breached. The results are
reported to the Board at each meeting.
Income forecasts are reviewed by the
Company's tax advisor through the year who also reports to the
Board on the year-end tax position and on CTA 2010
compliance.
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Legal, regulatory and reporting risks
Failure to comply with the London
Stock Exchange Listing Rules and Disclosure Guidance and
Transparency Rules; failure to meet the requirements of the
Alternative Investment Fund Managers Regulations, the provisions of
the Companies Act 2006 and other UK, European and overseas
legislation affecting UK companies.
Failure to meet the required
accounting standards or make appropriate disclosures in the Half
Year and Annual Reports.
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The Board receives regular
regulatory updates from
the Manager, Company Secretary,
legal advisers and
the Auditor. The Board considers
those reports and
recommendations and takes action
accordingly.
The Board receives an annual report
and update from the
Depositary.
Internal checklists and review
procedures are in place at
service providers.
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Inappropriate use of gearing
Gearing, either through the use of
bank debt or derivatives, may be utilised from time to time. Whilst
the use of gearing is intended to enhance the NAV total return, it
will have the opposite effect when the return of the Company's
investment portfolio is negative or where the cost of debt is
higher than the return from the portfolio.
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The Board receives regular reports
from the Manager on the levels of gearing in the portfolio. These
are considered against the gearing limits set out in the Board's
Investment Guidelines and also in the context of current market
conditions and sentiment. The cost of debt is monitored and a
balance sought between term, cost and flexibility.
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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.
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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
£'000
|
2023
£'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
Revenue
|
2024
Capital
|
2024
Total
|
2023
Revenue
|
2023
Capital
|
2023
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.
The Annual Report and Accounts will
also shortly be available on the Company's website
at 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.