TRY Tr Property Investment Trust Plc

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."

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. 

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

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

Company

Group

Company

Group and company balance sheets

as at 31 March 2024

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

3.   Earnings/(loss) per Ordinary share

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

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.