TR Property Investment Trust

TR PROPERTY INVESTMENT TRUST PLC

LONDON STOCK EXCHANGE ANNOUNCEMENT

Results for the year ended 31 March 2023

LEI: 549300BPGCCN3ETPQD32

Information disclosed in accordance with Disclosure Guidance and Transparency Rule 4.1

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

Chairman David Watson commented

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

Manager Marcus Phayre-Mudge commented

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

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

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

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

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

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

6.    Considered to be an Alternative Performance Measure.

Chairman's statement

Market Backdrop

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

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

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

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

Revenue Results and Dividend

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

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

Revenue Outlook

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

Net Debt and Currencies

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

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

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

Discount and Share Repurchases

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

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

Board Changes

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

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

Environmental, Social and Governance ('ESG')

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

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

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

Outlook

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

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

David Watson

Chairman

1 June 2023

Manager's report

Performance

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

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

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

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

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

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

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

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

Offices

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

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

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

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

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

Retail

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

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

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

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

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

Industrial and Logistics

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

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

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

Residential

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

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

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

Alternatives

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

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

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

Debt and Equity Markets

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

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

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

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

Investment Activity - property shares

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

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

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

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

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

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

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

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

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

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

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

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

Revenue and Revenue Outlook

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

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

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

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

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

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

Gearing and Debt

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

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

Physical Portfolio

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

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

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

Outlook

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

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

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

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

Marcus Phayre-Mudge

Fund Manager

1 June 2023

Principal and emerging risks

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

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

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

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

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

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

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

•    select suitable accounting policies and apply them consistently;

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

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

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

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

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

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

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

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

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

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

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

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

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

By order of the Board

David Watson

Chairman

1 June 2023

Group statement of comprehensive income

for the year ended 31 March 2023

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 2023

Notes to the financial statements

1      Accounting policies

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

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

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

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

2      Investment income

3      Earnings/(loss) per Ordinary share

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

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

4   Net Asset Value Per Ordinary Share

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

5.  Dividends

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

6.  Annual Report and Accounts

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

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

Columbia Threadneedle Investment Business Limited

Company Secretary,

1 June 2023

For further information, please contact:

Jonathan Latter

For and on behalf of

Columbia Threadneedle Investment Business Limited

020 3530 6283

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

ENDS

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

The Annual Report and Accounts will also be available shortly 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.