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TR Property Investment Trust plc

Financial Report for the half year ended 30 September 2021

03 December 2021

Financial Highlights and Performance

"A good set of results in challenging market conditions. A Share Price Total return of over 22% and an increase in the Interim dividend, reflecting our confidence that income will return to pre-pandemic levels over the next 18 months."

David Watson

Chairman

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

2.     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.

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

4.     Ongoing Charges are calculated in accordance with the AIC methodology. The ratio for 30 September 2021 is based on forecast expenses and charges for the year ending 31 March 2022. The performance fee included in the calculation above is the provision at 30 September 2021 referred to in note 2 rather than an estimate of the fee at the year end.

5.     Considered to be an Alternative Performance Measure.

CHAIRMAN'S STATEMENT

INTRODUCTION

For the six months to 30th September, the Trust delivered a healthy NAV total return of 15.6%, 4.6% ahead of the benchmark total return of 11.0%. The share price total return was an impressive 22.1% as the discount to the underlying asset value, which the shares traded at in March, virtually disappeared over the subsequent six months.

The period saw the continuation of the broad post vaccine recovery across all economies. However, the rebound continues to be unequal across the real estate landscape. Legacy issues abound. Office landlords face headwinds from low levels of occupation, particularly in larger cities, whilst retail property continues to lack fresh demand amidst an unrelenting move to online retail fulfilment. There have also been clear winners: the major disruption in supply chains has forced businesses to invest in more storage capability and domestic leisure use has unsurprisingly surged giving hotels and restaurants a badly needed boost.

Our manager continues to focus on sustainable income and has further tilted the portfolio towards index-linked income. When viewed against more popular index linked instruments, REITS with this type of explicit inflation proof income look undervalued.

Our ability to buy (and trade) alternative asset types beyond the traditionally dominant office and retail sectors continues to be a driver of value and differentiation. Our investments in self-storage, private sector residential, logistics and secure income have all performed well.

REVENUE RESULTS AND DIVIDEND

Revenue earnings for the first half are 10.31p per share, over one third ahead of the 7.65p recorded this time last year. The fact that earnings are substantially ahead of the prior year is not surprising since the cuts and suspensions of dividends that we saw in the same period last year have largely reversed (with a couple of notable exceptions). Earnings are also 3.5% ahead of the September 2019 result. Although some companies' dividends have not yet returned to pre-pandemic levels, changes in the portfolio with the focus on sustained income have compensated for this. There have also been some changes in dividend timetables where some income usually received in the second half has been brought forward.

The Board has announced an increased interim dividend of 5.30p, 1.9% ahead of last year's interim.

REVENUE OUTLOOK

The timing differences referred to above mean that first half earnings have benefited relative to the second half. As a result, we expect that the proportion of full year income generated in the first half will be significantly ahead of the usual two thirds. In addition, the second half of the prior year benefitted from a substantial tax refund which will not be repeated.

The decision to increase the interim dividend to 5.30p reflects the Board's confidence that revenue will return to pre- pandemic levels over the next eighteen months.

I would remind shareholders that the Trust aims to outperform its benchmark in total return terms. At some point the stocks delivering reliable income may become overvalued and the potential for superior capital returns in those unloved sectors, which typically have weaker revenue, may become an investment opportunity. Such a rotation could cause the Trust's revenues to fall, however substantial revenue reserves are still available to protect dividend levels in the short term.

NET DEBT AND CURRENCIES

Gearing at the end of September was 11.6%, lower than that of 16.5% at the end of March 2021. The decision to maintain gearing at this level reflects our manager's optimism towards large parts, but not all, of the pan European real estate landscape.

European currencies have remained stable over the period. As a reminder, our policy is to maintain a hedged currency exposure in line with the benchmark. Sterling represents around 28% of the benchmark and strengthening Sterling constitutes a headwind to the NAV. 

DISCOUNT AND SHARE REPURCHASES

The discount of the share price to the Net Asset Value narrowed over the period from -6.1% at March 31st to -1% at September 30th. The average discount over the six-month period has been -4.4% and the shares have traded in the range of -8.1% to par (nil discount). There were no share repurchases in the half year period.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE FACTORS ('ESG')

We continue to make progress seeking the relevant data from companies in our investment universe to enable us to benchmark their performance on key criteria such as Greenhouse Gas Intensity (Scope 1 & 2 Intensity per USD million sales/rent), Energy Intensity (MWh/USD million of sales/rent) and Water Intensity (Consumption of cubic metres/USD million sales). These metrics are included in global data on listed companies provided by MSCI, it already includes a large cohort of our companies and we are confident of coverage expanding. This is the first step in establishing a set of metrics whereby we can measure the improvement of our companies' performance. As highlighted in the Annual Report, it is crucially important that we don't penalise those companies who are modernising, at a steady pace, a legacy portfolio of energy inefficient buildings. A good example is the private residential sectors in Germany and Sweden where heavily regulated (and submarket) rental levels haven't encouraged tenants to improve their accommodation and landlords weren't incentivised to upgrade. This situation is now improving with heightened tenant awareness and governmental investment alongside private initiatives.

Our governance engagement remains elevated. We benefit from working alongside the BMO Responsible Investment team resulting in a comprehensive review of all voting opportunities. Over the last six months, we have raised concerns with a large number of companies and have then actively engaged with 9 of these on a range of governance issues. The scale of the Trust's ownership in numerous small and mid-cap stocks ensures that our views are being heard.

OUTLOOK

Inflationary pressures are clearly evident. Whether they are transient or prove a little more permanent is as yet unknown. With so much of our underlying income being index-linked (directly or indirectly) we remain confident that real assets will continue to be part of investors' armoury in an inflationary environment. Real estate continues to offer a substantial margin over fixed income and as economies reflate there is the opportunity for rental growth where demand outstrips supply.

Our manager continues to focus on those twin drivers of companies with secure index-linked income alongside those exposed to sub-sectors which are experiencing real rental growth.

David Watson

Chairman

2 December 2021

INTERIM MANAGEMENT REPORT AND DIRECTORS' RESPONSIBILITY STATEMENT

INTERIM MANAGEMENT REPORT

The Chairman's Statement above and the Manager's Report below give details of the important events which have occurred during the period and their impact on the financial statements.

PRINCIPAL RISKS AND UNCERTAINTIES

The principal risks and uncertainties facing the Company have not changed since the date of the Annual Report 2021 and continue to be as set out in that report. The impact of the ongoing COVID-19 pandemic on the results for the six months to 30 September 2021 is covered in the Chairman's and Manager's Report together with consequential positioning of the investment portfolio.

The principal risks and uncertainties facing the Company include, but are not limited to, poor share price performance in comparison to the underlying NAV; poor investment performance of the portfolio relative to the benchmark; market risk; the Company is unable to maintain dividend growth; accounting and operational risks; financial risks; loss of Investment Trust Status; legal, regulatory and reporting risks; inappropriate use of gearing; and personnel changes at Investment Manager. An explanation of these risks and how they are managed are set out in the Annual Report and Financial Statements for the year ended 31 March 2021 on pages 28 to 32 (which can be found on the Company's website www.trproperty.com).

GOING CONCERN

As stated in note 5 to the financial statements, the directors are satisfied that the Group has sufficient resources to continue in operation for a period of at least 12 months from the date of this report. Accordingly, the going concern basis is adopted in preparing the condensed financial statements.

RELATED PARTY TRANSACTIONS

Related party transactions are disclosed in note 8 to the financial statements. There have been no material changes in the related party transactions described in the last annual report.

DIRECTORS' RESPONSIBILITY STATEMENT

The Directors acknowledge responsibility for the interim results and approve this Half-Yearly Financial Report.

The principal risks facing the Company are substantially unchanged since the date of the Annual Report for the year ended 31 March 2021 and continue to be as set out in that report.

The Directors of TR Property Investment Trust plc confirm that to the best of their knowledge:

a.   the Half-Yearly Financial Statements have been prepared in accordance with IAS 34 and give a true and fair view of the assets, liabilities, financial position and profit for the period of the Group as required by the Disclosure Guidance and Transparency Rules ("DTR") 4.2.4R;

b.   the Chairman's Statement together with the following Manager's Report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

c.   the report includes a fair review of the information required by DTR 4.2.8R.

On behalf of the Board

David Watson

Chairman

2 December 2021

The Board members as at the date of the report are listed on page 27 of the full Financial Report for the half year ended 30 September 2021. 

MANAGER'S REPORT

PERFORMANCE

The Net Asset Value total return for the six months was 15.6%, ahead of the benchmark total return at 11.0%. UK property companies collectively returned 12.5% (in GBP terms), outperforming Continental property companies which returned 9.5% (in local currency terms). The Trust's physical property portfolio was also a positive contributor in the period delivering 9.3% total return.

After the initial surge in real estate equity prices in the Autumn of 2020 post the announcement of a range of successful vaccines, we saw prices trend sideways through the first quarter of 2021. However, from the very start of this financial period (March 31st) we saw a steady improvement in values, month-on-month right up to the end of August with the benchmark returning over 21% in those five months. The benign backdrop of continuing monetary policy largesse from central banks coupled with an improving outlook for all economies boded well for many parts of the real estate landscape. However, September saw a sharp correction with prices collectively falling -8.3% as investors fretted over fears of stagflation, rising energy and wage costs alongside the global breakdown in supply chains.

The portfolio positioning had been heavily adjusted in the immediate 'post vaccine' period (Q4 2020) essentially closing the underweight to European shopping centres and renewing exposure to office markets with shorter commute times. The last six months has seen that process extended with the portfolio further concentrating on capturing the impact of three key trends. Those sectors likely to experience the greatest rental growth in a recovering economic environment such as logistics, industrial, self- storage and prime office development continue to be heavily represented in the portfolio. Secondly, security of income is crucial. Private rented residential property continues to enjoy virtually full occupancy, particularly in Germany and Sweden where rents remain heavily regulated (and at sub-market levels). The final theme is inflation protection and seeking to own explicitly index-linked, high quality income across a broad range of sectors. This latter theme overlaps with the residential focus given the highly defensive nature of the earnings.

Reviewing the performance attribution, it was another period where the 'growth' names (those most likely to see rental growth through the economic recovery) performed well. However, there were a couple of periods (June and September) where the market rotated strongly into cheaper value names as investors reflected on the risk of rising interest rates impacting yields and having the greatest impact on the most aggressively priced parts of the real estate universe. All of our logistics and industrial exposure contributed strongly. Self-storage and supermarkets (UK and Sweden/Finland) were the next largest contributors.

German residential continued to be a dominant element of both our universe (accounting for 25% of our benchmark) and the portfolio. It was also a strong driver of performance given our large position in Phoenix Spree (solely focused on Berlin) which was a major beneficiary of the reversal of the Berlin rent freeze (deemed unconstitutional). Whilst the fundamental attractions of the asset class remain solid, the wider political backdrop proved a powerful headwind given the then impending election. This is examined in more detail later in the report. Ironically, this sector also saw the largest piece of M&A activity with the bid (and raise) from Vonovia for Deutsche Wohnen which has proceeded regardless of the political backdrop.

Within the secure, index-linked income cohort we did reduce exposure to the healthcare names (Assura, Primary Health Properties) in favour of those with a broader commercial asset exposure (Secure Income REIT, LXI REIT). The rationale being that a period of artificially high indexation could lead to overrented situations particularly in sub-sectors where underlying market rental growth is not necessarily tied to economic growth such as primary health facilities and care homes. This proved to be the correct approach with the UK healthcare names collectively performing only in line with the benchmark and well behind their broader based contemporaries.

Sweden enjoyed a very strong period of returns and my concerns around a number of excessively leveraged companies proved unfounded with investors keen to buy into the accretion driven by cheap funding. Whilst I had unfortunately avoided the best performers (ie. the most leveraged) we were still heavily invested in the region and there was little relative underperformance from that element of the portfolio.

OFFICES

As European economies move into the post (majority) vaccinated era, the return to office remains one of the most hotly debated subject. There are therefore only a handful of firm conclusions to be drawn and even some of those may reverse over the passage of time. The one undoubted conclusion - which predated the pandemic - but which was cemented by it, is the universal desire by corporates to improve the quality of the office working environment. Allied to this is the need to encompass and satisfy a broad range of environmental, energy usage and well-being concerns in the design and utilisation of space. Suffice to say, there is a shortage of buildings which meet these criteria and a surfeit of those which, over the next decade, will prove deficient and at risk of obsolescence.

In the near-term, take up has largely followed a post 'demand strike' recovery trajectory. Whilst this lack of demand was short and sharp (when compared to normal recessions) the data is skewed by the base effect of virtually zero activity in the previous period. City centre and traditional CBDs have recovered faster than decentralised areas. London and Paris have seen little recovery in their financial services dominated sub-markets of Docklands and La Defense.

Cities with shorter commute times, particularly those using high levels of personal transport, have returned to pre-pandemic utilisation levels. The larger ones, particularly London and Paris haven't. This in turn affects companies' desire to make space requirement decisions.  Deferring the decision whilst we work out what we need for the medium-term is a common message but not universal. In fact, Savills have recently reported that Central London office requirements are up 27% on the 5-year average at 10m sq ft. The take up of 540,000 sq ft in July 2021 is the second highest monthly figure since the start of the pandemic in March 2020.

This theme of strong recovery in CBDs is echoed in the Paris data (Immostat data) with take up in Central Paris now approaching pre-pandemic levels (Q3, 2021 versus Q3 2019) with average rents rising in contrast to La Defense and the Western Crescent where tenant incentives are rising alongside increased vacancy.

Interestingly, investors have been much more sanguine about the current low utilisation rates. They have looked beyond the short-term tenant indecision and whilst transaction volumes across many prime office markets are lower than pre-Covid they are recovering fast. London saw £4bn in H1 2021 versus £6bn longer term average. London (West End) prime yields are back at all time lows of 3.25%.

RETAIL

The outlook for this sector is becoming much more nuanced. Retail warehousing has seen a sharp recovery in investor sentiment, particularly for parks where the rents are considered affordable and where footfall has been maintained. Parks with high levels of fashion retailers are being avoided whilst those with food, discounters, bulky goods and DIY have seen strong recoveries. In the 8 months to August 2021, the IPD/MSCI Retail Warehouse segment in the UK saw capital growth of +6.2%.

Shopping centres, particularly in the UK (as opposed to Continental Europe) continue to experience downward pressure on rents resulting in negative capital growth YTD. The market remains oversupplied with elevated vacancy levels and no rental tension leading to further discounting by landlords keen to cover the large twin overheads of service charge and rates. We doubt many landlords have hedged their energy costs. Landlords of weaker centres with capped service charge arrangements will feel this additional cost burden. The IPD/MSCI Shopping Centre segment saw capital decline of -9.8% YTD.

Meanwhile, UK supermarkets saw capital growth of +4.6% YTD emphasising the disparity of performance within the broad retail segment. The food sector continues to enjoy high quality covenants and long leases with index-linked rents; characteristics which are in short supply in the average shopping centre.

Continental European shopping centres are generally anchored by hypermarkets not department stores and this has been a major benefit in ensuring renewed footfall as these economies reopen. Of course, the structural headwinds of omni-channel retailing are blowing hard but we have seen a marked reluctance of independent valuers to adjust values down until market evidence returns.

DISTRIBUTION AND INDUSTRIAL

The sector continues to set records in terms of rents, take up and investment yield compression across big box, last mile urban logistics, single and multi-let industrials. UK Bigbox saw 24.4m sq ft take up in H1 2021, 82% ahead of the 10 year average of 13.4m sq ft. Total UK wide vacancy is down to 4.4% with available supply of just 25m sq ft. Gerald Eve confirmed that Q3 2021 was another record quarter for take up (23.7m sq ft) and guarantees that 2021 will be the most active year on record. The tailwinds for the logistics sector have been present for some time but the pandemic and the global supply chain issues of 2021 have added to the overall demand for 'a little more just in case and a little less just in time'. Investor sentiment remains unsurprisingly strong with £3.8bn of transaction in H1 2021, a figure ahead of the five year annual average. Savills estimate that prime yields are now at 3.5%, 75bps of compression over the last year.

Multi-let industrials remain in high demand with further vacancy reduction and rental growth. Yields for prime estates have also compressed 75bps over a year, according to Savills and are again at record lows with investors anticipating inflation busting rental growth.

RESIDENTIAL

The structural shortage of residential units underpins our positive view towards the private rented sector ('PRS'), particularly where rents are regulated (and restricted to sub-market levels). Meanwhile, residential mortgage lending remains a lucrative part of many banks' books and we expect that to continue. Historically cheap debt availability is continuing to fuel price growth in this sector.

Where landlords are able to sell flats with vacant possession then returns are significantly ahead of the investment value as a rented asset. A very valuable long term underpin.

Sentiment towards German PRS was initially dominated by the German Constitutional Court's ruling that rent controls are determined at the Federal, not the State level. This was an important outcome and whilst we don't think this is the last ruling on this subject. It reminds all market participants that decisions over such an important part of social infrastructure should not be left to local politics which may well underappreciate that the major side effect of minimising rental growth is to also minimise new development.

The period was a bookended by the German general election. At the time of writing (early November) it is looking increasingly likely that the next German government will be a coalition of the SPD, the Greens and FDP parties.

We therefore expect a reinforcement of current rent regulation (not a surprise) but also a desire to create more affordable housing which is a positive for our companies.

Sweden continues to be our other area of focus where the market dynamics are very similar to Germany with regulated rents, a shortage of units and modest development response.

ALTERNATIVES

By definition this group covers a diverse range of real estate but rarely have we seen such divergence in returns at both the asset and company level. Healthcare and student accommodation both had a weaker period for very different reasons. However the common feature was that, in both cases, rents are not tied to economic growth. This of course was a good thing in the midst of the pandemic but as markets began to look forward to a post vaccine recovery, investors focused on rental growth tied to economic growth. For the healthcare sector, the attractiveness of the long index-linked income stream (but at risk of over renting) has suffered from the fear of rising interest rates. For student accommodation, the focus has been the return of overseas students which has been slower to recover than we had hoped.  Meanwhile, self-storage and supermarkets have both enjoyed very strong investor support for different reasons. The former continues to benefit from the evolution in supply chain management with reduced emphasis on 'just in time' and an appreciation of protecting your critical component supply chain whatever your business model. Rental growth and vacancy reduction continues to support elevated valuations. For supermarkets, the attraction has been a growing understanding that the core portfolio for the grocers involves providing them with supermarkets which are a critical part of their online fulfilment. For most retailers, online sales only touch a physical store in the event of click and collect or returns. For the supermarket operators, the store is a critical part of that supply chain. Post the year end Supermarket Income REIT raised £200m. The original intention had been to raise just £100m but demand was very strong reflecting the attractiveness of these index-linked income streams where the underlying tenants' revenues and margins are secure.

DEBT AND EQUITY MARKETS

The central banks' stimulus continued to ensure that the debt market remained healthy and liquid with a continuation of historically low rates for all types of credit and financing. EPRA recorded €12.3bn for the six months to the end of September which compared to €10.3bn in the same period last year (mid pandemic) and €12.6bn for the six months to September 2019 (pre-pandemic).

A remarkable level of consistency and a testament to state intervention ensuring liquidity.

Vonovia issued €500m 10 year debt at 0.625% whilst Deutsche Wohnen was able to secure 20 year money at 1.3%. Our largest companies continue to take advantage of current conditions and elongate duration of their debt; a strategy we concur with.

Whilst there were no IPOs in the period, there was a healthy level of follow on raises from those companies with share prices standing at premiums to asset value. Unsurprisingly the logistics space featured heavily with raises from Tritax (£400m), Eurobox (€250m), Aberdeen Standard Logistics (£125m) and Segro (£650m). Also busy were the healthcare names, Aedifica (€222m), Primary Health Properties (£130m), Assura (£175m). Target Healthcare raised just before the period (February) and again in October (post period). Residential names were busy as well with PRS REIT and Grainger in the UK, LEG, ADO and Vonovia in Germany and Wallenstam in Sweden.

In addition there has also been an elevated amount of M&A activity. Whilst we anticipated that this would be the case (as noted in the Outlook in the Annual Report) it hasn't been the privatisation of listed companies by private equity but the consolidation of listed players into larger, more efficient merged entities. More detail below.

PROPERTY SHARES

The performance of the majority of property shares reflected the continued recalibration of investors' expectations as the economic recovery took hold. The continuing central bank largesse kept a lid on debt costs. As a result the best performances came from stocks which were focused on growth sectors (eg. logistics) with leverage. Amongst our top performers included Argan (+36%), Industrials REIT, formally called Stenprop (+30%), Segro (+28%), VIB Vermoegen (+29%) and Warehouses de Pauw (+28%). However, the top performer was Sirius Real Estate (+49%) the owner of workspace across Germany. This is a classic case of a stock which enjoyed a huge rerating driven by a now proven business model in a market which is recovering quickly.

The dependability of earnings is always a key factor but in this period those companies where earnings could grow in line (or in excess of) inflation were particularly in demand. Secure income which was less tied to economic growth such as healthcare suffered with Assura returning just 1% and Primary Healthcare 4% in the six months. Those with residential exposure performed, particularly in Sweden, such as Balder (+22%) whereas German names suffered from concerns of further state pricing intervention if a left wing government was elected. The largest piece of M&A was the announcement of the takeover of Deutsche Wohnen by Vonovia and this included a portfolio sale of Berlin units to the State of Berlin. There was clearly political impetus to this merger.

In Sweden, we saw further consolidation as Castellum put forward an opportunistic bid for Kungsladen driven by the new Chairman of Castellum (Arnhult Rutger who owns 20%). The price offered is a 20% premium to NAV and given the irrevocables from 26% of the Kungsladen register, we expect the deal to proceed in Q4 2021.

Further M&A underpinned asset values with Blackstone increasing their bid for St Modwen Properties and eventually agreeing to pay a 21% premium to the NAV. In the student sector, APG (the Dutch pension giant) alongside their partner Blackstone agreed to acquire GCP Student Living. APG and Blackstone are already co-investors in several student accommodation funds and it is a good reminder that the scale of the operating platform is a crucial driver of value in this sub-sector.

Given the ongoing boom in logistics take up and the change in supply chain dynamics, it will be no surprise that self storage names also performed well in the period with Safestore (+33%), Big Yellow (+27%) and Shurguard (+25%).

Uncertainty around the utilisation rates for offices particularly in London and Paris resulted in more subdued gains for these names with Derwent London and Great Portland returning +9% and +11% respectively whilst Gecina, the largest Paris office owner returned just +1%. Smaller city exposure performed much better with Colonial (Madrid, Barcelona and Paris) +8% whilst Fabege +14% and Wihlborgs +8% illustrate investor response to Stockholm and Malmo respectively.

Retail remains an 'opportunistic trade' where extreme discounts to last published asset values can be interpreted as deep value or a trap in which further poor news reinforces the bears. The period saw various rallies but overall investors remain cautious following the initial value rallies of Q4 2020 and Q1 2021. Unibail Rodamco returned -7% and Klepierre +2%, whilst Hammerson was -7% and New River Retail -8%. Not all retail is equal and Ediston Property, a retail warehouse specialist, bucked the trend with +11% return over the six months as investors sought exposure to this subset of the retail landscape.

INVESTMENT ACTIVITY

Turnover (purchases and sales divided by two) totalled £150m equating to 10% of the average net assets over the period. This is sharply lower than the same period last year (£300m) and reflects my desire to remain with our winners whilst adjusting the portfolio around our three core themes highlighted earlier.

Several position changes are worth highlighting. Whilst we continue to have very limited exposure to UK shopping centres (essentially just modestly through the Landsec portfolio), we have been trying to get more exposure to retail warehousing. This involved bidding on various physical investment opportunities (where we were outbid) and then securing 7% of the equity of Ediston Properties, a retail warehouse specialist. We acquired the shares at 65p and we are now the 4th largest shareholder. The stock ended the half year at 74p and has just published its September NAV at 89p. It still has 25% of its assets in offices which are part of the disposal strategy.

With the takeover of Deutsche Wohnen by Vonovia for cash, I have continued to maintain exposure to Berlin through Phoenix Spree. The Board of Phoenix continue to do the right thing - buying back stock - as it represents the best use of capital given the ongoing discount to the net asset value. This is in the face of strong recovery in Berlin house prices and the rental market post the Constitutional Court's judgment that the rent freeze was unconstitutional. We accept there is ongoing political risk but the real estate fundamentals remain wholly convincing. Rents in the centre of the capital of Europe's largest economy remain on a par with rents in regional UK cities.

REVENUE AND REVENUE OUTLOOK

Revenue earnings in the first half at 10.31p were almost 35% ahead of the prior year. The first half in 2020 saw many dividend cuts and suspensions following the shock of the global pandemic. Companies began to return to paying dividends in the second half of last year, albeit at lower than previous levels. This has continued into the first half of the current year. Although some companies have not reached their pre-pandemic dividend levels, this has been compensated for by changes in the portfolio and the fact that the timing of some dividend payments usually received post September have been brought forward into the first half resulting in first half earnings 3.5% ahead of the first half earnings as at September 2019, pre-pandemic.

Although this is encouraging, earnings at the interim stage usually represent around 65% of the full year earnings. In the current year we expect this proportion to be higher due to the timing differences referred to above. We do not expect the second half to show a similar increase in earnings over the prior year. In the second half of the previous financial year companies had returned to paying dividends, some even compensating for dividends not paid earlier in the year, therefore although we expect the company dividend levels in the second half of the current financial year to be broadly comparable to the prior year, overall earnings in the second half will be lower in comparison due to the timing differences and also the fact that the prior year benefited from a substantial tax reclaim just before the year end adding almost 1.00p to earnings. That said, full year earnings are expected to be significantly ahead of the year to 2021, the Board has shown confidence in this by growing the dividend paid to our shareholders at the interim stage.

One note of caution, as the Chairman has expressed, there are factors which could pull back earnings in the second half, portfolio changes, a reduction in gearing levels and currency fluctuations in addition to the usual timing uncertainties of some dividends paid close to our year end and currency fluctuations.

GEARING AND DEBT

Gearing continues to be actively managed, once again using the flexibility of the revolving credit facilities and the ability to use CFDs to react to market conditions. Starting at 16.5% at the year end, gearing reduced a little in May, increased back to year end levels through the summer, then pulling back through August and September, ending the period at 11.6%. Wanting to retain this flexibility, we have renewed our facilities through the year, maintaining a number of providers and varying maturity dates.

PHYSICAL PORTFOLIO

The direct property portfolio produced a total return of 9.3% for the 6 months to the end of September made up of a capital return of 8.0% and an income return of 1.3%. The capital growth was driven by our two industrial assets in London and Gloucester. The valuation movements were both driven by rental value growth across the industrial market being reflected in completed asset management. At our industrial estate in Gloucester, we let the vacant unit to a health food business at a new headline rent of £8.50psf which was a 30% increase in the previous passing rent and 13% ahead of valuers' expectations. In Wandsworth we have completed two new lettings at record rents for the estate with the latest letting reflecting a rent of £35psf on a 2,000 sq ft ground floor industrial unit reflecting 25% rental growth in this central London location in only 12 months. This Wandsworth industrial asset is an almost unique estate having a large wealthy catchment, very good road and rail communications and a distinct lack of supply. It is little surprise that the majority of our tenants are centred on the provision of high margin services to the local population, especially food.

OUTLOOK

Income sustainability is the watchword. The vast majority of the total return from real estate (through a complete cycle) comes from earnings. Right now this is the crucial consideration. This leads us generally to favour income quality over value. Structural tailwinds in logistics, light industrial and fit for purpose offices will aid rental growth which in turn will support investor demand.

We remain cautious towards retail, particularly where we view leverage to be too high. For many of these companies, forced disposals at this point is highly destructive for equity holders. Brookfield's purchase of Hammerson's retail warehouse portfolio in April 2021 already looks like a great deal. At the same time, if rents have stabilised and affordability has returned to the underlying assets we will seek to invest in these sub-sectors, as is clearly the case in the retail warehouse market.

Index-linked income is a valuable safe haven which is under appreciated by market participants when offered in a REIT wrapper. Real assets should continue to form part of any inflation proofing in a portfolio. We will continue to focus on companies with assets which tenants need and can afford.

In the Annual Report in May we predicted more 'public to private' transactions. In fact there have been fewer of those type of transactions but much more merger activity between listed entities. Listed markets want liquidity and therefore market capitalisation / free-float is important. The sector still has too many small listed companies, with poor operating metrics trading at large discounts to asset value. They have no chance of raising capital accretively and we implore their Boards to look at delivering value to shareholders through mergers.

Marcus Phayre-Mudge

Fund Manager

2 December 2021

PORTFOLIO

Distribution of Investments

as at 30 September 2021

Distribution of Investments

UK Securities - 28.3%

UK Property - 5.7%

CFD Creditor - 0.1%

Continental Europe - 66.8%

Investment Exposure

as at 30 September 2021

Investment Exposure

Equities - 94.8%

UK Property 5.2%

Portfolio Summary

As at September 2021

1   Net unrealised gain/(loss) on CFD contract held as balance sheet debtor/(creditor).

2   Gross value of CFD positions.

3   Total investments illustrating market exposure including the gross value of CFD and TRS positions.

Investment Portfolio by Country

As at 30 September 2021

Group Statement of Comprehensive Income

for the half year ended 30 September 2020 (Unaudited)

The total column of this statement represents the Group's Statement of Comprehensive Income, prepared in accordance with IFRS. 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 for the period.

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

The final Ordinary dividend of 9.00p (2020: 8.80p) in respect of the year ended 31 March 2021 was declared on 27 May 2021

(2020: 29 May 2020) and was paid on 4 August 2021 (2020: 4 August 2020). This can be found in the Group Statement of changes in Equity for the half year ended 30 September 2021.

The interim Ordinary dividend of 5.30p (2020: 5.20p) in respect of the year ended 31 March 2022 was declared on 3 December 2021 (2021: 27 November 2020) and will be paid on 14 January 2022 (2021: 8 January 2021) to shareholders on the register on

17 December 2021. The shares will be quoted ex-dividend on 16 December 2021.