Final Results

RNS Number : 2285H

TR Property Investment Trust PLC

25 May 2011

 



This announcement and the information contained herein is not for publication, distribution or release in, or into, directly or indirectly, the United States, Canada, Australia or Japan.

TR PROPERTY INVESTMENT TRUST PLC

Unaudited preliminary results for the year ended 31 March 2011

25 May 2011

ORDINARY SHARES Financial Highlights and Performance	Year ended 31 March 2011	Year ended 31 March 2010	% Change
Revenue
Revenue earnings per share	6.94p	5.18p	+34.0
Net dividend per share	6.00p	5.75p	+4.3
	At 31 March 2011	At 31 March 2010	% Change
Balance Sheet
Net asset value per share	207.08p	185.22p	+11.8
Share price	177.10p	159.40p	+11.1
Net debt	7%	8%
Shareholders' funds (£'000)	530,602	475,500	+11.6
Shares in issue at end of period (m)	256.2	256.7	-0.2
Performance	Year ended	Year ended
	31 March	31 March
	2011	2010
Benchmark performance (total return)	+15.2%	+60.6%
NAV total return	+15.4%	+52.6%
Share price total return	+12.6%	+60.5%

SIGMA SHARES Financial Highlights and Performance	Year ended 31 March 2011	Year ended 31 March 2010	% Change
Revenue
Revenue earnings per share	2.57p	3.06p	-16.0
Net dividend per share	2.15p	2.00p	+7.5
	At 31 March 2011	At 31 March 2010	% Change
Balance Sheet
Net asset value per share	111.94p	98.12p	+14.1
Share price	83.45p	70.50p	+18.4
Net debt	8%	11%
Shareholders' funds (£'000)	139,841	122,577	+14.1
Shares in issue at end of period (m)	124.9	124.9	-
Performance	Year ended 31 March 2011	Year ended 31 March 2010
Benchmark performance (total return)	+16.9%	+70.0%
NAV total return	+16.5%	+64.1%
Share price total return	+19.7%	+90.0%

 

Chairman's Statement

Introduction

In a year of sharp short term changes in Stock Market sentiment, Pan European property shares produced both a decent absolute total return and a good one relative to the major market indices. In the twelve months to the end of March 2011, their average Sterling total return was 15.2%, and this beat the Sterling total returns from both the UK All Share Index (+9.3%) and the Stoxx 600 Index (+7.5%). Macro events led property share markets on a regular theme park ride. Two periods of savage price declines of 18% and 17% were caused by fears for the global economy and Eurozone sovereign debt problems. Each decline was followed by a strong share price recovery of 31% and 17% respectively resulting from better than expected economic numbers and by central bank action or rather inaction on lending rates.

The NAV return performance for both share classes was closely in line with their benchmarks. The revenue results were better than anticipated and I am pleased to report that this has enabled the Board to propose restoring growth to the dividends for both share classes.

In last year's statement I announced that Chris Turner would retire on 31 March this year and paid tribute to his achievements as senior fund manager since 1995. Marcus Phayre-Mudge became senior fund manager of the Trust with direct responsibility for the Ordinary Share class, supported by James Wilkinson, fund manager of the Sigma Share Class.  Marcus and James have worked with Chris for 14 and 9 years respectively. The execution of the transition has seen a pleasing degree of continuity, both before and after the year end.

In my remarks last year I thanked Chris not only for his financial results but also for his courage and judgement in making big decisions; developing a great relationship with shareholders and building an outstanding team to succeed him.  I will add one further observation. Chris has a philosophy of fund management which requires that investment decisions always analyse the quality of management as well as assets to add shareholder value. There is constructive self-criticism when there are errors of judgement, and markets are not slavishly followed.

This set of principles has been consistently applied and has formed a reference point to enable significant changes of policy which respond to new opportunities and situations. Well-judged changes of policy have positively changed the shape of the Trust over the years and have added superior value to shareholders. The clear distinction between the application of principle and policy is too rarely applied in business.

I am confident that Marcus will continue to apply good judgement within the principles of good fund management and that he, James and the team will move investment policy forward, making educated decisions to add shareholder value.   

NAV and Share Price Performance

The Ordinary share class showed an NAV total return of +15.40% versus its benchmark total return of 15.17%. The Sigma share class NAV total return was 16.45% compared to its benchmark total return of 16.86%. More details of the absolute and relative returns are set out at the start of each share class report and commented on by the fund managers.

Revenue Results

As anticipated in my interim report, the revenue results for both share classes have shown a substantial improvement over our managers' original expectations for the year. The most significant change has been to the revenue tax charge which has fallen sharply due to our overseas income being taxed at source but no longer subject to UK corporation tax.  Both share classes also benefited from higher than anticipated dividend receipts. More detailed comment on the revenue and taxation position is included in the managers' reports for their respective share classes. In summary the Ordinary revenue earnings per share rose 34% to a record 6.94p and the Sigma revenue earnings, which were anticipated to decline by 25%, showed only a 16% decline to 2.57p.

Dividends

Ordinary Share Class Dividend

The Board is proposing to shareholders an Ordinary share class final dividend of 3.70p which compares with the second interim dividend of 3.45p paid last year. Taken together with the unchanged interim dividend of 2.30p already paid, this will bring the full year payout to 6.00p, an increase of 4.3% over the 5.75p per share paid last year.

Sigma Share Class Dividend

The Board is proposing to shareholders a Sigma share class final dividend of 1.25p which compares with the second interim dividend of 1.10p paid last year. Taken together with the unchanged interim dividend of 0.90p already paid, this will bring the full year payout to 2.15p, an increase of 7.5% over the 2.00p per share paid last year.

Revenue Outlook

Details of the revenue outlook for both share classes are noted in the managers' reports. In summary our managers are advising the Board that, subject to unforeseen circumstances, they expect that net revenue per share for the Ordinary share class will be in the order of 6.40p a decline of 8% relative to the year to March 2011, and that the Sigma share class is expected to have net revenue of 2.40p, a decline of 7% relative to last year.

Net Debt and Gearing

Throughout the year both share classes have continued to be run with modest gearing ranging from 6% to 13%. The Ordinary share class started the year with £36m of net debt and finished the period with £37m. The comparable figures for the Sigma share class were £13m and £11m. The £50m one year variable multi-currency borrowing facility with the Royal Bank of Scotland was renewed last November on improved terms and since the year end we have signed an agreement with ING for a 2 year £30m multi-currency facility.

In addition we have also started to utilise CFDs in a modest way as an additional means to access competitively priced gearing.

Currencies

As in previous years the portfolios' exposure to foreign currencies was not hedged to the base currency, Sterling, at either the asset or the income level. The managers also monitor currency exposure against the benchmark. They have discretion to adjust currency exposure as they deem appropriate.

Over the second half of the year Sterling appreciated against the Euro by some 3%, but depreciated against the Swiss Franc and the Swedish Krona by a similar amount.

Discount and Share Repurchases

The Ordinary share discount to capital only net asset value averaged 10.7% over the year with a range of 2.1% to 16.9%. The Sigma share discount to capital only net asset value averaged 23.7% over the year with a range of 19.2% to 27.8%. A total of 500,000 Ordinary shares were repurchased in October 2010 at 164.25p per share. 

Outlook

In my opening paragraph, I highlighted the fact that pan-European property shares had outperformed the broader European equity markets over the year taken as a whole. This relative outperformance widened in the first quarter of 2011 and has continued into the new financial year. What are investors now beginning to focus on?  European economic health is, at the national level, a mixture of abounding vitality (Germany and the Nordics), continuing sickness (Southern Europe) and convalescence (the remainder including the UK). Whilst those pockets of health are to be welcomed, the prescription of continued very low policy rates and the need within the Eurozone for intra regional monetary support continues to leave investors with a nagging doubt about the trajectory of economic recovery as well as the unknown longer term consequences of this exceptional remedy. The central banks' strategy so far has been to keep policy rates (and bond yields) far below historical levels - with savers paying the price. Cash deposits always offered a very low return but this has now turned negative in real terms. Property, a real asset with a rental revenue stream that has traditionally exceeded inflation, looks attractive. Listed companies across Europe are, in the main, well financed and expect to maintain their current levels of earnings into next year. So stable and inflation-protected earnings are sought after investment attributes that provide broad support to the asset class.

Whilst the consequences of the central banks' policy decisions look to be beneficial to the asset class in the broadest sense, I must sound a note of caution. Real estate, with its recurring cashflow, is a strong candidate for leverage and this was its undoing in the financial crisis. Whilst listed property corporates are once again on a stable footing, a healthy banking sector is a requirement for a healthy property market. It is clear that much remains to be done to complete the rehabilitation and unwinding of the complex relationship between governments, central banks and the banking sector as a whole.

Both the Ordinary and Sigma share classes have an element of gearing and this reflects the managers' positive stance. With the economic machinery running at a multitude of different speeds across Europe, they anticipate a widening in the divergence of returns within the asset class. Focusing the portfolios to capture more of the growth within healthy and convalescing markets remains the central task but always with one eye on the state of the credit cycle.

Peter Salsbury

Chairman

Market Background and Outlook

Market indices show that European commercial property markets have continued to recover slowly throughout the last twelve months. What the indices fail to show is the extreme polarity of the market. It has been a year when good property rose in value and poor property declined in a manner similar in some ways to the changes in the health of European economies.  For investors, the principal motives remain the desire for stable income and the fear of inflation; their principal concerns have been weak occupational demand, the threat of rising interest rates and the lack of finance. The current definition of what is good or poor, or prime and secondary, in market parlance, still depends principally on the length and security of the income stream. Only in a few locations, Central London and Central Paris in particular, has the market yet broken out of its recessionary nervousness, and it has done so there because tenant demand has become sufficiently consistent and predictable that it has now reduced vacancy rates to a point where effective rental growth has re-emerged.

The slow pace of the recovery in economic strength continued to dominate the property investment outlook. The timing of the return of broad based growth in employment and consumer confidence remains the chief indicator of future performance. There have been positives for the market since last summer. The threat of a double dip recession across Europe has receded. Germany and Sweden are much stronger than a year ago. A massive amount of globally based equity capital has been invested, especially in London, and the signs are that more is yet to be spent. Fears that the banks would withdraw support from the asset class so fast as to precipitate a run on values have not materialised. More and more it seems to us that this debt burden is a banking nightmare and not a threat to the future value of most real estate. 

Property shares did well overall, outperforming both the All Share and the Dow Jones Stoxx 600, and this despite property regularly featuring as the least favoured sector of the Stock Market in surveys of generalist investors over the last twelve months. Nevertheless, pricing followed the volatility of the markets, oscillating on macro fears. The Greek crisis last May and the Irish crisis last November saw sharp price declines while better than expected economic numbers and central bank action to hold down interest rates were the factors principally underlying two prolonged rallies in the late summer and again in early spring this year. For the Sector, the latter rally also reflected increased concern over inflation, principally in the UK.  

Within the sector, individual price performances generally mirrored variations in the vibrancy of specific property markets. Balance sheet ratios were generally in order by last spring, and the number of seriously sick companies diminished further thanks to rights issues and share placings. There were very few mergers or acquisitions. Stocks with high dividend yields did not noticeably outperform as they had in 2009. Small and mid-cap stocks again outperformed, so that Sigma's benchmark outpaced the Ordinary Share benchmark for the second year running.

Property Investment Markets

It was a year of big contrasts in the investment market caused principally by strong investor demand for high quality assets and, conversely, at the secondary level, by the lack of tenant demand and the availability of fresh debt finance.  As a result the yield gap between prime and secondary is very wide. Prime values have risen more sharply than expected in many locations due to improvements in tenant demand, the weight of cash awaiting investment and a dearth of decent available stock. By contrast there has been relatively little investment activity at the bottom end of the market. Swathes of secondary shopping centres, office buildings and industrial buildings, vacant or part let, litter the edges of towns and motorways across the UK and Europe. These are properties that tend to be burdened with bank debt and their current value is often hard to assess. They appear to have little chance of seeing any immediate recovery in price.

UK

The UK investment market last year was just the tale of one city. London totally dominated in terms of turnover and value growth. Almost every property offered there, whether occupied or vacant, attracted multiple bids and sold for more than expected. Yields fell, actual and estimated rental values rose. Demand was fully international with overseas private investors, wealthy family offices and sovereign wealth funds dominant. UK buyers were in a definite minority and UK investors and the banks were the most prominent sellers. The causes of all this bullishness were three-fold. Firstly there was rental growth both in the office and retail sector as vacancy rates fell. Secondly there is the prospect of further rental growth, thanks to the dearth of new development. Thirdly London continues to be a most sought after location for the world's richest. The rise in commercial values mirrored the growth in London's prime residential values; indeed in the West End, conversion of office space to higher value residential is now serving to reduce the available commercial stock, so reinforcing the decline in vacancy.

Outside London the market has been much less buoyant. For the most part international investors did not stray outside the capital. Some good prices were achieved for the best located and let property, but prime yields were generally unchanged for most of the year and rental values often drifted downwards. Much of the buying interest was from opportunists hunting for decent buildings that are part empty and offered by a seller under pressure from a lender. Except in the core of the major UK regional cities, office markets continue to look sickly. Investors are well aware that the Government's austerity package is in its infancy in terms of job losses and will be affecting both demand and supply for the next three years in many regional towns. Even in the more prosperous South East the weak state of investor demand for out of town offices does not seem to have improved at all in the last twelve months.

Europe

Continental property investment demand has improved overall, but has also tended to be very city centric. As a general rule if residential prices are rising in a city, then commercial property values will be as well. Thus Paris and Stockholm offices led the way, with double digit gains. As most leases in Europe are for five years or have a tenant's right to break at the third or fifth year, investment demand also followed tenant demand.  As the year progressed the strength of the German economic recovery resulted in a wave of interest for retail and residential investments there. The German office and industrial markets remain patchier. Across the Continent, high quality retail was rarely offered, and sold very well in most locations. Italian property continued to attract private domestic investors. Spanish, Greek and Irish property fell in value.  Elsewhere, in those European countries with high vacancy problems - notably the Netherlands and Belgium - office markets remained soft and values did not improve.  

Rental Values

Offices

In a select number of capital cities occupier demand has recovered sufficiently to promote a return to rental growth. These locations aside, most office markets across the UK and Europe remain becalmed with high vacancy giving tenants the upper hand in rental deals. We will start with the positive news. In our last two background reports we have noted a recovery in demand and the decline in vacancy rates in certain capital cities, in particular London, Paris, Stockholm, Warsaw, Oslo and Geneva. In these cities markets have continued to improve, but the list has not grown much longer.

London remains the most strongly recovering market due to a combination of factors, of which the foremost is its status as a global financial and trading centre, so that demand for space is not linked purely to either the domestic or the Continental economy. London is short of top quality new space, thanks to the paucity of development starts in the last four years, and has a lease expiry profile that implies strong relocation demand over the next four years particularly in the City. Furthermore, in the West End, where the market is at its strongest, residential values are now so high that it is financially rewarding to convert quality office space into flats - so reducing the total stock and the vacancy rate still further. West End vacancy is now variously reported at between 4.5% and 6%. Prime rental values, which bottomed at £65 per sq ft in 2009 are now estimated to have climbed back to £90 per sq ft with £100 per sq ft being reported for isolated suites. In the City, where the overall vacancy rate moved back below 10%, best prime rents were probably unchanged at around £60 per foot over 2010, but average rents recorded growth.

Paris saw a stronger pick up in leasing activity in 2010, spurred by corporate relocations to higher quality space. Vacancy levels declined in both the central area and La Défense to around 6%, and top rental values rose by 5% to around €750 per square metre. A shortage of new top quality space is also encouraging for rental trends over the next two years. In Stockholm domestic demand has improved as the Swedish economy has returned to growth. The overall vacancy rate is still close to 10%, but again the shortage of top quality space has resulted in an increase in peak rents and the very strong Stockholm residential market is resulting in older space being removed from supply for conversion to residential.

Away from these select cities most office markets appear becalmed - saddled with a combination of high vacancy and low or nil employment growth. In Germany there has been local improvement in Hamburg and Frankfurt, and in Italy the Milan and Rome markets are showing resilience, but in other cities, such as Amsterdam and Brussels, percentage vacancy rates have remained well into double figures.  Capital city office markets in the Eurozone countries with sovereign debt problems have been the worst performers with rental values falling again. Regional and suburban markets in both the UK and Europe are almost uniformly chalking up high vacancy and limited demand, so that true rent levels are hard to ascertain. Even in London, there is little sign of any ripple effect whereby growth in demand in the central area spills out to the suburbs or to regional markets, where any demand is reliant on the domestic economy.

Retail

Tenant demand for retail property is still very polarised. Broadly, demand is being hit both by the decline in consumer confidence and by the internet, and the outlook is clouded by the future impact of rising interest rates on personal incomes. In the very best locations and in the countries where national consumer confidence is sustainably improving, notably in Germany and Sweden, vacancy rates are low or falling and rental values on the gradual increase. Elsewhere, landlords are often struggling to retain retailers and rental concessions are widespread. The stream of local and national retailers going into administration has abated but not ceased. The internet is still increasing its share of retail sales. Bookshops and record stores are disappearing fast; electrical stores and tour operators are scarce, even fashion internet sales are pushing on to 10% of turnover, so that fashion retailers want fewer units and want their remaining stores to be bigger and to be more akin to showrooms. The largest shopping centres have generally maintained occupation at above 95%, but this has often been achieved by short term lettings at less than stated rental values. In sub regional, neighbourhood and district centres vacancy is generally very visible and rental values are showing little or no sign of improvement. Central London (along with Central Manhattan and Hong Kong) has been a special case throughout the downturn, with rental growth a persistent feature for the main West End shopping locations, due principally to an influx of international retailers.

Storage and Industrial

Good quality, well located sheds have seen an improvement in take-up over the last year but much of the demand has been for relocation and upgrading rather than for business expansion. Vacancy rates have fallen modestly in many locations, but still remain historically very high, and the decline may be due as much to demolition as to a spurt in net take-up. Headline prime rental values appear to have stabilised but substantial incentives for letting beyond five years continue to be commonplace. Rental values for older space reflect the wide choice available to tenants and are usually agreed by negotiation rather than at asking levels.

Debt and Credit Markets

The proportion of UK and European debt, mostly bank debt, lent against real estate has declined very slightly over the past year, but remains at a very high level (circa £1,000 billion) relative to its historic average. With a very high level of loan termination due in the 2011-2014 period fears are constantly being aired that there is no way that the industry can refinance this burden. So far the banks have taken a pragmatic longer term view and extended debt repayments on a very large scale. In truth there is little else they can do, and so far their actions have gradually eased the position. Property values are, on average, on the rise so that more loans are becoming covered again. There is interest from other credit sources, mainly insurance companies, to grow their property loan books. Fresh equity capital is coming into the industry through stock markets and private placements, and sales of distressed stock are continuing at a modest pace. In the US the revival of the CMBS mortgage market has been an important source of fresh debt, but in Europe and the UK this alternative window remains virtually closed. The problem is that a high proportion of the outstanding debt appears to be lent against secondary property of the type which is not rising in value and which is accumulating vacancy and therefore losing income with which to service the outstanding loans. The level of provisions by banks against problem loans appears to be reducing, though it remains high. We think there may be a lot more writedowns to come.  The Irish position is the worst in Europe with NAMA holding €70 billion of bad loans and pledged to reduce this by 25% by the end of 2013. So far opportunistic investors hoping to cash in on the sale of distressed assets have been largely disappointed both by the paucity of offerings and by the lack of value growth in what they have purchased to date.

With overloaded loan books, the banks have continued to have little appetite for new lending. There is a supply of fresh bank debt but it has not grown markedly over the past year.  Loan to value ratios remain low, spreads wider than normal, and loans for secondary assets are hard to obtain. 

Property Shares

The EPRA Pan Europe Index produced a total return in Sterling of 15.2%. The year saw a wider than usual range of returns on a country by country basis, reflecting mainly the very different immediate outlook for the various Pan European economies. In local currency terms the pack leaders were Sweden, Germany, Finland and Austria, with total returns over 20%, the middle group in the 10% to 20% range were France, Switzerland, and the UK. The Benelux countries were between 5% and 10%. Greece and Spain took the wooden spoons, along, surprisingly, with Norway. Sterling's currency movement against the Euro was modest on a year by year basis. It fell sharply against the Swedish Krona and Swiss Franc, boosting those countries' Sterling returns.

Though actual NAV growth played an important part in individual stock price movements, it was the prospect of future NAV growth, or lack of it, which was probably the most influential factor in determining stock pricing. Stocks with high dividend yields did not noticeably outperform as they had in the year to March 2010. High leverage magnified price movements mainly on the downside, though the few stocks with both high leverage and a portfolio showing above average value growth produced outstanding returns. Small and mid-cap stock again outperformed so that Sigma's benchmark outpaced the Ordinary Share's benchmark for the second year running.

There were disappointingly few new issues. There were several aborted attempts mainly in the UK and Germany and talk of a large scale flotation of Carrefour property which has come to nothing so far. Equally, there were very few mergers or acquisitions of note. Capital Shopping in the UK saw off an attempted approach from Simon Property. Secondary issues raised some £1.5 billion overall. These were generally small scale accelerated placings often linked to a purchase of a property or a portfolio.

Overall the benchmark's leverage ratio remained at close to 50% throughout the year despite the increase in property values. Two specific events influenced this result - the addition to the benchmark of the giant and highly leveraged Spanish company Colonial in June 2010, and the €1.8 billion return of capital by Unibail in October 2010, which was funded by fresh debt.

UK

UK property shares rose by just under 8% in the year and produced a gross total return of 12.1%. Given that they were down by 3.5% in the first half, it was a very decent second half run. Not surprisingly it was some of the companies with portfolios concentrated in London that did best. Derwent London, Shaftesbury, CLS and Great Portland all featured amongst the best performers with total returns of between 23% and 29%. However not all the London companies performed - Minerva and Songbird both fell in value, the former failed to let its major City building, and hopes that the latter would see an early move to improve its corporate structure proved misplaced. Other stocks that produced negative total returns over the year included residential specialists Unite and Grainger, highly leveraged businesses such as Warner and Quintain, and industrial property specialists SEGRO and Hansteen. Even Helical Bar, so long an outperformer, declined and lost most of its traditional premium rating. Amongst the leaders, British Land stood out with a 22% total return, Hammerson returned 18%, Land Securities 13%, and Capital Shopping just 3%. It was Capital Shopping that provided the biggest story of the year. The company agreed to purchase the huge Trafford Centre in Manchester for a mixture of cash and shares. Simon Property, the huge US Mall REIT, which owned 5% of Capital Shopping, so objected to the deal that it announced that it wished to bid for Capital Shopping if it was permitted to do certain due diligence. This permission was refused and Simon Property eventually withdrew, but not before the purchase terms of the Trafford Centre had been altered in favour of Capital Shopping's shareholders. 

Europe

In Sterling terms European property shares (ex the UK) rose by just under 11.3% in the year and produced a gross total return of 16.8%. Swedish stocks were the best performers with the Krona total return of 31% translating into a Sterling total return of 41%. Fabege the largest Swedish property company returned 46%. It benefited from an ideal combination of above average leverage and an obviously strengthening local economy. German property stocks, of which there are very few relative to the size of the German economy, produced a Sterling total return of 21%. This would have been higher had not one of the larger companies, Gagfah, seen its share price collapse in February 2011 on news of a massive potential law suit from a German local authority. French stocks did well returning 16%, led by the two giants Gecina and Unibail. Their performance reflected the improvement in the Paris market where most French companies hold the majority of their portfolios.

There was little clear distinction between the performance of stocks by property use, though, reversing the UK trend, the residential specialists all outperformed except Gagfah. Of the retail specialists, Eurocommercial and Unibail returned over 20%, while Klépierre managed only 3% and Corio 6%. Office stocks were mixed up and down the list while industrial specialists underperformed except in Sweden.

Outlook

Last year saw European real estate equity returns become far more polarised than they had been since 2007. The economies of Europe are running at a variety of speeds. A few particular markets have virtually fully recovered from the recession, while many others may not yet have approached their nadir. We expect this wide divergence of returns to continue through the next two years as European national economies sprint or stumble back to normality.

It is therefore the economic background that we think will dominate real estate returns, both at a national level and at regional or city level. Within the UK, London clearly has a very exciting property market thanks to its global status, while other major UK cities do not share this excitement, and in our view are not about to share it. The same comments apply elsewhere, for instance to France and Paris, or to Italy and Milan.

Property shares have recovered well. Balance sheets are broadly in good order; fresh equity is available in good quantities when stocks are rightly priced. Average discounts are at low single figures, which is in line with global real estate securities pricing. The premium ratings of those stocks with the highest quality portfolios generally reflect the difficulty and cost of buying prime real estate directly.

Inflation remains a greater fear than deflation for most investors. Recent UK and Eurozone inflation forecasts are not consoling. Most Continental leases have annual rents indexed to the cost of living, and real estate securities have a good performance record in inflationary periods, provided that central banks do not force borrowing costs to well above the level of inflation. At present that would seem very unlikely. The bank debt refinancing problem rumbles on. In our view this is much more of a problem for the banks, and for the secondary and tertiary property markets, than for mainstream quality real estate values. However the side effect, the lack of fresh finance, is beneficial for the market in curbing speculation and depressing fresh development.

We firmly believe that a large number of companies in which we invest now enjoy the combination of a portfolio that is exposed to markets that will see rental and capital growth over the next 18 months, and a stable balance sheet that allows them to take advantage of investment and development opportunities as they arise. For us, the expected divergence in performance across sectors and geographies will shape the exposure of the portfolios and is a welcome environment for active stock pickers like ourselves.

Manager's Report

Ordinary Share Class

Performance and Background

The Ordinary share class NAV total return of +15.40% was a whisker ahead of the benchmark total return of 15.17%. As the Chairman has noted, the year to the end of March 2011 was another volatile one for stock markets. At times it is possible to feel overwhelmed by the rapid changes in sentiment caused by events or fears which have almost nothing to do with the day to day business of most of the companies in which we invest. Active short term trading is not something I have ever been any good at, so I don't try, instead relying on picking stocks and managements I think will outperform over the medium and longer term. In most years this approach has resulted in decent outperformance, but not last year.

Eighteen months ago there was much discussion regarding the shape of the recession, with a V camp, a U camp and an L camp. Right now, in the UK and across much of Europe, the L camp looks closest to the mark, though Germany and Sweden seem to have enjoyed a V shaped recovery, while the economies with sovereign debt problems may have further to regress. Meanwhile commercial property markets have to do battle with green issues, the increasing impact of the internet on retail sales, rising oil prices and with the potential growth, often the unwilling growth, of the population of major cities.

Investment Activity

I believe Warren Buffett once remarked that "idleness bordering on lethargy" was the cornerstone of his investment philosophy. Last year my investment turnover (sales and purchases together divided by two) was £74m or 13.6% of the average total assets over the year. On the whole, where I made changes I think they were beneficial, though I have not run the test on this. I added to our Central London weightings, buying Capital & Counties once it was split from Capital Shopping Centres last May. I added modestly to the Great Portland and Derwent London holdings, and should have bought more. I reopened a holding in Workspace, the Greater London industrial space owner. Elsewhere in the UK I reduced the SEGRO holding taking the view that the logistics and storage market will be dull for some time, and reduced the Big Yellow investment on the outlook for residential market turnover. Songbird, in which I invested in early 2010, turned out to be a poor performer with the shares almost unmoved over the year despite the 100% London portfolio weighting.

I increased the investment in Germany markedly after it became clear, in the autumn, that the German economy was making a more rapid recovery than the European average. I have never in the past been an avid fan of German real estate stocks, as their corporate governance has been generally poor. Even now the portfolio is not overweight in that country. The Swedish overweight worked well, and while my venture into Norwegian Properties was mistimed in the short term, I believe that this holding will perform in due course. I got rid of the remaining Greek holdings during the year and kept out of Spanish and Irish stocks.

Distribution of Assets

The primary distribution of the Ordinary Share Class portfolio has shown little change over the last twelve months. Continental securities rose from 56.3% to 58.3% of total assets. UK equities rose from 32.9% to 33.8%, and UK directly held property changed from 9.9% to 7.7% as a result of the sale of the Cambridge property.

On a see-through basis, that is to say viewing your total assets through the portfolio locations of the companies in which we hold equity and adding our direct property, 41% of the assets are retail properties, 36% office properties, 9% each are residential or industrial and storage and 5% are in other uses, mainly hotels, leisure or care homes. Of the 41% retail, 3% is in Central London, 11% is in the rest of the UK, 10% in France and the rest spread over the rest of Europe. Of the 36% in offices, 12% are in Central London and just 0.4% in the rest of the UK, 7% are in Paris and 4% in Stockholm. Of the residential 4% is in Germany and 3% in the UK (principally at our Colonnades building in the West End of London).

Largest Equity Investments

The list of the top twenty investments remained very constant over the year, the only entrant being the Swedish company, Fabege, and the only exit being a long time favourite, Big Yellow. The combined size of the top ten equity holdings, relative to the total portfolio, remained similar to previous years. They were worth £267m (£245m last year) and they made up 47% of the total assets (48% last year). 

Unibail remains by far the largest single holding. The shares outperformed with a total return of 23%. Even after returning almost a sixth of its capital to shareholders last autumn, the company remains by far the largest quoted property company in our investment universe with a portfolio of major shopping centres whose value exceeds that of the combined portfolios owned by Land Securities and British Land. More details are given in the notes on the top twenty stocks. Two points bear repetition. Firstly I believe that, despite its size, this company is extremely well run, and secondly the shares are highly liquid so our entire holding represents about two days' turnover in the shares.  

Land Securities and British Land, the two biggest UK REITs, together represent 12% of total assets (11% last year).  British Land outperformed with a total return of 22.5%, and Land Securities slightly underperformed, returning 13%. They have relatively similar portfolios split between Central London offices and UK regional retail. British Land's retail exposure is mainly retail warehousing and supermarkets, so that some 20% of its rental income is indexed. Both have long term fixed borrowings, which have been a curse for the last three years, as lower interest rates have brought no benefit to earnings and dividends have shown no growth, but both will benefit them relative to their competitors, when, eventually, long term interest rates rise again.

Amongst the remainder of the top twenty stocks, we saw strong total returns from Fabege (+46%), Castellum (+31%), Gecina (+26%), Eurocommercial and Great Portland (both +24%), Derwent London (+23%) and Hammerson (+18%). The returns from PSP Swiss Property and Swiss Prime Site (so confusing, these Swiss names) and from Icade and Silic, were all around benchmark average. The underperformers in the top twenty were Corio (+6%), Capital Shopping and Klépierre (both +3%), SEGRO (+2%) and Foncière des Régions (+1%).

Revenue

This time last year I tried to explain to you why our net after tax income had fallen by over 20% in that year. This year I will now try to explain to you why our net income has risen by 34% in the twelve months ending March 2011.

Investment income rose by £4.9m or 31.3% to £20.6m. There were lots of small changes, but by far the biggest component of the change was the dividend from Unibail, which, due to timing differences totalled some £4.2m in the year compared to £1.1m in 2009. Late on in the year the Trust became entitled to dividends from Hammerson and British Land totalling some £o.7m, both of which we had anticipated not going ex-dividend until after 1 April 2011. On the negative side, and as anticipated, other operating income, most of which was underwriting fees, declined from £1.5m to just £23,000. Following the sale of the Cambridge property and surrenders at Harlow and the Colonnades, gross rental income declined by £0.61m. The surrender premiums were taken to capital. Management fees were 9% higher, reflecting asset growth, other expenses were almost static and finance charges rose 26% because the Trust was geared throughout the year, whereas we had held cash in the first quarter of the previous year.

At the pre tax line the net profit is ahead by just 11.3%. The tax charge has fallen very significantly from 22.2% of revenue to just 6.4%. This change in the tax charge is worthy of a more detailed explanation. An amendment to legislation in the UK in July 2009 resulted in most overseas dividends no longer being taxable in the UK. However, in most Continental European countries, tax is still withheld locally on dividend payments, so there is still an underlying tax cost to the Trust. The tax charge for the Trust will always be variable depending upon the mix of income sources.

In the year to March 2011 a further factor has come into play. A number of European property companies unexpectedly distributed their dividends from capital reserves. In most instances these have been treated by the Trust as income, as they represent the usual periodic distribution of earnings from regular property investment activity (i.e. rental income) and not a return of capital or distribution of capital profits. However, because these dividends have been paid from capital reserves, withholding tax has not been applied so the dividends have been received gross. As these dividends are no longer taxable in the UK, no further tax has been paid.

It is difficult to predict the extent to which this trend will continue into the next financial year. As asset values recover and unrealised losses which have been accounted for through the revenue accounts reverse, it is expected that companies will resume paying their dividends from revenue reserves and withholding tax will be applied, increasing the Trust's overall tax charge.

As referred to in last year's Annual Report, there is the prospect of challenging withholding taxes on dividends from European countries and also applying the current UK tax treatment of foreign dividends to earlier periods. There is still no certainty on the outcome of these points, but we will continue to monitor the situation and to submit any claims where appropriate. Revised tax returns have been submitted for earlier periods on the basis of the case currently being heard by the EU Courts in relation to applying the current UK tax treatment of foreign dividends to these periods, but at this stage the outcome of these proceedings is uncertain and accordingly no benefit has been recognised in the financial statements.

Revenue Outlook

The expectation is that the underlying income from our equity portfolio will, as a whole, show a small amount of growth. This outlook is predicated on the current expected profile of policy rate increases by the central banks. Whilst most companies have a significant amount of interest rate hedging, rising rates will lead to greater interest bills. Counterbalancing that is the expectation that indexation of leases (most Continental stocks) will inflate top line revenues and feed through to earnings and dividends.

However, some of the factors described in the revenue section above which have led to greater than anticipated revenue in the year to March 2011, are likely to change in the year to March 2012. Principally these are the timing of dividend receipts (we anticipate that some of the dividends falling in March will revert to April next year) and the tax charge (will increase as companies resume dividend payments from income rather than capital accounts) and therefore we anticipate a small fall in the revenue figure for the forthcoming year.

There are two additional important factors which are also hard to predict, fluctuations in the exchange rates of European currencies versus Sterling (some 65% of our predicted income is denominated in non-Sterling currencies) and the cost of our own external debt which is floating.

Taking a fairly conservative view on these factors, we expect earnings for the year to March 2012 to be in the region of 6.40p pence per share. 

Gearing, Debt and Debentures

At the start of the year we had £47m of debt made up of £12m from the Debenture and £35m from the bank facility. The cash of £9.9m shown in the balance sheet at the end of March 2010 was mostly swallowed up in paying the second interim dividend of £8.9m the day after the year started. Over the summer, net debt declined slightly and was £29m at the end of September. In the second half, net debt rose again so that at the year end the figure was £37m giving gearing of 7%. The portfolio's see-through leverage (which adds the proportionate debt of all our equity investments on to our balance sheet net cash or net debt) started the year at 47% and remained close to that level through the first half and then rose to finish the year at 50%. The equivalent figures for the EPRA benchmark were close to 48% at both year ends.

Direct Property Portfolio        

The physical property portfolio produced a positive total return for the 12 months of 10.7% made up of a capital return of 5.5% and an income return of 5.1%. This return (almost) exactly matched the total return of the IPD monthly Index which returned 10.7% made up of a capital return of 3.5% and an income return of 7.0%.  On a like for like basis the portfolio produced a total return of 11.8% made up of a capital return of 6.1% and an income return of 5.7%. Over the 12 month period we sold one property, in Cambridge, for £6.7m which was reported at the September interim results.

At our largest property, the Colonnades in Bayswater W2, we took the surrender of the car park from NCP whose lease was due to end in 2014. We received a reverse premium and have subsequently invested part in the car park, improving the security and general parking environment. The new management contract with a car park operator gives the Trust much more control of this space. There has already been a positive impact on both the retail and residential components of the property through the provision of a safe, secure parking environment for residents and shoppers.  During the year we completed 15 residential lease extensions receiving over £900,000 in premiums.  We have now extended c.20% of the residential leases and the pace of renewals is increasing.

In Harlow we completed the surrender of the over-riding lease to Admin Re Limited (whose lease was due to expire in December 2012) for a reverse premium and have simultaneously relet 50% of the space.  Teva UK Ltd have taken a 10 year lease at above the previous passing rent.  Following the surrender, we have become landlord to the subtenants who occupy a further 35% of the building, leaving us to relet the remaining 15%.  We now plan to invest a proportion of the surrender premium in upgrading the building's air-conditioning system.  This repositions the building from a short-term income investment into a modernised, multi-let property with a longer-term income stream and has resulted in the value of the property increasing by 15% at the year end valuation. The vacancy rate, by rental value, including the space at Harlow, is now 6.9% compared with 4.9% at March 2010.

Postscript

This is my last manager's report, and if it reads the same as most of the previous reports, I apologise. Now it's time to go before my wits shrivel any further and the performance suffers accordingly. A shrewd man once told me that running a decent sized long-only investment trust is the best job in fund management. He was right. I have loved doing this work, not the least because I have had a succession of top quality Chairmen and non-executives who have been there with help and support, but who have let me run the portfolio without interference.  I owe a lot to my younger colleagues, especially Marcus, James and Joanne, all of whom have been with the Trust for so many years already, both at Henderson and now at Thames River. I'm confident your capital will be in safe hands.

Last but not least I would like to thank the shareholders, particularly the many individual shareholders who have taken the time to e-mail me their questions or views or have come to the AGMs over the years. Your continued interest has been of more value to me than you realise.

Chris Turner

Fund Manager

Ordinary share class

Manager's Report

Sigma Share Class

Introduction

Sigma's performance has been measured against a small cap index, the FTSE EPRA / NAREIT Small Cap Europe Index since 1 April 2009. I am able to report that this index has outperformed the FTSE EPRA / NAREIT Developed Europe Index (the EPRA index that includes both large and small cap stocks) over each subsequent 6 month reporting period. Over the last year, the small cap index returned 16.9% whilst the all-cap total return index rose 15.2%. This was broadly the same differential as that reported at the half year stage. Amongst general equities, smaller companies have generally underperformed their larger competitors over the last year, however the reverse has been true of smaller property companies.

Indeed since the launch of the share class in July 2007, Sigma's NAV total return has been -1.4%, whilst the all-cap EPRA index has returned -11.8%. In the same period, the FTSE Smaller Companies Index returned -19.8% whilst the All Share was down -8.7%. Size has clearly been a handicap to performance outside the real estate equity market. We believe that there are few economies of scale in real estate businesses (once a business is large enough to attract competitive financing). In fact outperformance is generated through focused, proactive management of both the underlying assets as well as the balance sheet. The ability to be 'fleet of foot' has certainly been critical through the financial crisis. This doesn't mean that all managements of smaller companies achieved this but as a broad statement we believe that small and mid sized property companies will continue to outperform their larger peers. Our experience in the last twelve months has continued to reinforce this view. It is important to note that there are always exceptions and this is not a hard and fast rule. Some larger companies do display a number of the key qualities that we consider drive relative outperformance in smaller companies. Unibail, the largest property company in the sector continues to surprise on the upside with a clarity of strategy, rapid response to changing market conditions and opportunistic deployment of capital (investing in their business as well as returning to shareholders when deemed appropriate).   

Performance

In the year to March 2011, the Sigma share class total return NAV rose 16.5% and this compares with a total return from the FTSE EPRA/NAREIT Small Cap Europe Index of +16.9%. As outlined in the interim report, the first quarter was dominated by the crisis that enveloped the Eurozone. Between the beginning of the financial year (31 March) and the low point of the year (end of May) the benchmark index fell over 17%. The Euro continued to weaken and fell 6.2% in May and June to €1.22 to £1 . In local currency terms, there was little difference in performance across the Eurozone and UK property stocks. In a period of dramatic risk aversion by investors, there was precious little stock differentiation. Real estate stocks across the piece were tarred with the same brush. Exceptions were driven by geography or currency, viz Sweden and Switzerland. However, the second quarter of the financial year up to the end of September saw a strong yet steady recovery in real estate equity prices. Investors responded to the robust political dialogue as well as the concrete proposals surrounding the European Financial Stability Facility and its proposed successor the European Stability Mechanism (which will take effect from 2013). Central to the recovery in prices were two expectations: that there was now a real political impetus to reinforce the regulatory and economic surveillance framework and that policy rates would remain 'lower for longer', with the consequence of stronger earnings from those businesses with floating rate debt.

This pattern of a dramatic, macro event driven sell off followed by an even stronger recovery was to repeat itself twice more before the year end. In November, as the Irish debt crisis took hold, small cap property stocks sold off -8.7% in the month, only to recover +13.3% in December. More recently, events in Japan, North Africa and the Middle East resulted initially in sell offs followed by stronger recoveries. Over the last two months of the financial year, small cap property stocks rose +5.8%. In summary, the investment backdrop for the fund over the year was a steadily appreciating underlying real estate asset class (reflected in equity prices) punctured by intermittent and quite violent sell offs. Valuable lessons were learned from the May 2010 correction and the appropriate strategy was to remain flexible, particularly in relation to gearing both on balance sheet and on a see-through basis.

Investment Activity

Investment turnover (purchases and sales divided by two) was £58.5m which equates to 41.2% of the average investments (over the year) of £141.9m. This figure is much lower than that reported for the twelve months to March 2010 (over 90%) and reflects in particular the Board's decision that the small cap index constituents review was conducted annually as opposed to quarterly. A summary of the benchmark constituent methodology is contained in the Report of the Directors. As stated in the performance section above, the period was one dominated by improving investor appetite for the asset class but one punctured by brief periods of great volatility. My response was to maintain a modest level of gearing throughout the period which fluctuated between 5%-13%. The reduced levels of turnover also reflect the fact that there were far fewer new investment opportunities in the period. Whilst 2008 saw a tremendous number of rescue rights issues (to repair balance sheets), these continued on into the first half of 2009 but then evolved into proactive (rather than reactive) capital raisings for opportunistic acquisitions. In the year to March 2011 we saw none of the former and only a handful of the latter. This was partly investment indigestion (the need to get the capital raised out to work) but also investor reluctance to fund 'blind' cash pools particularly after such a record breaking reflationary period for asset values. Development Securities, Shaftesbury and Helical Bar all raised opportunistic capital through rights issues or placings. In the case of Development Securities and Helical Bar, share prices have subsequently performed poorly reflecting the paucity of attractive investment opportunities in which to deploy the capital. The other side of this coin is of course that distressed sellers were (and still are) fewer than expected. In all other instances, raisings have had a clear purpose: Songbird (to repay expensive debt), Deutsche Euroshop (buying a shopping centre in Hamburg), Conwert (to buy its partially owned subsidiary ECO) and TAG (acquiring a larger competitor Colonia). Interestingly, what we did see was several examples of private equity investors placing their holdings in listed companies. In June and October, Oaktree placed 23% of Deutsche Wohnen (their entire position in the stock). We participated in the placings, believing that the perceived stock overhang had been lifted. In the UK, Safestore, the self storage operator's share price benefited from the placing of Bridgepoint's final 18% stake. Again we participated for the same reason.  

Our periods of greatest activity surrounded the volatility spikes in May, November and more recently in March this year. Whilst we were nimble enough to reduce gearing appropriately, the recoveries in sentiment were even faster and opportunities to buy on share price weakness were often brief windows. The December rally being a case in point.

Largest Equity Investments

As flagged in Investment Activity, turnover has fallen and hence the broad shape of the portfolio has been maintained over the period. Last year I identified the Scandinavian region as likely to be an economic outperformer and that has been the case with GDP growth of 5.5% in 2010 (source : OECD). As importantly there are a significant number of property companies in the region operating with above average leverage and a higher proportion of floating rate debt; ideal beneficiaries of improving economic conditions with low (for the moment anyway) policy rates. Exposure to Sweden, Norway and Finland collectively increased to over 25% of the portfolio and 7 individual stocks feature in the top 20 holdings. Particular increases in exposure were to Norwegian Properties (prime CBD offices in Oslo and Stavanger) and Sponda (Helsinki focused portfolio).    

Given the ongoing issues across much of the Eurozone, it will come as little surprise that I increased the exposure, where possible, to German assets. Germany's economic performance continues to drive forward at an impressive pace (particularly when compared to the Club Med group of southern European countries). However, very little German commercial property is owned by listed companies (it remains dominated by open-ended funds). Our 10^th largest position is now Deutsche Euroshop and this is a stock in which we had a nil position twelve months earlier. Whilst there have been no changes to the overly conservative strategy (and management) of this business over the year, I increasingly wanted access to improving German consumer confidence and this company owns 15 shopping centres in Germany (and 3 in Poland). Although just outside the top 20 positions, our holding in Deutsche Wohnen, Germany's largest listed residential landlord, equates to 1.9% of net assets and is a new holding this year. Together with our longstanding position in Alstria (primarily Hamburg offices), our German holdings total around 9% of net assets. Added to this, on a 'see through' geographical exposure basis, would be Hansteen's portfolio of German industrial (which account for 70% of their assets) and a key reason for holding that stock. The large increase in exposure to our only Italian listed company, Beni Stabili was also partially 'top down' driven. Again, we began to feel more comfortable with Italy's expected economic performance and this company primarily owns very good quality retail and office property focused on Milan and Northern Italy - the submarkets we wanted to get access to.

Whilst the overall UK exposure dropped from 34% to 30% of the portfolio over the year, the focus on the Greater London area increased. There was additional investment in our core London holdings, Great Portland Estates and Shaftesbury (our second and third largest investments) together with new positions opened in Workspace and Capital & Counties. Workspace which owns a 5.5 million sq ft portfolio of business space across the capital has undertaken impressive corporate rehabilitation over the last 18 months. We last owned the stock in December 2007. A rights issue in December 2009 coupled with a (partial) change of senior management and more recently a restructuring of their largest joint venture pointed to a stabilised business focused exclusively in Greater London business space. The holding grew rapidly and is now 1.9% of assets. Capital & Counties, spun off from Liberty International, owns both the Earls Court and Olympia exhibition venues as well as being the largest retail landlord in Covent Garden. We expect progress on the development plans at Earls Court to be announced later in 2011. Residential values in London continue to rise and this site would have strong international investor appeal. However, UK residential prices are generally only rising in London and the South East and over the year we have reduced our broad UK residential exposure with the Grainger position more than halved.

Distribution of Assets

Whilst exposure to the UK has dropped over the year, the portfolio remains overweight where expected: West End office and retail, Docklands (our holding in Songbird), South East industrial and self storage. Our UK residential exposure has dropped sharply from 12.8% last year to 5.3%. In town, retail (outside of London) has fallen from 3.6% to 3.0%, again reflecting our concerns over consumer behaviour as public sector employment falls, whilst taxes, food and petrol prices rise. However, on the Continent, our retail exposure has increased and the fund remains overweight retail versus the index.

In the office sector, the only geographical submarkets in which we are overweight are the UK (just London), France (almost entirely Paris), Norway and Italy (virtually all Milan). I mentioned last year the reduction in exposure to the Brussels office market and this strategy has continued.

The Central European exposure which was heavily reduced in 2008, remains limited today. Whilst we are beginning to see improving underlying tenant demand in certain markets (Polish retail), we are yet to see appropriate vehicles through which we can get suitable exposure. Investors are still smarting from the inappropriate structures and balance sheets of the multitude of AIM listed property vehicles launched between 2005 and 2007.

Revenue  

I noted in the interim report that I had advised the Board that revenue earnings for the year would be in the region of 2.3p per Sigma share. I am pleased to report that we exceeded that forecast with earnings of 2.57p. The revenue within the Sigma share class is more evenly spread over the year than the Ordinary share class and a number of companies surprised us positively in the second half. Of particular note was our largest holding, Eurocommercial Properties who pay an annual dividend in November. They increased the dividend by 2.25% which was greater than we had anticipated in our forecast. In fact, within the portfolio, there were very few companies that disappointed us with their income statements or dividend distributions. As noted in last year's report, cashflows, particularly amongst our Continental holdings were aided by high levels of floating rate debt which led to reduced interest rate bills as central banks kept policy rates artificially low over the period. The other significant contributing factor in the second half of the year was the impact of a number of our Swedish holdings. These companies are generally amongst the first to distribute between late March and early April thus crossing the 'cusp' of our year end. The strength of the Swedish Krona made a positive contribution with dividend income worth 7% more in Sterling than twelve months previously.

Whilst our expectations were exceeded, an explanation as to why the earnings of 2.57p per share were lower than the previous twelve month period (3.06p per share) is required. Please note that the reasons were flagged in the Revenue Expectations section in last year's Report but are worthy of repetition. In the year to March 2010, earnings were flattered by several items which were not expected to recur. The first was that a number of UK property companies chose to pay a second interim dividend (in lieu of a final dividend) ahead of that new tax year and the change in personal income tax thresholds in April 2010. This had the effect of pulling income from 2010/11 back into 2009/10. This amounted to approximately 0.2p per share of post tax income. Of greater importance to the income in that period was the successful VAT reclaim on management fees as well as underwriting income. These non-recurring items added just under 0.5p per share to income in that year. Combined, this 0.7p is close to the difference this year.

Revenue Expectations

The earnings for the last financial year were better than expected. The reasons behind those improved figures, such as base rates remaining lower for longer than anticipated, will continue to flatter the income statements of many property companies - if such low interest rates persist. However, with more than 60% of the income of the fund coming from the Eurozone and Scandinavia where the interest rate tightening cycles are already underway we must reflect that impact in our earnings expectations. Set against that potential negative impact is the fact that almost every Continental holding enjoys the benefit of annual indexation of underlying rents. The levels of indexation vary hugely across subsectors and markets but we remain confident that this will be a positive contribution. The greatest unknown is the impact of currency volatility. Unlike the Ordinary share class, Sigma's income is spread more evenly across the year (as opposed to being predominantly earned in the first quarter of the financial year) and with the majority coming in the form of non Sterling dividends, accurate forecasts are harder to make. On balance, we expect dividend payments to be broadly in line with the current year but with the substantial caveat that currency levels (which helped boost our Sterling earnings in the last quarter of the year just past) could have the opposite effect in the future.

As flagged earlier in the manager's statement we continue to hunt for those markets which are exhibiting signs of rental growth and equilibrium in the balance of supply and tenant demand. In the event that the transmission of estimated rental values into hard cashflow exceeds our expectations then this will of course ultimately boost earnings.

The payout ratio reached 84% this year. The cautious approach of previous years has ensured a stable but growing dividend. This payout ratio has the capacity to increase further if our confidence in underlying rental markets continues to improve.

Cash, Gearing and Debentures

Sigma has a £10m share of the Group facility with RBS and a £2.85m share of the remaining debenture. The total debt availability is therefore currently £12.85m. Based on shareholders' funds of £139.8m, these facilities represent a maximum external gearing of around 9%. The gearing was 8% at the full year and ranged between 13% in April to 5% in August. The debt position has been actively managed.

Post the year end, a two year £30m borrowing facility has been agreed with ING, the Sigma share of this facility is £6.0m.

Alongside the gearing figure on the balance sheet we also calculate the 'see through loan to value' which adds the proportionate debt of all our equity investments to our own balance sheet net debt. This figure is 56.3% and the equivalent figure for the benchmark is 52.5%. These statistics highlight that as the fund continues to hold a number of lower beta small companies, which have less than average gearing, this reduces our overall 'see through' gearing.

Management Changes

On a personal note, I would like to thank Chris for all his help and guidance over the last fourteen years. His depth of knowledge and experience is unparalleled. The Chairman has commented on the continuity of your management team. James joined Chris and I in 2002. He has worked extremely closely with me on Sigma since launch in 2007. I am delighted that he will become the lead manager on the Sigma share class.

Marcus Phayre-Mudge

Fund Manager

Sigma share class

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

The directors are responsible for preparing the Annual Report and the Group financial statements in accordance with applicable United Kingdom law and those International Financial Reporting Standards as adopted by the European Union.

Under Company Law the directors must not approve the Group financial statements unless they are satisfied that they present fairly the financial position, financial performance and cash flows of the Group for that period. In preparing the Group financial statements the directors are required to:

o select suitable accounting policies in accordance with IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors and then apply them consistently;

o present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;

o provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group's financial position and financial performance;

o state that the Group has complied with IFRSs, subject to any material departures disclosed and explained in the financial statements; and

o make judgements and estimates that are reasonable and prudent.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group's transactions and disclose with reasonable accuracy at any time the financial position of the Group and enable them to ensure that the Group financial statements comply with the Companies Act 2006 and Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

 

Ordinary Share Class Statement of Comprehensive Income

for the year ended 31 March 2011

	Year ended 31 March 2011			Year ended 31 March 2010
	Revenue Return	Capital Return	Total	Revenue Return	Capital Return	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Investment income
Investment income	20,581	-	20,581	15,696	-	15,696
Other operating income	23	-	23	1,502	-	1,502
Gross rental income	3,041	-	3,041	3,655	-	3,655
Service charge income	1,222	-	1,222	1,506	-	1,506
Gains on investments held at  fair value	-	54,475	54,475	-	154,504	154,504
Net returns on contracts for difference	29	(22)	7	-	-	-
	______	______	______	______	______	_____
Total income	24,896	54,453	79,349	22,359	154,504	176,863
	______	______	______	______	______	_____
Expenses
Management and performance  fees	(2,494)	(1,247)	(3,741)	(2,288)	(1,144)	(3,432)
Repayment of prior years' VAT	59	30	89	443	292	735
Direct property expenses, rent  payable and service charge costs	(1,577)	-	(1,577)	(1,792)	-	(1,792)
Other expenses	(689)	-	(689)	(696)	-	(696)
	______	______	______	______	______	______
Total operating expenses	(4,701)	(1,217)	(5,918)	(4,333)	(852)	(5,185)
	_____	______	______	______	______	______
Operating profit	20,195	53,236	73,431	18,026	153,652	171,678
Finance costs	(1,179)	(1,179)	(2,358)	(937)	(937)	(1,874)
	______	______	______	______	______	______
Profit from operations before tax	19,016	52,057	71,073	17,089	152,715	169,804
Taxation	(1,223)	828	(395)	(3,797)	589	(3,208)
	______	______	______	______	______	______
Total comprehensive income	17,793	52,885	70,678	13,292	153,304	166,596
	______	______	______	______	______	_____
Earnings per Ordinary share	6.94p	20.61p	27.55p	5.18p	59.71p	64.89p
	______	______	______	______	______	______

Ordinary Share Class Balance Sheet

as at 31 March 2011

	2011	2010
	£'000	£'000
Non-current assets
Investments held at fair value	571,264	512,665
	______	______
Current assets
Debtors	5,707	9,286
Cash and cash equivalents	3,012	9,863
	______	______
	8,719	19,149
Current liabilities	(33,840)	(40,614)
	______	______
Net current liabilities	(25,121)	(21,465)
	______	______
Total assets less current liabilities	546,143	491,200
Non-current liabilities	(15,541)	(15,700)
	______	______
Net assets	530,602	475,500
	______	______
Net asset value per Ordinary share	207.08p	185.22p

Sigma Share Class Statement of Comprehensive Income

for the year ended 31 March 2011

	Year ended 31 March 2011			Year ended 31 March 2010
	Revenue Return	Capital Return	Total	Revenue Return	Capital Return	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Investment income
Investment income	4,610	-	4,610	4,940	-	4,940
Other operating income	14	-	14	483	-	483
Gains on investments held at fair value	-	17,190	17,190	-	44,260	44,260
	______	______	______	______	______	______
Total income	4,624	17,190	21,814	5,423	44,260	49,683
	______	______	______	______	______	______
Expenses
Management and performance fees	(692)	(346)	(1,038)	(626)	(313)	(939)
Repayment of prior years' VAT	14	7	21	104	68	172
Other expenses	(161)	-	(161)	(162)	-	(162)
	______	______	______	______	______	______
Total operating expenses	(839)	(339)	(1,178)	(684)	(245)	(929)
	______	______	______	______	______	______
Operating profit	3,785	16,851	20,636	4,739	44,015	48,754
Finance costs	(300)	(300)	(600)	(206)	(206)	(412)
	______	______	______	______	______	______
Profit from operations before tax	3,485	16,551	20,036	4,533	43,809	48,342
Taxation	(274)	-	(274)	(707)	817	110
	______	______	______	______	______	______
Total comprehensive income	3,211	16,551	19,762	3,826	44,626	48,452
	______	______	______	______	______	______
Earnings per Sigma share	2.57p	13.25p	15.82p	3.06p	35.73p	38.79p

 

Sigma Share Class Balance Sheet

as at 31 March 2011

		2011	2010
		£'000	£'000
Non-current assets
Investments held at fair value		150,308	133,557
		______	______
Current assets
Debtors		7,295	4,674
Cash and cash equivalents		1,176	1,582
		______	______
		8,471	6,256
Current liabilities		(16,089)	(14,387)
		______	______
Net current liabilities		(7,618)	(8,131)
		______	______
Total assets less current liabilities		142,690	125,426
Non-current liabilities		(2,849)	(2,849)
		______	______
Net assets		139,841	122,577
		______	______
Net asset value per Sigma share		111.94p	98.12p

 

Group Statement of Comprehensive Income

For the year ended 31 March 2011

	Year ended 31 March 2011			Year ended 31 March 2010
	Revenue Return	Capital Return	Total	Revenue Return	Capital Return	Total
	£'000	£'000	£'000	£'000	£'000	£'000
Investment income
Investment income (note 2)	25,191	-	25,191	20,636	-	20,636
Other operating income	37	-	37	1,985	-	1,985
Gross rental income	3,041	-	3,041	3,655	-	3,655
Service charge income	1,222	-	1,222	1,506	-	1,506
Gains on investments held at fair value	-	71,665	71,665	-	198,764	198,764
Net returns on contracts for difference	29	(22)	7	-	-	-
	_________	_________	_________	_________	_________	_________
Total income	29,520	71,643	101,163	27,782	198,764	226,546
	_________	_________	_________	_________	_________	_________
Expenses
Management and performance fees	(3,186)	(1,593)	(4,779)	(2,914)	(1,457)	(4,371)
Repayment of prior years' VAT	73	37	110	547	360	907
Direct property expenses, rent payable  and service charge costs	(1,577)	-	(1,577)	(1,792)	-	(1,792)
Other administrative expenses	(850)	-	(850)	(858)	-	(858)
	_________	_________	_________	_________	_________	_________
Total operating expenses	(5,540)	(1,556)	(7,096)	(5,017)	(1,097)	(6,114)
	_________	_________	_________	_________	_________	_________
Operating profit	23,980	70,087	94,067	22,765	197,667	220,432
Finance costs	(1,479)	(1,479)	(2,958)	(1,143)	(1,143)	(2,286)
	_________	_________	_________	_________	_________	_________
Profit from operations before tax	22,501	68,608	91,109	21,622	196,524	218,146
Taxation	(1,497)	828	(669)	(4,504)	1,406	(3,098)
	_________	_________	_________	_________	_________	_________
Total comprehensive income	21,004	69,436	90,440	17,118	197,930	215,048
	_________	_________	_________	_________	_________	_________
Earnings per Ordinary share (note 3a)	6.94p	20.61p	27.55p	5.18p	59.71p	64.89p
Earnings per Sigma share (note 3b)	2.57p	13.25p	15.82p	3.06p	35.73p	38.79p

The Total column of this statement represents the Group's Income Statement, 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.

All income is attributable to the shareholders of the parent company. There are no minority interests.

Group and Company Statement of Changes in Equity

	Share Capital				Retained Earnings
	Ordinary	Sigma	Share Premium Account	Capital Redemption Reserve	Ordinary	Sigma	Total
for the year ended 31 March 2011	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 March 2010	64,181	15,615	43,162	43,513	338,641	92,965	598,077
Net profit for the period	-	-	-	-	70,678	19,762	90,440
Ordinary shares repurchased	(125)	-	-	125	(826)	-	(826)
Ordinary dividends paid	-	-	-	-	(14,750)	(2,498)	(17,248)
	________	________	________	________	________	_______	________
At 31 March 2011	64,056	15,615	43,162	43,638	393,743	110,229	670,443
	________	________	________	_________	________	_______	________
	Share Capital				Retained Earnings
	Ordinary	Sigma	Share Premium Account	Capital Redemption Reserve	Ordinary	Sigma	Total
for the year ended 31 March 2010	£'000	£'000	£'000	£'000	£'000	£'000	£'000
At 31 March 2009	64,181	15,615	43,162	43,513	186,807	47,011	400,289
Net profit for the period	-	-	-	-	166,596	48,452	215,048
Ordinary dividends paid	-	-	-	-	(14,762)	(2,498)	(17,260)
	________	________	________	_________	________	_______	________
At 31 March 2010	64,181	15,615	43,162	43,513	338,641	92,965	598,077
	________	________	________	_________	________	_______	________

Group and Company Balance Sheets

as at 31 March 2011

	Group 2011 £'000	Company 2011 £'000	Group 2010 £'000	Company 2010 £'000
Non-current assets
Investments held at fair value	721,572	700,872	646,222	626,622
Investments in subsidiaries	-	44,753	-	53,745
	_________	_________	_________	_________
	721,572	745,625	646,222	680,367
Current assets
Debtors	8,892	8,637	10,325	9,644
Cash and cash equivalents	4,188	3,876	11,445	11,402
	_________	_________	_________	_________
	13,080	12,513	21,770	21,046
Current liabilities	(45,819)	(87,547)	(51,366)	(103,179)
	_________	_________	_________	_________
Net current liabilities	(32,739)	(75,034)	(29,596)	(82,133)
Total assets less current liabilities	688,833	670,591	616,626	598,234
Non-current liabilities	(18,390)	(148)	(18,549)	(157)
	_________	_________	_________	_________
Net assets	670,443	670,443	598,077	598,077
	_________	_________	_________	_________
Capital and reserves
Called up share capital	79,671	79,671	79,796	79,796
Share premium account	43,162	43,162	43,162	43,162
Capital redemption reserve	43,638	43,638	43,513	43,513
Retained earnings	503,972	503,972	431,606	431,606
	_________	_________	_________	_________
Equity shareholders' funds	670,443	670,443	598,077	598,077
	_________	_________	_________	_________
Net asset value per :
Ordinary share (Note 4(a))	207.08p	207.08p	185.22p	185.22p
Sigma share (Note 4(b))	111.94p	111.94p	98.12p	98.12p

Group and Company Cash Flow Statements

as at 31 March 2011

	Group 2011	Company  2011	Group 2010	Company  2010
	£'000	£'000	£'000	£'000
Reconciliation of operating revenue to net cash inflow /(outflow) from operating activities
Profit from operations before tax	91,109	90,908	218,146	218,207
Financing activities	2,958	3,774	2,286	2,650
Gains on investments held at fair value through profit or loss	(71,665)	(72,680)	(198,764)	(196,618)
Increase in accrued income	(349)	(271)	(306)	(566)
Decrease/(increase) in other debtors	4,056	3,552	(3,250)	(3,156)
Increase/(decrease) in creditors	224	15,570	(4,116)	(5,853)
Net purchases of investments	(4,259)	(18,232)	(97,357)	(97,653)
Increase in sales settlement debtor	(2,071)	(2,071)	(775)	(775)
Increase/(decrease) in purchase settlement creditor	4,268	4,268	(274)	(274)
Scrip dividends included in investment income	(837)	(837)	(2,937)	(2,937)
	_________	_________	_________	_________
Net cash inflow/(outflow) from operating activities before interest and taxation	23,434	23,981	(87,347)	(86,975)
Interest paid	(2,958)	(3,774)	(2,286)	(2,650)
Taxation paid	(1,329)	(1,329)	(1,323)	(1,323)
	_________	_________	_________	_________
Net cash inflow/(outflow) from operating activities	19,147	18,878	(90,956)	(90,948)
Financing activities
Equity dividends paid	(17,248)	(17,248)	(17,260)	(17,260)
Purchase of Ordinary shares	(826)	(826)	-	-
(Repayment)/drawdown of loans	(8,538)	(8,538)	45,250	45,250
	_________	_________	________	_________
Net cash (used in)/arising from financing activities	(26,612)	(26,612)	27,990	27,990
	_________	_________	_________	_________
Decrease in cash	(7,465)	(7,734)	(62,966)	(62,958)
Cash and cash equivalents at start of the year	11,445	11,402	77,568	77,517
Exchange movements	208	208	(3,157)	(3,157)
	_________	_________	_________	_________
Cash and cash equivalents at end of the year	4,188	3,876	11,445	11,402
	_________	_________	_________	_________

Notes to the Financial Statements

1	Accounting Policies
	The financial statements for the year ended 31 March 2011 have been prepared in accordance with International Financial Reporting Standards (IFRS), which comprise standards and interpretations approved by the International Accounting Standards Board (IASB), together with interpretations of the International Accounting Standards and Standing Interpretations Committee approved by the International Accounting Standards Committee (IASC) that remain in effect, to the extent that they have been adopted by the European Union and as regards the Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
	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
		2011	2010
		£'000	£'000
	Dividends from UK listed investments	2,583	1,933
	Dividends from overseas listed investments	18,079	11,007
	Scrip dividends from overseas listed investments	837	2,937
	Interest from listed investments	331	428
	Property income distributions	3,361	4,331
		_________	_________
		25,191	20,636
		_________	_________
3	Earnings per share
a	Earnings per Ordinary share
	The earnings per Ordinary share can be analysed between revenue and capital, as below.
		Year ended 31 March 2011 £'000	Year ended 31 March 2010 £'000
	Net revenue profit	17,793	13,292
	Net capital profit	52,885	153,304
		_________	_________
	Net total profit	70,678	166,596
		_________	_________
	Weighted average number of shares in issue during the year	256,514,041	256,725,000
		_________	_________
		pence	pence
	Revenue earnings per share	6.94	5.18
	Capital earnings per share	20.61	59.71
		_________	_________
	Earnings per Ordinary share	27.55	64.89
		_________	_________
b	Earnings per Sigma share
	The earnings per Sigma share can be analysed between revenue and capital, as below.
		Year ended	Year ended
		31 March 2011 £'000	31 March 2010 £'000
	Net revenue profit	3,211	3,826
	Net capital profit	16,551	44,626
		_________	_________
	Net total profit	19,762	48,452
		_________	_________
	Weighted average number of shares in issue during the period	124,922,000	124,922,000
		_________	_________
		pence	pence
	Revenue earnings per share	2.57	3.06
	Capital earnings per share	13.25	35.73
		_________	_________
	Earnings per Sigma share	15.82	38.79
		_________	_________
4	Net asset value per share
4a	Net asset value per Ordinary share
	Net asset value per Ordinary share is based on net assets attributable to Ordinary shares of £530,602,000 (2010: £475,500,000) and on 256,225,000 (2010: 256,725,000) Ordinary shares in issue at the year end.
b	Net asset value per Sigma share
	Net asset value per Sigma share is based on net assets attributable to Sigma shares of £139,841,000 (2010: £122,577,000) and on 124,922,000 (2010: 124,922,000) Sigma shares in issue at the year end.

5	Share capital changes
	Ordinary shares During the year, the Company made market purchases of 500,000 ordinary shares for cancellation. Sigma shares During the year, the Company made no market purchases for cancellation.
6	Status of preliminary announcement
	The financial information set out in this preliminary announcement does not constitute the Company's statutory accounts for the years ended 31 March 2011 or 2010. The statutory accounts for the year ended 31 March 2011 have not been delivered to the Registrar of Companies, nor have the auditors yet reported on them. The statutory accounts for the year ended 31 March 2011 will be finalised on the basis of the information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting.
7 8	Dividends Ordinary shares Subject to shareholders approval at the AGM, a final dividend of 3.70p per share will be paid on 2 August 2011 to shareholders on the register on 8 July 2011. The shares will be quoted ex-dividend on 6 July 2011. An interim dividend of 2.30p per share was paid on 11 January 2011. The total dividend in respect of the year is therefore 6.00p per share. Sigma shares Subject to shareholders approval at the AGM, a final dividend of 1.25p per share will be paid on 2 August 2011 to shareholders on the register on 8 July 2011. The shares will be quoted ex-dividend on 6 July 2011. An interim dividend of 0.90p per share was paid on 11 January 2011. The total dividend in respect of the year is therefore 2.15p per share. Annual Report and AGM The Annual Report will be posted to shareholders in June 2011 and will be available thereafter from the secretary at the Registered Office, 51 Berkeley Square, London W1J 5BB. The Annual General Meeting of the Company will be held at The Royal Automobile Club, 89/91 Pall Mall, London, SW1Y 5HS on Tuesday 26 July 2011 at 12 noon.

This announcement and the information contained herein is not for publication, distribution or release in, or into, directly or indirectly, the United States, Canada, Australia or Japan and does not constitute, or form part of, an offer of securities for sale in or into the United States, Canada, Australia or Japan.

The securities referred to in this announcement have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act") and may not be offered or sold in the United States unless they are registered under the Securities Act or pursuant to an available exemption therefrom.  The Company does not intend to register any portion of securities in the United States or to conduct a public offering of the securities in the United States.  The Company will not be registered under the U.S. Investment Company Act of 1940, as amended, and investors will not be entitled to the benefits of that Act.

This announcement does not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of the securities referred to herein in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration, exemption from registration or qualification under the securities law of any such jurisdiction. 

The contents of this announcement include statements that are, or may be deemed to be "forward looking statements".  These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "anticipates", "expects", "intends", "may", "will" or "should".  They include the statements regarding the target aggregate dividend.  By their nature, forward looking statements involve risks and uncertainties and readers are cautioned that any such forward-looking statements are not guarantees of future performance.  The Company's actual results and performance may differ materially from the impression created by the forward-looking statements. The Company undertakes no obligation to publicly update or revise forward-looking statements, except as may be required by applicable law and regulation (including the Listing Rules).  No statement in this announcement is intended to be a profit forecast.

For further information please contact:

Marcus Phayre-Mudge

Fund Manager - Ordinary share class

TR Property Investment Trust plc

Telephone: [phone]

James Wilkinson

Fund Manager - Sigma share class

TR Property Investment Trust plc

Telephone: [phone]

 

END

 

 

FR EAESLASPFEAF